Will 'Exciting Things Happening At Burger King' Pay Off For Investors?

| About: Restaurant Brands (QSR)

You may have noticed new Burger King (BKW) commercials airing on television recently with the likes of David Beckham and Aerosmith front man Steven Tyler. The company's new motto "Exciting Things Are Happening At Burger King" is shown predominantly through the commercials. On Wednesday, shares of Burger King once again hit the public market, trading on the New York Stock Exchange under the symbol BKW. Shares traded up 3.5% before settling at $15.01 to end Wednesday's trading session. Over 6.9 million shares traded hands. The three month average for McDonald's (NYSE:MCD) volume is 6.7 million shares in comparison.

The large restaurant company, which was delisted back in 2010, sold 16% of its free floating shares on the exchange. The rest of the company will be owned by 3G (71%), Pershing (12%), and Justice (1%). The large shareholder 3G will have a 180 day lockup before it can sell more shares, while the other two minority owners will have a one year lockup period.

Burger King has restaurants in just over 80 countries and showcases its international growth potential as the main reason to invest in the company. Burger King's franchise business model gives the company a high level of free cash flow. The majority of Burger King's restaurants (93%) are franchised. The company has a goal of 100% franchises ultimately. Rivals like McDonald's, Yum Brands (NYSE:YUM), and Wendy's (NYSE:WEN) have a franchise rate of 70-90%.

Forty percent of the company's restaurants are outside of the United States. Broken down by region, Burger King has the following number of stores:

  • North America: 7,500 (60% of restaurants)
  • Latin America: 1,222 (10% of restaurants)
  • EMEA: 2,822 (23% of restaurants)
  • APAC: 908 (7% of restaurants)

Burger King's royalty rates are increasing for international and North American stores. In 2006, Burger King's royalty rate was 3.7% as a company. By 2011, that rate had increased to 4.14%. In the United States, legacy stores have old royalty rates of 3.5%. As the stores re-negotiate long term deals, the rates increase to 4.5%, improving Burger King's overall yearly royalty rate. International franchisees pay royalty rates of 5.0%. As the company expands internationally, the royalty rate increases as well.

Along with receiving royalty fees and franchise fees each from franchisees, the company maintains rental income. Burger King owns $800 million to $1 billion in real estate. The real estate is turned into rental income for the company as franchisees pay monthly rent on their restaurant locations.

With the acquisition by a private equity group in 2010 came a brand new management team. The board of directors and managers have quick service restaurant experience as well as experience with Burger King franchising. One of the negatives holding Burger King back over the years was constant changing of management and new ideals. Over the last 25 years, the company's CEOs have an average tenure of 2 years. Private equity group 3G is not like others as it tends to focus on one deal at a time, committing "all its eggs in one basket." The company's new chief executive officer has said the company is in the second inning, and still has work to do, using a nine inning baseball game as an analogy.

In North America, Burger King has four pillars it hopes to put in place to increase sales and profitability. The company's average unit sales ($1.15 million) trail other burger chains like Wendy's ($1.46 million) and McDonald's ($2.43 million).


Burger King is working on filling menu gaps to appeal to customers in groups like women, kids, and seniors. New menu items like premium coffee, chicken strips, real fruit smoothies, new French fries, chicken wraps, fresh salads, and a new line of desserts have all been strategically tested and put in place to appeal to newly targeted demographics. The company has also made sure 100% of stores, even old legacy stores, have digital menus in place.


New marketing initiatives using celebrities like Beckham and Tyler are growth drivers for new products. Everyone probably knows that Burger King has real fruit smoothies thanks to David Beckham spilling some on his shirt before he is told to take it off. Others, like myself, get the jingle stuck in our heads and know that "Exciting things are happening at Burger King."


Part of Burger King's image is the interior and exterior of the company's restaurants. Old legacy stores are rapidly being converted into "20/20 Image" restaurants. Right now 89% of the company's restaurants are legacy and 11% are 20/20 Image (in North America). The company's goal is to have 40% of its restaurants converted to 20/20 Image stores. Burger King has reduced the costs or remodels and secured a line of credit for franchisees hesitant to spend money to remodel. The company has commitments from 1400 franchisees to remodel. Leading franchisee, Carrol's Restaurant Group (NASDAQ:TAST), has committed 450 stores to remodel.


Prior to the company's 2010 acquisition, executives visited stores once or twice a year, leaving many of the operations up to individual stores with much room for error. The company has now dedicated management staffs to visit stores once every 30-45 days by placing regional directors in key markets to work hands on with staff. Management bonuses have also been restructured to better match operations costs and spending.

Internationally the company is hoping to tackle new markets and grow aggressively in key markets like Brazil, Russia, and China. The company sees potential in its three major regions by at least doubling the current number of restaurants in Latin America and EMEA, while the company sees tripling its presence in the APAC region. Burger King has a small presence on the continent of Africa and has 0 stores in India, the second most populous country on Earth. Burger King uses McDonald's and Yum Brands to compare potentials in select countries.

  • Brazil: 140 Burger Kings, 616 McDonald's
  • Argentina: 58 Burger Kings, 194 McDonald's
  • Russia: 39 Burger Kings, 275 McDonald's
  • Nordic Region: 134 Burger Kings, 467 McDonald's
  • South Africa: 0 Burger Kings, 144 McDonald's, 614 KFCs
  • China: 56 Burger Kings, 1,287 McDonald's, 3,244 KFCs
  • Indonesia: 30 Burger Kings, 109 McDonald's, 396 KFCs

One of the ways the company hopes to tackle international territories is through joint ventures. A recent joint venture was signed with VTB Capital to bring several hundred restaurants to Russia. The deal places the private equity group of Russia's second largest bank to help with capital and current franchisee Alexander Kolobov to serve as CEO of the Russian joint venture. Kolobov has experience as Russia's largest Burger King franchisee and also owns Russia's largest chain of coffee shops (Shokoladnitsa). Back in 2011, Burger King signed a joint venture to expand more rapidly in Brazil. With 140 current Burger King restaurants and a potential of over 600, Burger King signed a deal with Vinci Partners and placed a former general manager of Burger King Brasil in charge of a joint venture in the large South American country. Last week, Burger King announced a deal to bring 1,000 restaurants to China. The Chinese deal marked the largest one time expansion plan in the company's history and will give the company a closer number to McDonald's' current restaurant base in the most populous country.

In the twelve months ending March 30th, 2012, Burger King saw same store sales increase 4.6%. In North America, same stores sales were up 4.2%, while international stores fared better (+5.1%). International same store sales have been positive eleven of the last twelve quarters. The international possibilities for Burger King make this quiet IPO worth buying into. Shares of Burger King are undervalued and will rise as the company expands and meets its growth objectives. Also look at Carrols Restaurants' shares as a play on the strength of Burger King restaurants in North America. As Burger King sells off existing company owned stores, old trusted franchisees like Carrols benefit by buying restaurants from the company. In May, Carrols announced it was acquiring 278 existing Burger King restaurants.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TAST over the next 72 hours. Author has no position in BKW, but may go long over the next 72 hours.

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