Burger King’s Strategy: Cut Costs, Sell Coffee

HamburgerBurger King (NYSE:BKW) reported fourth-quarter and full-year 2012 results on Friday that had shares trading up as much as 4.1 percent. In need of some good news after sliding nearly 7 percent in the first two weeks of February, and with industry projections generally bleak for 2013, the burger maker served up results that showed substantially reduced costs and a strong game plan for the coming year.

Fourth-quarter highlights included 2.7 percent comparable-sales growth and a system-wide sales increase of 6.7 percent. Adjusted diluted earnings rose an attractive 57.8 percent to $0.23 per share as the company shifted to a franchise-owned store model that dramatically cut costs. The strategy increased the company’s fourth-quarter EBITA margin from 26.5 percent in the year-ago period to 43.2 percent, yielding earnings growth even though total revenues fell 30.33 percent for the period. To round it all out, Burger King increased its cash dividend by 25 percent from the previous quarter to $0.05 per share.

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Catalyzing some of Burger King’s sales growth were aggressive adjustments to its menu, a strategy that many restaurants have used recently to counter a general decline in demand. The collective tightening of consumer belts in America, thanks to ongoing economic headwinds and and the recently-expired payroll tax holiday, has forced restaurants across the board to focus on value in order to attract customers…

Several restaurants, including Burger King, have had a slow start to 2013. Shares of Burger King were off 2.2 percent this year to date before its earnings. Yum! Brands (NYSE:YUM) was off 4.9 percent for the same period, with sales in its important China division suffering due to food-safety concerns. Fellow hamburger maker McDonald’s (NYSE:MCD) has had a slightly better run, with shares up 3.8 percent for the period, but this growth was overshadowed by 5.1 percent year-over-year losses.

Each company has aggressively promoted the value items on their menus in order to maintain sales growth, and while the strategy is paying off in the short term, long-term prospects are not as bright. Lower prices mean lower margins, and slowly advancing food costs could quickly make many value-menu items uneconomical.

Aware of this progression, Burger King is joining many of its competitors in pursuing high-demand items like coffee, which has become increasingly trendy at fast-food locations. Burger King recently announced a partnership with Seattle’s Best Coffee, which is owned by Starbucks (NASDAQ:SBUX), in order to carry the brew. Reports indicate that Burger King customers are more likely than average to be regular coffee drinkers, and the company is adding ten new coffee drinks to its menu as a result.

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