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BKC AT A GLANCE

P/E ► 12.2 AVG EV/EBITDA ► 7.61 AVG ROA ► 9.3% AVG ROE ► 20.8% AVG Debt to Equity ► 1.68 AVG Current Ratio ► 0.801 AVG Interest Coverage Ratio ► 6.07 AVG

 

 

 

 

 

 

Burger King is the second largest fast food hamburger restaurant chain in the U.S. with more than 11,565 company-operated and franchised restaurants in 71 different countries.^[1] The company generated $2.45 billion in revenue in 2008^[2]. Like most players in the quick service restaurant market, Burger King faces several important challenges. The cost of doing business has increased due to rising foods prices while intense competition from McDonald's , Yum! Brands (YUM) and Wendy's limits Burger King's ability to pass costs on to consumers.^[3] However, with the 2008 economic downturn, consumers in the United States have turned to Burger King as a low-cost alternative to more expensive dining options.^[4]

Additionally, strong international sales (38% of operating income) are also a bright spot.^[5] Furthermore, since 2004, Burger King has implemented several cost cutting initiatives, including smaller restaurant sizes that take advantage customers' preference for the drive-thru, a real time scheduling system to improve employee efficiency, and the closure of poorly performing restaurants. These measures resulted in an increase in net income from just $5MM in 2004 to $190MM in 2008.^[6] Despite improvements, Burger King still trails its largest competitor, McDonald's (MCD) in terms of revenue per restaurant and growth. In 2008, McDonalds had a revenue of $23.5 billion and received nearly 6 times as much in franchise fees per franchised restaurant than Burger King.^[7]

Business Overview

Burger King competes within the fast food hamburger restaurant (FFHR) category of the $59 billion quick service restaurant (QSR) segment of the restaurant industry. Burger King offers hamburgers, chicken and specialty sandwiches, french fries, soft drinks, breakfast foods, and a variety of other fast food choices.

In 2008, roughly 90% of the company's restaurants were franchised and only 10% were company owned,^[1] although the latter produced approximately 73% of the company's revenue.^[2] Burger King also operates in three geographic regions: the U.S. and Canada, EMEA/APAC (Europe, the Middle East, and Africa/ Asia Pacific), and Latin America.^[8] Sales in the U.S. and Canada account for 44% of total revenue; however, Latin America is the fastest growing sector.^[2]

Business Financials

In FY 2008, Burger King increased revenue by 10% to $2,455 million from $2,234 million the previous year. Revenue similarly grew by approximately 10%, or $148 million, in FY 2007 from FY 2006.^[2] Increases in revenue are a direct result of Burger King's successful advertising campaigns as well as the tendency for consumers to seek lower-cost dining alternatives during stagnant economic conditions. Net income also experienced rises over the past three years, from $27 million in 2006, to $148 million in 2007 and finally$190 million in 2008.^[2]

This graph shows both revenue and net income for Burger King over the past three years. Profit margin is superimposed to offer a visual of its trend over this time frame. ^[2]

Business Segments

Burger King operates in three geographic regions: ^[9]

• U.S. and Canada: The U.S. and Canada is BKC's largest sector with 7,512 restaurants generating approximately $1.1 billion in revenue.^[10]
• EMEA (Europe, the Middle East, and Africa)/APAC (Asia Pacific): The EMEA/APAC sector is BKC's largest international sector. It has 3,051 restaurants in 42 countries and generated approximately $3 billion in sales (2008).^[10]
• Latin America: The Latin American sector has 1,002 restaurants in 25 countries. The Latin American sector contributed approximately $1 billion in sales (2008).^[10] BKC Latin America experienced a 8% sales growth from 2007 to 2008.^[6]

This graph is a breakdown of Burger King's markets by number of restaurants. Burger King operates in three markets: the U.S. and Canada, EMEA/APAC, and Latin America.^[11]

Quarterly Business Financials

Burger King Holdings reported revenue for Q4 2009 (ending 6-30-09) of $629.9 million, a decline of 2% from the same quarter in 2008. For the entire fiscal year, Burger King reported revenues of $2.54 billion, a growth of 3% over the previous year. Burger King attributes most of its revenue growth to the acquisition of franchised restaurants as well as a worldwide net restaurant growth rate of 3.1%. During Q4, operating income increased 7% over the previous year to $87.7 million, while operating income on the year decreased 2% from the prior year to $342.9 million. On the year, Burger increased its net restaurant count by 360, a decade-high number for the company, for a total of 11,925 restaurants.^[12]

In the recession economy, Burger King stressed its need to cut prices, which lowers margins. However, the company was able to offset some of these measures through lower supply costs for food and paper. Burger Kings reported EPS on the quarter reached $0.43, which beat analyst estimates of around $0.37. Burger King Holding's shares rose almost 6% on the news.^[13]

Trends and Forces

Burger King's International Presence Will Play A Large Role in Upcoming Days

BKC is growing its international presence with an emphasis on underpentrated markets in developing countries, while scaling back its number of domestic franchises by closing underperforming restaurants. Latin America is one of its fastest growing regions. It opened 45 new restaurants in Mexico in 2007^[14] and another 34 restaurants in Brazil from 2005-2007. franchisees)^[15], ^[16]. In total, the number of BKC company operated and franchised restaurants in Latin America increased by 49% and 76%, respectively, from 2003-2007, while the number of BKC franchises in the U.S. and Canada has actually dropped by nearly 10% over the same time period.

The Rising Costs of Agricultural Commodities are Pressuring Margins

Burger King is heavily dependent on a wide array of agricultural commodities such as beef, corn, cheese and poultry. Over the past few years, the prices of these commodities have increased drastically; on the other hand, intense competition in the QSR industry limits the company's ability to pass these costs onto customers^[17].

Historical and USDA forecasted Corn prices per bushel

Wheat prices have since risen more dramatically-Data from USDA

Burger King Capitalizes on Economic Downturn by Providing Lower Cost Dining Options and Riding Out Innovative Advertising Campaigns

The 2008 economic downturn produced a class of consumer demanding a cheaper alternative dining option. Burger King's cheaply priced menu options satisfied those needs and shares rose by over 20% between February and April 2008. Also, BKC's management has reinvigorated its marketing strategy by pursuing partnerships with the NFL, Nascar and multiple product placements in movies such as Spiderman3. In July 2007, Burger King was ranked in the top position for the "most-liked" television advertisements for all national advertisers^[18]. Towards the end of the same year, the company launched a new ad campaign. The campaign which featured real customers and hidden cameras, was credited by management for leading to double digit sales growth during the December quarter. ^[19].

Burger King Has Streamlined Its Operations, Closing Gaps and Re-tailoring Service

Burger King has the third highest sales in the FFHR segment and McDonald's leads the FFHR sector with $2.1 M in sales per restaurant^[20].

Additionally, Burger King has reduced the average size of new restaurants. Since approximately 62% of sales can be attributed to drive-thru purchases^[23], management has announced that larger restaurants aren't necessary. Since adopting a smaller restaurant design, Burger King has reduced its building costs by 25% ^[24] and has begun using new appliances and systems to increase efficiency and further cut costs.

Competition

Burger King competes with:

• McDonald's (MCD): McDonald's is one of the world's largest companies and by far the worlds largest fast food hamburger chain with $23.5 billion in revenue (2008) and a 27.4% operating margin.^[7]
• Wendy's International (WEN): Wendy's is the third largest FFHR restaurant. Wendy's is sensitive to rising beef and oil prices because of their low margins.^[25]
• Yum! Brands (YUM): With more restaurants than McDonald's and revenues near $11 billion in 2008, Yum! is one of the largest restaurant companies in the world.^[26] Yum! operates KFC, Taco Bell, Pizza Hut, Long John Silver's, and A&W All-American Food Restaurants. Although Yum! doesn't compete in the FFHR category, BKC competes with it in the QSR segment.

Data from BKC 2008 Google Finance Profile Page, MCD 2008 Google Finance Profile Page, MCD 2008 Annual Report, WEN 2008 Google Finance Profile Page, and YUM 2008 Google Finance Profile Page

Market Share

The FFHR is a $67 billion segment. Burger King has a 4% share of the segment and is second behind McDonald's 90% share. The QSR segment and FFHR category are extremely competitive because each FFHR restaurant offers similar menus and prices.

Burger King is second behind McDonald's in the Fast Food Hamburger Restaurant category for revenue.^[27]

References

1. ↑ ^{1.0 1.1} Burger King Holdings 2008 10-K Report; Part 1: Business, p. 3
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} Burger King Holdings 2008 10-K Report; Part 1: Selected Financial Data, p. 38
3. ↑ McDonald's absorbs some costs to keep customers
4. ↑ Burger King Profiting in the Downturn
5. ↑ Burger King Holdings 2008 10-K Report; Part 1: Selected Financial Data, p. 39
6. ↑ ^{6.0 6.1} 2008 Burger King 10-K; Selected Financial Data, p. 39
7. ↑ ^{7.0 7.1 7.2} McDonalds Google Finance Profile
8. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3-8
9. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3-8
10. ↑ ^{10.0 10.1 10.2} 2008 Burger King 10-K Report; Selected Financial Data: p.42
11. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3-8
12. ↑ Burger King Holdings Inc. Reports Fourth Quarter and Full Fiscal 2009 Results
13. ↑ Lower Costs Help Profit at Burger King
14. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 8
15. ↑ Burger King Holdings 2007 Annual Report, "Management's Discussion and Analysis...", p. 4
16. ↑ Burger King Holdings 2007 Annual Report, "Management's Discussion and Analysis...", p. 4
17. ↑ McDonald's absorbs some costs to keep customers
18. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 2
19. ↑ Wall Street Journal, Media and Marketing, pg. B3, "Hey, No Whopper on the Menu?" February 08, 2008
20. ↑ Bruger King Company Report 10-05-2007
21. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
22. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
23. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
24. ↑ Burger King Holdings 2007 Annual Report, "Business", p. 3
25. ↑ ^{25.0 25.1} Wendy's International Google Finance Profile Page
26. ↑ ^{26.0 26.1} Yum! Google Finance Profile Page
27. ↑ Burger King Company Report