News
Burger King pleased with new value mix
April 28, 2010
Although its $1 Double Cheeseburger limited-time offer was embroiled in controversy, Burger King executives said the LTOs strategy paid off as expected.
Ben Wells, Burger King Corp. CFO, said on the company's third quarter earnings call today that the U.S. promotion did result in a shift in the sales mix and lower average check, but the chain's value mix is now more in line with competitors'. During the LTO promotion, the chain's value mix moved from about 12 percent to 20 percent.
The company expects the mix to remain at that level and continue to impact same-store sales until it laps the introduction of the offer, which was in stores from mid-October 2009 through mid-April. Wells said the company is counter-balancing the permanent mix shift with more indulgent offerings and new add-ons in the product pipeline.
Burger King Holdings Inc. reported that sales remained soft for the third quarter ended March 31, but chairman and CEO John Chidsey said the company's long-term growth strategy remains on track.
Worldwide comparable sales for the quarter were down 3.7 percent compared to positive 1.0 percent in the same period last year.
The EMEA/APAC business segment posted positive comparable sales of 1.1 percent for the quarter compared to negative 0.6 percent in the same period last year. Strong performance in Spain, Australia, Korea and Turkey more than offset negative comparable sales in Germany and the United Kingdom.
U.S. and Canada comps were down 6.1 percent for the quarter compared to positive 1.6 percent in the same quarter last year. Comps in the segment were negative 2.0 percent in March, an improvement over reported January and February comps of negative 8.2 percent, which the company previously said were negatively impacted by severe inclement weather.
More encouraging, the segment realized positive traffic in March as the impact of weather became less significant. Chidsey reported that April traffic also is up, especially at lunch. Looking forward, the company expects the environment to remain challenging as high unemployment continues even as consumer confidence improves.
"While we continue to operate in a very challenging macroeconomic environment, we remain committed and focused on the success and growth of our brand by effectively managing our business for the long term," Chidsey said. "Even though the quarter's results were negatively impacted by severe U.S. weather conditions in January and February, I am encouraged by our overall performance in March including positive U.S. traffic and sequential quarterly improvement in average check. Average check in the U.S. was helped by the national launch of our premium Steakhouse XT burger line that continues to receive favorable consumer response."
Growth strategy
The company continued its growth during the quarter, opening 37 net new restaurants worldwide, reflecting a 6.3 percent growth rate internationally. During the quarter, the company completed the acquisition of 35 restaurants in Singapore in early March. For the 12-month period ended March 31, the company posted positive net restaurant growth across all business segments with 89 percent of the restaurants opened outside of the U.S. and Canada.
　
Chidsey said the company expects its international growth to continue at a strong pace, projecting that in five years, 55 percent of Burger King stores will be located outside of the United States and Canada. For the full 2010 fiscal year, the company is on target to open 250 to 300 net new restaurants.
In the United States and Canada, the company continued with its re-imaging program. Chidsey said the program is slightly ahead of schedule and that remodeled and scrape-and-rebuild stores continue to see "great sales lifts."
Burger King also made progress on its deployment of new restaurant equipment, with the company's new broilers now in 70 percent of stores and its new point-of-sale system in 59 percent of stores.
Chidsey said he was encouraged by improved franchisee relations, noting that they recently voted to extend the introductory pricing of the Steakhouse XT and to a $1 Icee promotion scheduled for this summer.
Financial results
Revenues for the quarter were down 1 percent to $596.9 million, compared to $599.9 million in the same quarter last year. Year to date, revenues were down 1 percent to $1.88 billion, compared to $1.9 billion last year. Revenues were adversely impacted by negative worldwide same-store sales, partially offset by favorable currency translation of $19.5 million and strong net restaurant growth of 305 units during the past 12 months.
Net income for the quarter was down 13 percent at $41 million compared to $47.1 million in the same period last year. Year to date, net income was down 2 percent to $137.9 million, compared to $141.2 million last year.
The Burger King system operates more than 12,000 restaurants in all 50 states and in 74 countries and U.S. territories worldwide. Approximately 90 percent of Burger King restaurants are owned and operated by independent franchisees.
A replay of Burger King Holdings Inc. third quarter earnings call webcast will be available for replay for 30 days via the investor relations section of the company's website.
　
Looking ahead
Looking ahead, the company expects increased beef costs to be counterbalanced by its favorable pricing on chicken. The Wall Street Journal reported earlier this month thatwholesale prices of 50 percent lean boneless beef were up 30.7 percent from lows in November. Analysts speculated then that the price increase would impact Burger King and McDonald's restaurants as they competed on value.
Wells said that overall, commodities are forecasted to be slightly better over last year.
The company's fiscal 2010 fourth quarter marketing calendar includes promotional movie tie-ins with summer releases of expected blockbusters Iron Man 2 and The Twilight Saga: Eclipse.
Superfamily promotions will include Marmaduke and SpongeBob SquarePants.
Featured products during the quarter will flex both ends of the company's barbell menu strategy. Value offerings will include the BK Breakfast Muffin and Buck Double. Indulgent products, aimed at driving higher check averages, will include the newly added BK Breakfast Bowl and products engineered to be cooked on the flexible broiler such as BK Fire-Grilled Ribs, scheduled to launch as an LTO at the end of May.
Burger King chief marketing officer, North America, Michael Kappitt, told analysts during the Q&A portion of the call that the company's innovation pipeline is on track and will continue at a manageable pace.
The company's breakfast strategy also is progressing, he said, with the new BK Breakfast Muffin boosting the daypart better than expected. The company expects more lift when the Seattle's Best Coffee launches this summer.
"The U.S. economy is showing mixed signs of improvement with recent reports on improved retail spending and consumer confidence. However, high levels of unemployment and underemployment will remain our industry's biggest headwind," Chidsey said. "So we will continue to manage the brand for the future, well-positioning us as the economy continues to recover.
"In the near term, we are excited about our product line-up that includes a balance of value and premium products that take full advantage of our game-changing broiler. And we are looking forward to the launch of our enhanced breakfast platform this fall, led by this summer's roll-out of Seattle's Best Coffee.Overall, I am pleased with our global momentum and confident in our ability to keep moving the brand forward."　
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