Lords of the Rings… and More

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

 In a land far, far away, the Chief Overlord of all things Fast Food was preparing his strategy for a deeper foray into the Hamburger, French Fries, and Onion Ring arena. With McDonald's Corp. (NYSE: MCD) at the top of the heap, he knew the battle would be tough. Add to that the offensives being put on by Burger King Worldwide, Inc. (NYSE: BKW), Jack in the Box, Inc. (NASDAQ: JACK), and a bevy of others, and he knew a deep consultation with the elders was necessary for greater wisdom.

"I have come a long way to seek knowledge on how to penetrate, gain a foothold, and build market share beyond Mordor for my delectable menu offering of burgs, dogs, fries, rings, shakes, and more."

"This is not really a very good time, Chiefy," said the Elder. "Can't you see we're wolfing down our lunch right now? I must say this Whopper is magnificent! How's your Big Mac, my Queen?"

"It's splendid! The children love their meals as well; I just wish they'd all choose to go to the same place. Luckily, the outlet mall at Rivendell has a McDonald's, Burger King, and Jack in the Box, all within an elves hop of each other."

The Chief Overlord, despondent, left and resolved to do his own due diligence on burger chains and what would be important for investors who might consider his company. He did understand that location, location, location was indeed a vital factor in a chain's success.

His research concerning McDonald's was interesting. While they don't offer onion rings, their varied menu and full-speed-ahead marketing impressed him. Full year 2012 highlights for the company included Global Comparable Sales increasing 3.1 percent. The U.S. was up 3.3 percent, Europe was up 2.4 percent, and Asia/Pacific, Middle East and Africa (APMEA) was up 1.4 percent.  Additionally, McDonald's returned $5.5 billion to shareholders via dividends and share repurchases.

However, the fickleness of consumers' appetites worried him. He further saw that McDonald's Global Comparable Sales decreased 1.9 percent in January 2013. The Chief wondered if onion rings on the menu would parlay into even greater revenues for the Golden Arches entity. Nevertheless, he felt that the aforementioned commitment to rewarding shareholders was something for investors to consider.

While waiting for February 2013's announcement of fourth quarter and full year 2012 financial results, the Chief reviewed the results for Burger King for the third quarter ended Sept. 30, 2012. Third Quarter highlights included system-wide comparable sales increasing 1.4 percent and system-wide sales increasing 3.9 percent on a constant currency basis. Adjusted EBITDA increased 6 percent on an organic basis to $162.0 million. Adjusted Diluted EPS increased 11 percent to $0.17. Moreover, the company initiated a new quarterly cash dividend of $0.04 per share.

Comparable sales increasing, however modestly, was a sign to the Chief that investors should consider companies able to generate increased sales from established operations in tough economic times in an ultra-competitive fast food market. He knew he would have to get a location established at the Rivendell outlet mall.

The Chief Overlord noted aggressiveness on Burger King's part. Burger King announced in February that they would tackle the dangerous terrain of the worldwide specialty coffee market. Their restaurants will offer Smooth Roast Coffee, Fresh Flavored Iced Coffees, and Lattés - blended by Starbucks subsidiary Seattle's Best Coffee. The Chief Overlord took a draw on the churchwarden pipe Gandalf had given him at a summer festival and applauded Burger King's new initiative for growing revenues.

His research into Jack in the Box showed that company's restaurant sales decreased $161.1 million in fiscal 2012 (ended Sept. 30, 2012) and $288.3 million in fiscal 2011 (ended Oct. 2, 2011), compared with the respective prior year. The decrease in restaurant sales in both years was due mainly to decreases in the average number of Jack in the Box company-operated restaurants. This was somewhat offset by an increase in the number of Qdoba company-operated restaurants and increases in average unit volumes at their Jack in the Box and Qdoba restaurants.

The Chief understood that the company was, and is, undertaking their Jack in the Box refranchising strategy. This includes the sale of restaurants to franchisees. They expect the number of company-operated restaurants and related sales to decrease, while revenues from franchise restaurants will increase. He pondered whether he should adapt the franchise or company-owned model. He felt some investors might like the franchise model, as it puts the onus on the franchisee to be efficient in their operations.

Regardless, he knew perceptive investors would look at his commodity costs, operating costs, and expenses. In 2012, commodity cost increases for Jack in the Box were driven by higher costs for most commodities other than produce and pork. Food and packaging costs were 32.8 percent of their restaurant sales in fiscal 2012. He knew keeping costs down would be inviting to savvy investors who might desire investing in his yet unnamed burger entity.

The Chief Overlord looked beyond the tree line to the gathering economic storm over Mordor. Would he have the heart to enter the fray and meet these fast food behemoths head on? He wasn't sure, but now he was hungry… and the Rivendell outlet mall really wasn't that far away.


MichaelONTARIO has a position in McDonald's. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. 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!

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