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Burger King franchisee Carrols Group reports beef costs impacting margins
May 12, 2010
Carrols Restaurant Group Inc., the parent company of Carrols Corp., reports that the Burger King franchisee is being pressured by rising beef costs and the competitive environment, according to its earnings report for the first quarter ended April 4.
Comparable restaurant sales for its Burger King stores were down 6.4 percent.
"Our Burger King restaurants continue to be challenged by a number of factors including competitive activity, said Alan Vituli, chairman and CEO of Carrols Restaurant Group, in a news release. "To add to this, we experienced severe weather in early 2010, while also facing a tough 5.1 percent comparable sales comparison from the prior year.
"Lower comparable restaurant sales this year, combined with very aggressive price-driven promotional activities and rising beef costs, resulted in substantial margin erosion. The $1 double cheeseburger promotion, while improving customer traffic trends, did not generate sufficient incremental sales to overcome the lower margins from reduced selling prices. We are optimistic for better top-line trends given the less difficult sales comparisons in the second and third quarters."
Vituli said the company is still cautious about the overall profitability at its Burger King restaurants. "While we would expect to see some margin improvement as the discounting subsides, significantly higher beef prices are likely to continue to pressure profitability near-term."
Burger King Corp. CFO Ben Wells said on BKC's third quarter earnings call in April that $1 Double Cheeseburger created a desirable and permanent shift in the sales mix and lower average check, as the chain moved its value mix more in line with competitors'. The chains comps are not expected to recover until the company laps the $1 Double Cheeseburger promo later this year. The company also said it expected increased beef costs to be counterbalanced by its favorable pricing on chicken.
Comps at the Carrols' fast casual Pollo Tropical were up 3.7 percent and down 2.0 percent at fast casual Taco Cabana.
Total revenues for the quarter were down 3.1 percent to $195.1 million from $201.3 million in the same period last year. However, revenues from the company's Hispanic Brands increased 0.6 percent to $107.5 million vs. $106.9 million in the same period last year.
Burger King revenues were down 7.3 percent to $87.6 million for the quarter compared to $94.5 million in the same period last year. The company has closed five Burger King restaurants, excluding relocated restaurants, since the beginning of the first quarter of 2009.
As of April 4, the company owned and operated 558 restaurants, including 311 Burger King, 91 Pollo Tropical and 156 Taco Cabana restaurants.
Net income for the first quarter was down 54 percent to $2.3 million, or $0.11 per diluted share, compared to net income of $5.0 million, or $0.23 per diluted share, last year. Both years included additions to existing impairment or closed restaurant reserves of $0.3 million, or $0.01 per diluted share.
"We are encouraged by the top-line performance of Pollo Tropical and Taco Cabana during the quarter, with both generating sequential quarterly improvements in comparable restaurant sales and positive guest traffic," Vituli said. "Customers at our Hispanic Brand restaurants are responding favorably to our new menu items, our product line extensions and our promotions. In addition to elevating our product offerings, we are also enhancing restaurant service models and facilities, as we strive to further differentiate these quick-casual brands from conventional quick-service restaurants. We will continue to roll-out these changes and expect they will have a positive impact on our business over the longer-term." 2010 outlook
While the company is encouraged by the continuing improvement in sales trends for its Hispanic Brands, uncertainty regarding the impact of Burger King's marketing strategy makes forecasting sales and earnings difficult in the current environment. The company provided the following updates:
- Commodity costs for Burger King are now expected to increase 4 percent to 5 percent given the company's outlook regarding beef costs for its Burger Kings
- The company anticipates the opening of four to five new Hispanic Brand restaurants
- General and administrative expense is now expected to be flat compared to 2009
- The amount of debt reduction will vary based on earnings and capital spending, but is currently estimated to be $5 million to $15 million
Vituli concluded, "Restoring Burger King's proprietary brand positioning, built on premium, flame-grilled sandwiches, seems to be more of a priority in Burger King Corporation's marketing, and will hopefully provide more balance to the brand's barbell strategy as we move forward.
"With regards to improvements in consumer spending trends, we remain cautious. In 2010 we are continuing to constrain capital expenditures with only modest new unit development and intend to continue to reduce outstanding debt with our free cash flow. We would expect to accelerate expansion of our Hispanic Brands in 2011 as the economic recovery progresses and are actively working to build the real estate pipeline for new restaurants. Our initiatives to elevate the positioning of Pollo Tropical and Taco Cabana are progressing and helping to improve sales trends for those operations."
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