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Burger King Worldwide Inc (BKW): The Return of the King

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Burger King Worldwide Inc (NYSE:BKW)’s reign in the kingdom of fast food burgers has been a tumultuous one. During its long troubled history, Burger King Worldwide Inc (NYSE:BKW) has been occupied by many outside powers. First was The Pillsbury Company in the 70s and 80s, the liquor giant Diageo in the 90s and the private equity firm TPG Capital for much of the 00s. Each neglected or badly managed (often both) Burger King Worldwide Inc (NYSE:BKW) and almost led it to its ruin. Forever the US’s No. 2 burger joint, far behind McDonald’s Corporation (NYSE:MCD), they eventually lost even that distinction when The Wendy’s Co (NASDAQ:WEN) usurped their position last year. And worse than just being dethroned as the US’s No. 2 was the way they were dethroned. It was not so much due to a strong performance by Wendy’s, but due to the King’s weak performance with many years of declining sales.

But since being acquired by the private equity firm 3G Capital of Brazil in late 2010 and rejoining the public market again in June 2012, things are starting to look up for the King.

Under a new ruler
When 3G Capital purchased Burger King Worldwide Inc (NYSE:BKW) in 2010, the kingdom was already hurting. US and Canadian same store sales were on a decline and international growth had mostly stalled. General & Administrative expenses were high, the balance sheet was highly leveraged, capital expenditures were a bit too big and the operating cash flows were a bit too small. And to top it off, previous management had no real strategy for future growth, or even a plan to just simply stop the bleeding.

Today is a much different story. Same store sales are positive and continuing to improve; both internationally and particularly at home with US and Canadian sales. G&A costs are down by about 40%, the balance sheet has been reasonably deleveraged, capital expenditures have been almost cut in half and cash flows on their way to doubling. And just as important, new management has a plan for future growth. A plan that already appears to be working.

Royalty and other fees
One of their strategies for growth is to further increase the percentage of franchised restaurants, with the goal of eventually transforming all company-owned restaurants into franchise-operated locations by the end of 2013. At the time of 3G Capital’s acquisition, franchised restaurants made up 89% of all worldwide locations; a percentage that remained unchanged for years under old management. For a point of comparison, McDonald’s currently franchises about 82% of its worldwide restaurants (a percentage they have continually increased over the years). In just little over two years under new management, Burger King’s percentage of franchised locations has increased to about 97%.

Franchising allows companies like Burger King Worldwide Inc (NYSE:BKW) to expand quickly without spending as much of their own money. And management certainly wishes to expand; recently negotiating many master franchise agreements and joint ventures with many large international restaurant operators. Burger King sees the potential to double their presence in Latin America, double their presence in Europe, Asia, and Africa and triple their presence in the Asia-Pacific region.

Under the franchise model, a large portion of the costs of expansion are shouldered by the franchisees, who must pay Burger King a one-time up-front fee just to become a franchisee, and then on-going royalty and advertising fees that are a percentage of that franchisee’s sales. Currently Burger King averages about 4.15% for royalty fees and around 4% for advertising fees. To compare the company to McDonald’s once again, McDonald’s Corporation (NYSE:MCD) takes in about 12% in royalty fees and about 4% for advertising. Burger King still has a while to go before they can even come close to a McDonald’s Corporation (NYSE:MCD) level of fees. As older franchise agreements expire, however, Burger King can renew those contracts; signing current and future franchisees to new 20-year agreements with much more favorable fee rates for Burger King-corporate.

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