Earnings Scorecard: Burger King

Burger King Holdings Inc. (BKC), the world’s second largest fast food hamburger chain, posted fourth quarter and fiscal 2010 results on August 24. The company’s adjusted earnings for both quarter and fiscal surpassed the Zacks Consensus Estimates, but results declined on a year-over-year basis on the back of sagging comparable restaurant sales, hurt by a sluggish economic environment and high level of unemployment. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the fourth quarter, total revenue dropped 1% year over year to $623.0 million due to the decline in comparable sales as the restaurant industry remains under pressure, and an unfavorable currency translation. The company also missed the Zacks Consensus Estimate of $639 million.

Comparable sales in the quarter dipped 0.7%, reflecting a 1.5% decline in the U.S. & Canada, partially offset by a 3.9% rise in Latin America and 0.2% increase in EMEA/APAC, led by a solid performance across its South American and Asia-Pacific markets.

For fiscal 2010, total revenue dropped 1% year over year to $2,502.2 million and was also below the Zacks Consensus Estimate of $2517.0 million. The slash in revenues was due to the reduction in comparable sales, partly offset by a favorable currency translation and a robust restaurant growth.

Comparable sales in the fiscal year dipped 2.3%, reflecting a 3.9% decline in the U.S. & Canada, and dropped 1.3% in Latin America. This decrease was due to harsh weather conditions in the U.S., U.K and Germany, which hurt comparable sales in January and February, partially offset by a 0.8% increase in EMEA/APAC.

The company forecasts that fiscal year 2011 will remain challenging due to the continuation of sluggish economy and a weak consumer environment, resulting from the high unemployment rate. As a result, comparable sales are also expected to remain soft.

Burger King stated that it plans to open between 225 and 275 net new restaurants in fiscal 2011, with more than 90.0% of the net restaurant growth expected to take place outside of the United States and Canada.

Burger King intends to refranchise about half of the company-operated restaurants over the next 3-5 years, potentially bringing its ownership mix down to 5%.

(Read our full coverage on this earnings report: Mixed Results for Burger King)

Earnings Estimate Revisions: Overview

Following the fourth quarter earnings release, the Zacks Consensus Estimate for the company has decreased; with the analysts covering the stock seeming to have a negative view. The company believes fiscal 2011 will also be a challenging year; as a result, comparable-restaurant sales are expected to remain under pressure in fiscal 2011. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

From the table below, a negative inclination can be witnessed among the analysts. The company views 2011 as a challenging year; thus, over the last 7 days, out of 18 analysts, 14 have reduced their estimates for fiscal 2011 and 1 has raised the estimate for the same period. For fiscal 2012, out of 12 analysts, 5 have slashed their estimates and 1 has increased the estimate, over the last 7 days.

Negative revisions by the analysts are based on the year-over-year decline in top line due to softer comparable-store sales as the restaurant industry remains under pressure, given the economic downturn, which has badly affected consumers’ disposable income.

Only 1 analyst has raised the estimate, given that the company concentrates on overseas expansion for strong unit growth. Moreover, to drive traffic, the company is remodeling its restaurants. Additionally, Burger King drives its revenues through franchising, which requires little capital.

Magnitude of Estimate Revisions

The table below indicates that earnings estimates have decreased by 8 cents to $1.36 for fiscal year 2011 and by 10 cents to $1.53 for 2012, over the last 7 days. The magnitude of estimate revisions indicates that the analysts expect earnings to remain under pressure.

Our Recommendation

We believe Burger King is well positioned to sustain growth in the existing and new markets through new product introductions, an upgraded prototype design and expanded restaurant hours. Overseas expansion remains one of its key growth drivers. Moreover, we think the stock provides relative safety and moderate growth in a turbulent environment and exposure to faster-growing international markets, which are central to Burger King’s expansion plans, and where it has a significantly small presence relative to its competitors.

Additionally, to drive sales, particularly at the premium end, Burger King is remodeling its restaurants, with an up-market feel. We think the remodels will drive traffic, particularly eat-in guests and premium customers, while boosting returns on capital. Nearly, since 90% of Burger King restaurants are franchised, future unit growth of the company will be achieved through franchising, which requires little capital investment from the company.

However, adversely affecting the company’s growth is its sagging same-store sales and declining traffic, which the company expects to continue in 2011 due to the continuation of the sluggish economy and a weak consumer environment resulting from the high unemployment rate. Furthermore, the discount war among fast-food chains to lure consumers may adversely affect the top and bottom lines.

Accordingly, we keep our conservative view on Burger King shares and have a Zacks #4 Rank (short-term Sell recommendation). Our long-term recommendation for the stock remains Neutral.

Apart from Burger King, another stock that promises long-term growth opportunities is Buffalo Wild Wings Inc. (BWLD), which has a Zacks #1 Rank (short-term Strong Buy recommendation), as it has a long track record of success, a viable business strategy and a debt-free balance sheet. Buffalo Wild Wings reported second quarter earnings of 50 cents that also topped the Zacks Consensus Estimate of 42 cents.

BURGER KING HLD (BKC): Free Stock Analysis Report

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