Greasing the Wheels of Fast Food Commerce
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Agoraphobic fast food junkies rejoice! Burger King Worldwide (NYSE: BKW) now delivers fast food to your home. Already in twelve major metropolitan regions, the BK Delivers initiative is expanding yet again to Salt Lake City UT.
The program seems to be gaining traction with this expansion, and franchisees, (Burger King is 99% franchisee run) have been asking to join the program. The couch potato can order crisp french fried potatoes and Whoppers and have them arrive piping hot. Or that new Hershey's sundae pie or smoothie will arrive chilled.
While only a tiny percentage (75 in the U.S. as of this writing) of the company's 13,000 restaurants in 88 countries offer home delivery, it could become as widely accepted as pizza delivery. If so, it would give Burger King a keen competitive edge.
Burger King is already the second-largest fast food retailer behind McDonald's, and this is only one of its profit driving strategies.
The four pillar strategy
Burger King's CFO, Joshua Kobza, unveiled the company's four pillar strategy at the annual Piper Jaffray 2013 Consumer Conference in June: Menu, Marketing, Image, and Operations. On menu, Kobza said the company is beginning to, "catch up to (their rivals') market platform with wraps, salads, and smoothies" and indeed, the company has come out with differentiating desserts like its Hershey's brand sundae pie and summer BBQ menu featuring Southern style chicken and pulled pork sandwiches and sweet potato fries.
The company is aiming at marketing less to the 18-34 year old male (despite this seeming to be the ultimate delivery demographic), rebalancing to be inclusive of seniors, women, and families with children. Kobza added with a laugh,"We've moved away from the King figure which scared a large portion of our customers."
Image is using refranchising agreements to reimage restaurants which Kobza admitted had begun to look dated. The company was able to redesign and negotiate prices for franchisees to bring remodeling costs from $500,000-600,000 down to $300,000 and also offer temporary royalty fee discount incentives earning a 15%-16% ROIC for franchisees who remodel.
And finally on operations, it expanded the number of field employees from 90 to 250. Field employees coach franchisees on improving speed of service, cleanliness, inventory, and labor scheduling and give them same-store sales goals. The company has also standardized its point of sale software across all the refranchised stores with plans to continue the process globally, getting better data visibility in the process.
The company has almost achieved the fully franchised model with attractive margins and free cash flow with 7,000-plus restaurants reupping (refranchising) in the U.S., with just 50 company-operated locations left in the Miami HQ area.
Global brand equity
Internationally, the game plan is master franchising joint ventures instead of the more common domestic mom and pop model. More aggressive growth targets are Brazil, Russia, and China with 30-40 store openings in each this year. Kobza says they are having no trouble finding franchisees with the brand's global recognition.
Major markets seeing accelerated developments are Brazil, Russia, and China. In China, it is developing more chicken-heavy menus to compete with the already established Yum! Brands KFC restaurants. Germany, Spain, and the U.K. are strong in Europe, but France is a wide open opportunity with only one restaurant at the Marseilles airport. India is another country in which the company wants to enter.
Caveats and pretzel cheeseburgers
Because it is asset-light and franchise funded, Burger King has a high margin, high cash flow, and very low capital expenditure to EBITDA model. The company has committed to return as much of that free cash to shareholders, starting with a 1.20% yield at a 23% payout ratio.
However, the company's trailing P/E is a rich 49.79 and the short interest has increased to 13.80% this month before earnings on July 31, but the PEG is 1.51.
Earnings weren't great for competitor McDonald's, but on July 23, Wendy's (NASDAQ: WEN) announced sizzling Q2 results of $0.08 EPS, a 33% improvement year over year, margin expansion, as well as a 25% dividend hike. The Street was "lovin' it" and took shares up over 8%. The dividend now stands at 2.30%. The company also doubled previous guidance for EPS growth this coming year based on selling 425 of its restaurants to franchisees. Goldman Sachs liked the sale, upgrading the stock from sell to neutral.
Wendy's has many of the same growth strategies in place as Burger King: remodeling (more bistro like decor), international expansion, and menu innovation (witness their surprise hit, the pretzel bacon cheeseburger).
Wendy's is now close to being 85% franchisee operated with 6,544 restaurants, both international and domestic. It, too, has a high short interest of 14.00% after the stock's 55.56% run this last year. The forward P/E is 27.46 and the PEG is higher than Burger King at 2.21.
Another burger chain with more than 50% franchisees is Jack in the Box (NASDAQ: JACK). In 2012 alone, the company earned franchise revenue (rent, fees, and royalties) of $325.8 million and with $182 million already this year, the company looks to surpass that in 2013.
Jack in the Box is in the middle of a company-wide reorganization, closing 10% of its 600 fast casual Qdoba Mexican Grill restaurants (think Chipotle Mexican Grill), located in 44 states in the U.S. and Canada. The company is the smallest chain of these three with 2,200 Jack in the Box restaurants in 21 states in the U.S.
The company is expanding more on the QDoba side with 70-75 new locations this year to only 20 Jack in the Box openings. One has to wonder why the company closes QDobas only to open just as many? Especially after two quarters of guiding QDoba same-store sales to be flat. Competing against Chipotle also seems like a chump's game.
The Foolish takeaway, no deliver it instead!
Although Wendy's has the pretzel bacon cheeseburger and a higher yield, I like Burger King better. I used to like Jack in the Box, but Burger King, with almost 99% franchisee operation, looks more attractive. This delivery initiative also radically differentiates it from almost every quick serve restaurant out there (save pizza joints). I also think its international ambitions look promising and those annuity like cash flows should eventually add up to dividends in investors' pockets.
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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!