2023-11-02 00:45:17 ET
Summary
- QSR owns iconic brands in the quick service restaurant industry, with a dominant position in core categories and geographies.
- The company is making progress in revitalizing the Burger King brand, which had suffered declines in the US.
- Overleveraged balance sheet and near-term headline risks around weight loss drugs suggest a hold rating for now.
Investment Thesis:
Restaurant Brands International Inc. ( QSR ) owns some of the most iconic and beloved brands in the quick service restaurant industry. The company boasts a portfolio including Tim Hortons, Burger King, Popeyes, and Firehouse Subs, operating over 30,000 locations globally. While QSR undoubtedly owns high-quality assets and dominant brands, I believe investors should wait for more clarity on current turnaround efforts at Burger King, deleveraging progress, and some other near-term risks before initiating a position.
Dominant Footprint with Highly Recognizable Growth Brands
QSR's portfolio includes prominent QSR brands with extensive global footprints. For example, Tim Hortons holds a commanding ~60% share of the Canadian breakfast foods market . This gives Tim Hortons unmatched scale and mindshare, as the brand has become synonymous with coffee and donuts.
Burger King and Popeyes also represent two of the largest and most highly recognizable brands globally in hamburgers and chicken, respectively. Burger King operates over 18,700 locations worldwide , making it the second-largest hamburger chain behind only McDonald's. Popeyes has over 3,600 restaurants globally , ranking second in the chicken QSR space behind KFC. The strong awareness of BK and Popeyes allows QSR to consistently drive traffic across markets worldwide.
In Q2 2023, Burger King International generated nearly 60% of total system-wide sales for the brand, totaling over $4 billion. However, U.S. Burger King stores have faced strained franchisee relations and deteriorating restaurant conditions in recent years. Turnaround initiatives like "Reclaim the Flame" aim to address this, which I'll explore shortly. But overall, QSR still has work to do to reignite growth in its core U.S. markets.
QSR is also working to expand digital capabilities, with the Tim Hortons app seeing 4.9 million monthly users as of Q2 2023. Leveraging digital prowess can provide convenience to customers and engagement opportunities through personalized offers and loyalty programs. But it requires continued investment as technology rapidly evolves to meet rising consumer expectations.
Stretched Balance Sheet and Other Risks
While the business is strong, QSR's balance sheet raises concerns. The company holds significant long-term debt totaling $12.8 billion as of the last report. Net leverage stands at a high level of 4.9x EBITDA, though management aims to reach a "mid-4x level."
Another emerging risk worth monitoring is the potential impact of the surging popularity of weight loss medications like Ozempic. With obesity rates high, drugs that aid weight loss have gained significant traction . These medications often suppress appetite as a side effect.
If the use of anti-obesity drugs continues to rise, it could curtail customer demand for indulgent fast food offerings. Consumers taking appetite-suppressing pills may cut back on visiting QSR chains, instead opting for healthier prepared meal options. Diminished traffic from lower appetite could pressure sales and earnings across QSR's concepts. This may seem like a far-fetched idea, but recent research reports from Barclays suggest that these concerns are far more real than people think.
Lastly, if Burger King's US recovery roadmap stalls, QSR would miss out on considerable earnings growth. The brand initiatives appear effective so far, but past efforts have failed. And BK still needs to show sustained positive traffic to prove the strength of the brand long-term. Investors should want to see further sales growth and profitability improvement before rewarding the turnaround efforts.
Potential Upside Catalysts
At recent prices of around $66 per share, QSR trades at a TTM P/E ratio of 20x, in line with peers. If Reclaim the Flame (Burger King US turnaround initiative) drives consistent earnings growth at Burger King, the valuation multiple would likely expand. Reclaim the Flame is aimed at updating advertising, digital platforms, technology, remodels and relocations to spur franchise growth in the United States. Q2 2023 results are encouraging with 8.3% top-line growth year-over-year at Burger King US, but we would want to see more proof that the sales momentum is sustainable. Second, QSR continuing to improve franchisee profitability across its concepts would enable unit growth to accelerate. Opening profitable new units is the clearest path to value creation.
Relative Valuation (Seeking Alpha)
Conclusion
QSR possesses strong brand equities and dominant market positions in its key categories and geographies. Turnaround efforts are gaining traction, and growth prospects look solid, especially internationally. However, the company's heavy debt load and exposure to other near-term risks give me pause. With in-line valuation and uncertainty still ahead, I rate shares a Hold and suggest nibbling cautiously for now. If QSR can demonstrate sustainable growth and deleveraging, the long-term upside could be substantial. I look forward to monitoring results in the quarters ahead.
For further details see:
Restaurant Brands: Turnaround Efforts Promising, But Debt Overhang Looms Large