Burger King Worldwide Inc (NYSE:BKW), the second largest hamburger chain in the world, recently surprised Wall Street with robust fourth quarter earnings that exceeded both top and bottom line estimates. While other fast food chains, such as McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM), have struggled this past year attempting to balance global growth with unstable commodity costs and lagging demand, Burger King has apparently defied the odds and prospered.
The Miami-based company only returned to the publicly traded market less than a year ago, after being taken private by Brazilian investment firm 3G Capital in 2010. Has 3G Capital’s rapid restructuring program succeeded – where three previous groups of owners over the past half-century – have failed? Let’s slice up Burger King’s fourth quarter numbers and examine the company’s growth prospects in 2013.
Fourth Quarter Earnings
During the fourth quarter, Burger King reported adjusted earnings of 14 cents per share, or $48.6 million. Adjusting for one-time costs, earnings came in at 23 cents per share, topping the FactSet analyst consensus of 15 cents per share on the same basis.
Revenue came in at $404.5 million, also exceeding the forecast of $375.3 million. Although its bottom line more than tripled from a year earlier, when it was still privately held, its top line decreased 30% due to restructuring and refranchising costs.
Burger King finished fiscal 2012 with an EPS of 33 cents per share, or $117.7 million, up from 25 cents per share, or $88.1 million, a year earlier. However, revenue dropped 16% from $2.34 billion to $1.97 billion.
Lower costs and rapid growth
97% of Burger King’s restaurants are now franchised – up from 90% at the end of 2011. Restaurant chains traditionally shift towards a more franchise-centered business model because it collects royalties from franchisees, while minimizing its exposure to overhead costs and maintenance fees.
The franchisee model helped reduce Burger King’s costs substantially during the fourth quarter. Total operating costs fell 40% to $292.6 million, aided by lower expenses for food, packaging, rent and payroll.
The company used its stronger cash flow to renovate 600 restaurants in the United States and Canada, and hired more field managers to assist with its franchises. Burger King ended the quarter with 12,900 stores in 86 countries and territories.
Looking ahead, Burger King forecasts 3% food inflation in 2013, which will cause higher beef prices. However, it also expects declining prices for potatoes, cooking oil and paper packaging to more than offset those higher costs.
Specialty items boost sales
Burger King has also aggressively changed its menu to quickly meet shifting consumer tastes. Smaller chains such as Burger King and The Wendy’s Company (NASDAQ:WEN) can usually change their menus more often than larger chains such as McDonald’s or Yum Brands. During the quarter, Burger King’s North American sales were strengthened by strong sales of its chicken Paremsan sandwich, holiday gingerbread shares and Cinnabon Minibon rolls.