QSR (Restaurant Brands International): What’s
on the Menu at QSR Brands in 2016?
By: Brendan Fanning, Student at
Marquette University
Disclosure: The AIM Equity Fund
currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
·
QSR - the large Canadian restaurant firm - announced a $300M share buyback plan in December 2015 as a result of a number of
divestitures from 3G Capital’s private equity affiliates
·
The Q3 2015
earnings report announced strong same store sales trends for both the Burger
King (BK) and Tim Hortons (TH) brands
·
Continued
net restaurant growth and expansion plans into the U.S. for the TH brand show increasing strong
growth prospects within the company
· Current
metrics and consumer trends (lower gasoline and heating costs) paint an attractive picture for the quick service
restaurant industry going forward in 2016
Restaurant Brands International, Inc.
(NYSE:QSR): Recent News
On
December 4, QSR announced the buyback of 8.15M shares for around $300M. The
buyback represents exchange notices from shareholders of 30.9M units, including
25.7M units held by the affiliate, 3G Capital. However, it is important to note
that none of the shares being converted by 3G are owned directly by the
principle partners of 3G. The sellers represent other private equity partners affiliated
with 3G who entered in the early stages of the BK transformation looking to
exit their positions within normal PE harvest periods. The offering will lower
3G’s ownership stake in QSR from 51.3% to 47.5%.
During
the September 2015 earnings call, CEO Daniel Schwartz announced a quarter of
strong comparable sales performance across both the Burger King and Tim
Hortons’ brands. According to Schwartz, recent success has been driven by
successful product introductions and a continued focus on guest satisfaction. Specifically,
Schwartz cited the introduction of the Extra Long Jalapeno Cheeseburger and
Fiery Chicken Fries at BK and new breakfast and lunch wraps at TH. Behind the
strength of these introductions, BK’s same store sales grew by 6.3% and TH’s
same store sales increased 5.3% for the quarter. On the development front, the
company has experienced net restaurant growth of 210 units, representing a 5.2%
increase on a trailing 12 month basis.
Regarding
TH’s expansion strategy, QSR has reached an agreement with their partners to
establish around 150 TH locations over the next 10 years in the Cincinnati
area. It will be interesting to see how the US consumer takes to the TH brand,
which has seen much of its success in Canada and the Buffalo, NY area. This
expansion effort speaks to QSR’s commitment to expand TH’s presence in the U.S.
and possibly on a global scale. The success or failure of this Cincinnati area
expansion will likely be the turning point for the TH brand in the U.S. and
will be watched carefully.
Current Economic Environment
According
to data from Black Box Intelligence, restaurant industry traffic was down 1.7%
in November, while average check sizes grew 2.0% for the month. Monthly same
store sales growth shifted positively for the month at a rate of 0.5%.
For
October, industry traffic fell 2.8% and same store sales dipped 0.2%; however,
average check size rose 2.6% for the month. Higher pricing within the industry
helped offset the lower traffic for the month.
Overall,
substantial drops in commodity prices, declining gasoline costs, and lower
unemployment suggest a stable environment - pointing to continued strength
within the quick service restaurant industry. Additionally, the University of
Michigan Preliminary Consumer Sentiment survey came in at 91.8 for December, an
increase from the 91.3 November number. The survey recorded notable strength in
personal finances and buying plans among consumers. The Sentiment Index has
averaged 92.9 during 2015, which is the highest since 2004.
Competitive Environment
While
the quick service restaurant environment is certainly marked by fierce
competition, CEO Daniel Schwartz made it clear during the Q3 earnings call that
QSR doesn’t comment on their competition and their strategy doesn’t change
regardless of how the industry is or isn’t performing. The emphasis continues
to be on creating great guest experiences and running profitable restaurants.
As evidence of this strategy, QSR remodeled 40% of restaurants in the system as
of the end of 2014, and has slimmed down both BK and TH’s menus to be more
operationally efficient. Additionally it is interesting to note that according
to Credit Suisse research, there has been particularly strong positive same
store sales correlations among the QSR industry leaders during times of
accelerated growth, especially for the period of 2001-2011.
What has the stock done lately? QSR has bounced around quite a bit YTD
with a big run up in late September and early October after an optimistic
earnings call for Q3. However, news of the stock buyback in December caused a
slight decline bringing the YTD price change to -7.9%. In terms of valuation,
QSR is currently trading with a P/E (NTM) of 28.2x compared with McDonald’s P/E
(NTM) of 21.9x and YUM Brands P/E (NTM) of 20.4x.
Source: FactSet
3G
Capital’s divestiture and the subsequent share buyback is a minor blip on the
radar screen for QSR. With the principle partners of 3G still invested, and two
of the company’s other top shareholders, including Pershing Square and
Berkshire Hathaway, it seems that some of the greatest minds in the investment
world are behind Restaurant Brand’s story. The brand recognition of BK globally
and TH in its Canadian home market, coupled with a 99% franchised model, should
continue to drive shareholder value. A few key indicators for QSR going forward
include the consumer spending environment, both in the U.S. and abroad, and also
how the expansion of TH shakes out in the US. The result of crashing oil prices for consumers (i.e. lower gasoline and heating costs) could again make QSR a featured item in 2016 for investors!
