Fast food chain Burger King (NYSE:BKC) is doing some serious cooking based on third quarter earnings. Its revenue increased 10% from $539 million last year to $594 million in its most recent quarter. It also saw its earnings per share (EPS) increase by 20% from 25 cents a share to 30 cents a share. But beyond its top and bottom line there are other things about the quarter worth noting.
Comps Are King
A great deal of effort is generally spent by fast food and casual dining chains trying to grow foot traffic at existing locations. In fact, this is why these types of companies are constantly introducing new menu items and promotion gimmicks. With that in mind, Burger King's comps reveal that it's doing something right.
In the period ending March 31, 2008 the company reported a 5.8% increase in worldwide comparable sales. In the U.S. and Canada it reported a 5.4% increase, which is terrific news.
Burger King wasn't going up against an easy comparison. In the comparable period a year ago system-wide comp sales were up a respectable 3.2%. In other words, the most recent performance is a true demonstration of its strength. (To learn more about consumer spending, read Using Consumer Spending As A Market Indicator.)
Another thing one must consider is Burger King's consistency. Even the industry's 800 lb gorilla, McDonalds (NYSE:MCD) hasn't been immune to the slowing U.S. economy, which is an accomplishment for Burger King. The most recent quarter marks the seventeenth consecutive quarter it has shown positive worldwide comp growth, and the sixteenth consecutive quarter of positive U.S./Canadian comps. Companies that can continue to grow consistently, even in difficult times deserve special attention.
Its competition Wendy's (NYSE:WEN), which is set to merge with Triarc (NYSE:TRY), the parent of Arby's, saw its U.S. franchise comps decline 0.1% in its most recent quarter and its U.S. company operated comp stores decline 1.6%. Meanwhile, Sonic (Nasdaq:SONC), did turn in a terrific second quarter, it saw its system-wide comps increase 3.2%. Only McDonalds, with its first quarter global comp increase of 7.4% is in the same league.
Margins Matter Too
2007 and 2008 were very difficult years for fast food businesses because of the cost of food, such as cheese, milk, bread, chicken, beef, and corn based products and the lofty cost of labor, insurance and land. Burger King on the other hand, has managed well despite these threats. Its operating income in the latest quarter went from $62 million last year to $81 million this year. It increased from 11.5% to 13.6%.
This demonstrates that the company has the ability to weather the current economic storm. I also think it may help garner favorable analyst coverage in the near future. At the very least I think it, along with the favorable comps, might lead the sell-side to inch up its earnings estimates going forward. (For related reading on analysts, and what you need to know about them, see Three Kinds Of Analysts And What You Need To Know About Them.)
The Flip Side
Investors should keep in mind that Burger King's performance may be a double edged sword in that the investment community seems to have become accustomed to its consistent performance. Should the company stumble, or should promotional activity from McDonald's, or Sonic for example ramp up and draw traffic away from Burger King, the impact to the stock could be sharp.
Bottom Line
Burger King's third quarter was a solid one. Its comps and its margins, coupled with its excellent top and bottom line growth lead me to believe that the stock may be headed even higher.
To learn more about investing in restaurants, read Sinking Your Teeth Into Restaurant Stocks.