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Restaurant Brands' Digitization Aids, Comps Woes Linger

Zacks Equity Research

Restaurant Brands International Inc. QSR is likely to benefit from digitalization, reimaging and innovative initiatives. Increased focus on expansion efforts and the franchise business model bode well. Notably, shares of the company have gained 38.4% in the past three months, outperforming the industry’s 13.7% growth. However, dismal comps at Tim Hortons and Burger King, as well as decline in traffic due to coronavirus outbreak pose concerns.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Restaurant Brands continues to focus on improving its services through comprehensive training, enhanced restaurant operations, reimaging efforts and attractive menu options to enhance overall guest satisfaction, and thereby drive comps. Notably, the company expects to drive traffic by expanding the customer base, spreading out into new dayparts, and continuing to build brand leadership in food quality and taste. 

In January 2020, the company launched three dream donut flavors nationally across Canada, gaining momentum in markets from an operational perspective and seamlessly fitting into its core baked goods assortment category.

Restaurant Brands believes that there is a huge opportunity to grow its brands around the world by expanding presence in existing markets as well as entering new markets. Notaby, the company continues to evaluate opportunities to speed up international development of the three brands by establishing master franchisees with exclusive development rights as well as joint ventures with new and existing franchisees.

Evidently, the company has formed master franchise joint venture partnerships for the brand in Mexico and Spain. The company is optimistic about the major expansion opportunity that lies ahead for the brand in the United States. Furthermore, the company is confident about Tim Hortons’ long-term growth prospects and remains committed to delivering on its growth strategy of expanding the brand worldwide.

Meanwhile, Restaurant Brands is also taking initiatives to reimage its restaurants to a more modern décor. In 2020, the company intends to revolutionize the drive-through experience at Burger King and Tim Hortons through the rollout of outdoor digital menu boards on an expedited basis. It plans to complete the rollout to approximately half of Burger King locations in the United States and a majority of the Tim Hortons systems in Canada.

Apart from reimaging initiatives, the company is also investing in technology-driven initiatives like digital ordering to boost sales. The company’s app and digital platforms are allowing it to offer services more effectively and efficiently. During first-quarter 2020, delivery sales increased more than six times compared with pre-pandemic levels.

Moreover, the company’s loyalty program, Tim's Rewards, is gaining popularity. The company said that following a rapid ramp-up phase, nearly half of the customers pay through Tim's Rewards. Notably, the company plans to integrate loyalty cards into the digital channel, basically through their mobile app, thereby boosting the top line in the upcoming periods.

Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and Restaurant Brands has also fallen prey. Although the company has reopened the majority of its restaurants, it is likely to witness dismal traffic due to social distancing protocols. Due to this, comparable store sales at both Tim Hortons and Burger King declined sharply during the first quarter of 2020. Comps at Tim Hortons declined 10.3% compared with a fall of 0.6% in the prior-year quarter. The decline can primarily be attributed to decrease in system-wide sales, mainly in the month of March, due to the coronavirus outbreak. It was also negatively impacted by FX movements on a reported basis. Moreover, comps at Burger King declined 3.7% against growth of 2.2% in the prior-year quarter.

A strong balance sheet will help the company tide over the ongoing crisis. On Mar 31, 2020, the company’s long-term debt stood at $13.1 billion compared with $12.1 billion as of Dec 31, 2019. As a result, the company’s debt-to-capitalization was 77.9% compared with 74% at the end of Dec 31, 2019. Moreover, the company ended first-quarter fiscal 2020 with cash and cash equivalents of $2.5 billion, which may not be enough to manage the high-debt level.

Zacks Rank & Key Picks

Restaurant Brands currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Jack in the Box Inc. JACK, Wingstop Inc. WING and Yum China Holdings, Inc. YUMC, each sporting a Zacks Rank #1.

Earnings in 2021 for Jack in the Box are expected to rise 23.2%.

Wingstop has a three-five year earnings per share growth rate of 11%.

Yum China has a trailing four-quarter positive earnings surprise of 62.9%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.

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