Burger King Worldwide Inc (BKW), The Wendy’s Co (WEN): Greasing the Wheels of Fast Food Commerce

Agoraphobic fast food junkies rejoice! Burger King Worldwide Inc (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.

Burger King Worldwide Inc (NYSE:BKW)

The program seems to be gaining traction with this expansion, and franchisees, (Burger King Worldwide Inc (NYSE:BKW) 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 Co (NYSE:HSY) 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 Worldwide Inc (NYSE:BKW) a keen competitive edge.

Burger King Worldwide Inc (NYSE:BKW) is already the second-largest fast food retailer behind McDonald’s Corporation (NYSE:MCD), and this is only one of its profit driving strategies.

The four pillar strategy

Burger King Worldwide Inc (NYSE:BKW)’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 Co (NYSE:HSY)’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, Inc. (NYSE:YUM) 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 Worldwide Inc (NYSE:BKW) 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 Corporation (NYSE:MCD), but on July 23, The Wendy’s Co (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 Group Inc (NYSE:GS) liked the sale, upgrading the stock from sell to neutral.