More growth or saturation in sight for Restaurant Brand?…

Restaurant Brands International is a leading quick-service restaurant company in the world. Burger King, Tim Hortons, and Popeyes are its largest and most popular brands. Tim Hortons is one of the most loved restaurant brands in Canada.

Restaurant Brands operates over 27,000 restaurants, including more than 18,000 Burger King restaurants, 4,800 Tim Hortons restaurants, and 3,100 Popeyes restaurants worldwide. In all, the company has more than 2500 franchises in over 100 countries. It has high market penetration in North America and Europe.

The company focuses on localized menus and quality food ingredients in order to attract consumers. It operates through three reportable segments: Tim Hortons (TH), Burger King (BK), and Popeyes Louisiana Kitchen (PLK). Tim Hortons is the largest accounting for 50% earnings, followed by Burger King (42%) and Popeyes (8%). 

Investment Data

Revenue Growth & Market Exposure

Most of Restaurant Brands’ brands are leading food stores in the world. Over the last 45 years, Restaurant Brands has established itself as a leader in great food taste and quality. It ensures strict quality controls and procurement norms to maintain its quality standards. Burger King is the second-largest fast-food hamburger chain, while Tim Hortons is one of the largest restaurant chains operating in the quick-service segment in North America and Popeyes ranks amongst the world’s largest chicken quick-service restaurants globally. Restaurant Brands is in a good position to benefit from an expanding market of its iconic brands. The company continues developing new products, focusing on customer feedback, in order to strengthen its leadership position in the quick-service food industry. 

All of QSR’s restaurants are franchised. The company earns most of its revenues from royalties which are based on a percentage of sales reported by its franchise restaurants and franchise fees. Restaurant Brands’ franchise agreements are typically a 10-year or 20-year plus renewal period contracts. It also has long-term beverage supply arrangements with major beverage vendors like The Coca-Cola Company and Dr. Pepper/ Snapple, Inc. for its TH and PLK brands in the U.S. and Canada. The company is targeting an overall international development of all of its brands through the establishment of master franchises with exclusive development rights and joint ventures with new and existing franchisees. 

Restaurant Brands witnessed a sharp decline in its comparable sales across brands and regions as a result of COVID-19 starting mid-March. Sales and traffic declined as most of the businesses remained closed. The company also deferred its April’s rent granting restaurant owners flexibility in managing their cash flow. However, almost 75% of the restaurants are now open on a global basis.

Restaurant Brands is in a good position to understand the shifts and consumption patterns of consumers and is rapidly responding to the changes. There has been a rapid rollout of home delivery options across restaurants since the outbreak of COVID-19. Restaurant Brands’ drive-thrus will continue to support its business and act as a secure and highly convenient means for guests to get food. In the wake of the current crisis situation, the company is also rolling out new curb-side pickup options on mobile apps in North America. Its products are very accessible through its own app and third-party delivery partners. Restaurant Brands witnessed 1.5 million new app downloads and a significant increase in loyalty registration during the quarter. The average check size increased due to frequent ordering both in the drive-thru and on delivery. 

The company has extended its digital rollup promotion expansion to more than 1,000 stores.

Dividends

Restaurant Brands last raised its dividend payout by 4%. It sports a decent dividend yield of 3.8% but has a very high payout ratio of ~90%. The company has registered a 62% growth in annualized dividends in the last three years. It also has a share buyback program. Strong free cash flow generation from Restaurant Brands’ three iconic brands offer a long runway for expansion. Moreover, the franchise business model entails very little capital expenditure on the company. Restaurant Brands generated free cash flow of approximately $116 million in the first quarter, paid a total of $232 million in common dividends, and ended the quarter with $2.5 billion of cash. Its total debt balance stood at ~$13 billion. The company’s liquidity position continues to be very strong and it has no near-term maturities. 

Restaurant Brands has a target to build 40,000 restaurants in the 2020s. The company has been expanding its geographical footprint worldwide and has successfully established 60% of the new restaurants in leading international developing economies like India, China, etc. These countries are witnessing huge growth in consumerism and Restaurant Brands is in a good position to benefit from this rising trend. The company continues to build the Burger King brand globally. Strong focus on guest experience including technology like delivery, kiosks, and outdoor digital menu boards should also support future revenue growth. 

Restaurant Brands quickly leveraged the infrastructure to adapt its platforms in response to the rapidly evolving needs that the COVID crisis accelerated and has seen some remarkable progress especially in delivery, mobile app guest experience, and CRM in just a short period of time.

Source: QSR Investor Presentation

Competition

With very few barriers to entry, the restaurant industry is highly competitive. Restaurant Brands competes with many foodservice companies as well as local operators in the U.S., Canada, and internationally. McDonalds’ is one of its biggest rivals. The company also faces competition from casual restaurant chains, convenience and grocery stores, and other food delivery services providers. Technology has emerged as a critical differentiator in enabling delivery and Restaurant Brands has made good progress on the digital front.

Bottom Line

Restaurant Brands is one of the most efficient franchised quick-service restaurant operators in the world with three leading independent brands having huge potential for future growth. Strong growth in system-wide sales, superior cash flow, and balanced capital allocation pave a strong path for shareholder value creation. The company is favourably placed from the growing chicken, coffee, and bakery market which is expected to reach a $590 billion market size by 2023. Restaurant Brands has, however, been facing challenges, as a result of the ongoing limitations to in-restaurant dining in most markets. The company is expecting future growth prospects will be driven by its digital capabilities. The strength of its three iconic global brands and a strong and diverse network of partners around the world should help fund future dividend hikes.