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Burger King Worldwide Inc.’s (BKW - Analyst Report) second-quarter adjusted earnings per share of 21 cents beat the Zacks Consensus Estimate of 19 cents by 10.5% and increased 20.1% year over year. Increased adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and lower interest expense contributed to growth.

Revenue & Margins

Burger King’s total revenue plunged 48.5% year over year to $278.3 million due to the adverse impact of refranchising, negative currency translation and lower comparable sales. However, the reported revenues marginally beat the Zacks Consensus Estimate of $278.0 million. Organically (excluding the impact of refranchising and currency), revenues nudged up 1.2% in the quarter thanks to net restaurant growth and positive comps.

Organic adjusted EBITDA grew 2.7% year over year driven by net restaurant growth and cost containment initiatives. Food and paper costs as well as occupancy cost ratio were palpably lower in the quarter.

Comps Discussion

Overall comps in the quarter nudged up 0.6%, which was also a sequential improvement from a decline of 1.4%. Improving comps in Europe, the Middle East, and Africa (EMEA) and Asia-Pacific (APAC) contributed to the sequential increase. Comps were higher in the company-owned units as against the franchised ones. However, quarterly comps compared unfavorably with 4.4% growth recorded in the year-ago quarter.

Comps grew a respective 2.9% and 3.9% in EMEA and APAC. However, U.S. & Canada again reported negative comps of 0.5% although it was much better than the first-quarter’s decline of 3.0%. The Latin America and the Caribbean (LAC) region performed miserably and posted a comps decline of 2.2%, which was steeper sequentially.

Segment Results

Although on its way to improvement, a still anemic macroeconomic environment and stiff competition led to the decline in U.S. and Canada comps. However, Burger King remains steadfast in executing its Four Pillars strategy in this region that includes menu improvements, marketing initiatives, operational efficiency and re-imaging in the U.S. and Canada.

The success of Steakhouse Gold premium burgers and the “Trial Weeks” value promotion in Germany, continued success of “King of the Day” promotions in the UK, the couponing initiatives in Spain and a strong performance in the underserved Russian market facilitated comps growth in the EMEA region.

Continuous poor performance in Mexico and Puerto Rico marred LAC region comps. Further, Brazil, which was relatively better-positioned last quarter, posted flat sales this quarter hurt mainly by unexpected temporary store closures due to protests in June. Management is striving hard to resist the downfall in comps and hence altered the menu and promotional strategy in Mexico to increase traffic in the latter half of the year.

In the APAC region, Australia has been the star performer. The region registered higher levels of sales each month of the quarter powered by value promotions such as “Shake and Win” and “Penny Pinchers”. Management now plans to foray into the world’s sixth most densely inhabited country – Pakistan.  

Refranchising

During the second quarter of 2013, Burger King refranchised 305 units. Burger King seeks to finish its refranchising initiative in 2013.

Re-imaging

Burger King seeks to re-image at least 40% of its U.S. and Canada restaurants by 2015. In 2012, Burger King completed around 600 re-images, thus refurbishing 19% of the system. So far re-imaged restaurants have delivered an average sales lift of 10% to 15%, thus providing an attractive return to franchisees.

Our Take

Burger King’s second quarter results signaled a thorough sequential improvement across most regions and indicators. The resiliency of the Eurozone against ongoing recession deserves a special mention.

Burger King currently carries a Zacks Rank #2 (Buy). Some restaurant companies that are worth a look at the current level are Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report) all of which carry a Zacks Rank #2 (Buy).
 

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