Burger King net, revenue drop; international sales ignite

Burger King Holdings Inc. reported its second quarter 2011 results Aug. 11, which included a net income drop to $42.8 million, compared to net income of $49.0 million for the same period last year.

This decline was primarily due to a significant increase in interest expense as a result of debt incurred with the company's sale to 3G Capital in October 2010.

Burger King's total revenue was down 4 percent to $596.2 million.

Comparable sales declined by 5.3 percent in the U.S. and Canada compared to the same period last year.

Softness in the U.S. and Canada led to system-wide comparable sales of negative 2.2 percent. Negative comparable sales growth in the U.S. and Canada was largely due to lower traffic compared to the prior-year period, which was supported by value promotions, such as the BK Breakfast Muffin Sandwich and Buck Double promotions.

The international picture looked bright for the company, with comparable sales for the quarter ending June 30 up by 6.8 percent in Latin America and 2.2 percent in Europe, Middle East, Africa and Asia Pacific (EMEA/APAC).

Also, Burger King was the quarter's adjusted EBITDA of $150.6 million compared to $117.1 million in the same quarter of 2010, a 29 percent improvement. The boost was primarily driven by cost savings following a global restructuring and from the company's previously disclosed zero-based budgeting program. This was Burger King's highest adjusted EBITDA margin in over a decade, according to Daniel Schwartz, chief financial officer.

"We also continued to generate strong and stable cash flow and our balance sheet reflects the highest cash balance in five years. Going forward, our focus remains on growing our comparable sales, improving our company restaurant margin and expanding our global footprint through franchisee development," he said.

International growth, U.S. turnaround plan

Schwartz added that the company's focus is on improving sales trends and company restaurant margins, while also expanding its global footprint.

Burger King continues to prioritize four key areas in an effort to drive comparable sales growth and traffic, including marketing/communications; menu enhancement; operations improvements; and image.

The company's enhanced marketing process is more data driven to increase its consumer base. To help achieve these objectives, Burger King recently named mcgarrybowen as its lead AOR and Starcom as its media AOR. It also is searching for a new PR agency after recently parting ways with Edelman.

In its effort to broaden its target demographics, Burger King is enhancing its menu. During the second quarter, promotions continued for the BK Stacker line, which has been highly successful, Schwartz said, as well as the new chicken tenders. The chain also continues to refocus advertising efforts on the Whopper in an effort to reconnect guests with its flagship product.

Burger King is in the process of rolling out a soft serve ice cream line, which is expected to be available systemwide in the U.S. next month. There are several other menu enhancements in the pipeline, according to the company.

Jonathan Fitzpatrick, Burger King's executive vice-president, chief brand and operations officer, said various products, such as oatmeal, smoothies, coffees and salads, are currently in test at about 100 locations in various markets.

"We're only 30 days into these tests and are still ironing out the equipment, crew training and supply chain issues. We're encouraged with the early results and will continue the tests through the end of the calendar year," he said.

"If I had to guess, (one year from now), 20 to 35 percent of our menu could be new. Any of our proteins that we cook go through our flex broiler, so leveraging that broiler investment will be a big part of our menu innovation," he said.

Burger King also continues to roll out its reduced cost 20/20 remodel program discussed during its Q1's earnings call.

"There has been substantial franchisee interest and participation (for the reduced cost program) We are starting to see the initial results from the reduced cost 20/20 program, including a 15 to 20 percent sales uplift," he said.

Internationally, Burger King is evaluating opportunities in high growth areas throughout the world. In July, the company entered into a master franchisee agreement in Brazil and will open its first unit there as early as this fall.

Throughout the past year, Burger King increased its global count by more than 150 units, with 90 percent of those coming from outside of the U.S. The brand's strongest international markets are Turkey, Russia, the Middle East, China and Brazil.

Schwartz said growing the brand internationally is a key component in long term growth.

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