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McDonald’s Corporation (MCD): Poised to Take the Crown?

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There are certain companies that seem so entrenched in their industry that there is no way for their competition to overtake them. McDonald’s Corporation (NYSE:MCD) is arguably the leader in the fast food business, but one of their old competitors is making changes that could challenge for the crown. Seemingly from out of nowhere, Burger King Worldwide Inc (NYSE:BKW) is making steady changes to their business model that could make the company a true contender against McDonald’s.

Changing Tastes

To be fair, the market for fast food is one of the most highly competitive spaces in the restaurant business. For years, companies have come and gone trying to take market share in this business. However, after many years, the top names stay the same. Burger King Worldwide Inc (NYSE:BKW)has been competing with McDonald’s Corporation (NYSE:MCD) and The Wendy’s Company (NASDAQ:WEN) forever. While they didn’t always exist as separate entities, Yum! Brands, Inc. (NYSE:YUM) businesses like KFC, Taco Bell, and Pizza Hut have been steady competitors as well.

McDonald's Corporation (NYSE:MCD)What these companies have in common is they all are large, well known brands where customers can get a quick meal at a reasonable price. For years, McDonald’s Corporation (NYSE:MCD) had led the way in updating and changing their menu to appeal to the changing tastes of consumers. In the past, Burger King Worldwide Inc (NYSE:BKW), The Wendy’s Company (NASDAQ:WEN), and Yum! Brands, Inc. (NYSE:YUM) all seemed to stay focused on fast food without making too many changes to their menus. On a positive note, Burger King has recently changed their menu and introduced new options to health conscious customers.

3 Big Challenges

One issue facing Burger King Worldwide Inc (NYSE:BKW) is they are struggling when it comes to same-store sales. In their peer group, Yum! Brands, Inc. (NYSE:YUM) has some serious challenges primarily due to problems in their Chinese operations. On a normal basis, Yum! Brands has turned in positive same-store sales growth, and once these short-term issues in China fade into the background, I expect this positive trend to continue.

When it comes to McDonald’s Corporation (NYSE:MCD), the company’s same-store sales have been growing in the low single-digits, but in the current quarter, their same-store sales were down 1%. The Wendy’s Company (NASDAQ:WEN) has been introducing some new menu items as well and reported same-store sales up 1%. Burger King Worldwide Inc (NYSE:BKW)’s same-store sales in the important U.S. market were down 3%, and in Europe and Latin America same-store sales were down around 1%. The company’s only point of strength was the Asia-Pacific region where same-store sales were up 2.7%. With nearly 12,000 stores showing negative same-store sales, Burger King has some work to do.

A second challenge facing Burger King Worldwide Inc (NYSE:BKW) is the company’s diluted shares have increased whereas both McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM) have retired shares. Over the last year, Burger King’s diluted shares increased 1.48%, and The Wendy’s Company (NASDAQ:WEN) followed with a share count increase of 0.87%. By contrast, McDonald’s retired 2% of their outstanding shares, and Yum! Brands retired 2.72%. While a 1.48% increase at Burger King might not sound like that big of a deal, it will make earnings comparisons more difficult going forward.

Third, Burger King Worldwide Inc (NYSE:BKW) is saddled with a balance sheet that is significantly weaker than its peers. The company’s debt-to-equity ratio is 2.43, whereas the next highest ratio comes from Yum! Brands, Inc. (NYSE:YUM) at 1.28. With McDonald’s Corporation (NYSE:MCD) and The Wendy’s Company (NASDAQ:WEN) carrying debt-to-equity ratios of 0.84 and 0.73, you can see that Burger King needs to pay down a significant amount of debt to bring their balance sheet in line with their competition.

2 Kingly Positives

Even with the aforementioned challenges, there are two positives that investors should pay attention to when considering the future of Burger King Worldwide Inc (NYSE:BKW). First, the company carries the best operating margin of its peer group. In the current quarter, the company’s operating margin was 31.25%, which was a significant improvement over 14.76% last year. By comparison, McDonald’s Corporation (NYSE:MCD) reported an operating margin of 29.51%, Yum! Brands, Inc. (NYSE:YUM) came in with a margin of 19.21%, and The Wendy’s Company (NASDAQ:WEN) fell significantly behind at just 3.72%.

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