Burger King profit falls 83%, sales remain positive

Burger King Worldwide Inc. said Monday its 83-percent drop in third-quarter net income reflected the company’s transition to a heavier franchised business, not sales softness, as ongoing menu and marketing initiatives continued to drive customer traffic and check averages.

Steve Wiborg, president of Burger King North America, said many of the menu items introduced in April’s menu overhaul, including sandwich wraps, soft-serve ice cream and salads, continued to sell well, as did the more premium limited-time barbecue and chicken offerings that ran during the summer.

Burger King’s third-quarter global same-store sales rose 1.4 percent, and the company said sales were trending positive in October. Its largest rival, McDonald’s, had posted earlier this month its worst quarterly sales growth result in nearly nine years — global same-store sales rose 1.9 percent. McDonald’s also said its sales weakness was expected to continue in October.

“Premium products like the pulled-pork sandwich, sweet-potato fries and frozen lemonades resonated very well with our customers and had a positive impact on average check,” Wiborg said. “The trade-up effect that we see with the premium LTOs provide an important balance to our value-based promotions and further reflects our focus on system profitability.”

Burger King same-store sales rose 1.6 percent in the United States and Canada; 1.8 percent in the Europe, Middle East and Africa division; and 2.7 percent in Latin America and the Caribbean. Same-store sales fell 2.2 percent in Burger King’s Asia-Pacific region, driven by weaker sales in Australia and South Korea, as well as tough comparisons in New Zealand, which was lapping its hosting of the 2011 Rugby World Cup.

Miami-based Burger King’s major refranchising initiative and negative foreign-currency conversions dragged down revenue and earnings, the company reported. During the Sept. 30-ended quarter, Burger King refranchised 221 company-owned restaurants, including 182 units in the United States and 39 international locations.

For the quarter, net income fell 83 percent to $6.6 million, or 2 cents per share, from $38.8 million, or 11 cents per share, in the same quarter a year ago. Absent the impact of refranchising and foreign-currency translation, the company’s adjusted net income would have totaled $61.1 million, or 17 cents per share, in the latest quarter, compared with $54.2 million, or 16 cents per share, a year ago.

Third-quarter revenue fell 25.8 percent to $451.1 million.

Four pillars for growth

Burger King said it would remain focused on its four-pronged growth strategy, which involves menu innovation, new marketing, the reimaging of restaurants and operational improvements.

Wiborg said the company was seeing “excellent results” from the systemwide rollout in early August of Cinnabon-branded Minibons, which are averaging about 35 orders per store per day, suggesting a highly incremental product.

The chain’s customer segmentation data has also showed that Burger King has made gains in reaching women and seniors, Wiborg added. To sustain traffic from those new customers, Burger King’s advertising will focus more on taste and premium products, while an ongoing value strategy based on coupons and dollar menu advertising will continue to build core guest traffic.

“Burger King has historically focused on a very narrow consumer base,” Wiborg said. “A key element of our strategy is to broaden the appeal of our advertising and bring a more diverse customer mix back into our restaurants.”

He noted that the new platforms like chicken strips, smoothies and frappes were “all new growth” that did not cannibalize sales of existing items, and that trend continued in the third quarter, when barbecue sandwiches and sweet-potato fries did not hurt sales of core items.

“There was no decline in our product mix of Whopper or other burger lines, and we saw the same thing happen again in chicken,” Wiborg said. “We’re growing the platforms we set out to do without cannibalizing any other dayparts or mix.”

He added that same-store sales in October were trending above the numbers for the third quarter, giving Burger King confidence it can sustain growth into early next year, when it faces comparisons to the April launch of the new menu.

Refreshed units restarting growth

During the third quarter, Burger King secured more than 350 commitments to remodel franchised restaurants in the United States and Canada, as the company aims to have 40 percent of its system in those two countries reimaged within the next three years. Officials said the average cost to reimage a store is $300,000, but remodeled stores experience an average sales lift of between 10 percent and 15 percent.

The chain is 95-percent franchised as of the end of the quarter.

“Our refranchising initiative is allowing us to put restaurants in the hands of the best operators in the system while facilitating an accelerated reimaging of our domestic-restaurant system base and driving accelerated unit growth globally,” Schwartz said. “We believe this is the right strategy for BKW and will position us to generate sustainable, high-quality free cash flow growth.”

Miami-based Burger King Worldwide operates or franchises more than 12,600 restaurants in the United States and more than 80 international markets.

Contact Mark Brandau at [email protected]
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