Restaurant Brands International: Staying Cautious On Comparable Sales Growth Trends

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Restaurant Brands International has had a lackluster 12 months, with the stock virtually flat in that time.Comparable sales growth has been slowing throughout the year, including in the company's most...

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While I didn't think the valuation was all that expensive for investors with a longer-term mindset, these shares had returned ~45% since my initial piece 18 months before that, and that ultimately drove a downgrade from 'Buy' to Hold'. I do have my fair share of duff calls, but that one hasn't been too bad, with QSR stock roughly flat in that time: Data by YCharts This year has seen a steady weakening in the company's comparable sales growth, and that has been pretty broad-based across its various segments. While you can reasonably chalk that up to broader cyclical issues, it nonetheless keeps me cautious here despite QSR's reasonable returns potential. I leave my 'Hold' rating in place as a result. Comps Now Flagging QSR's recent share price performance is being mirrored at the business level. Comparable sales growth has been flagging all year, and while this is probably a cyclical rather than company-specific issue (other restaurant companies are experiencing the same trend), it is nonetheless weighing here. With that, 2024 has so far served up three straight quarters of decelerating comps in all of the firm's operating segments. On a consolidated basis, Q3 comparable sales growth of 0.3% was down from 1.9% in Q2 and 4.6% in Q1. Domestically, Tim Hortons ('TH') is the only segment still posting positive comps. TH is a coffeehouse chain with ~3,860 stores in Canada and a further ~650 in the United States. Comparable sales there were up 2.7% last quarter. With a roughly flat store count, TH system sales increased by a similar amount. Positively, management attributed this to traffic rather than price hikes.   Data Source: Restaurant Brands International Quarterly Releases For franchisors like QSR, unit level economics are crucial for a number of reasons. Most obviously, strong returns at the store level will encourage franchisees to open more outlets. Chains with relatively strong unit-level economics are also in a better place to absorb any weakness, reducing the likelihood that the head company will need to provide monetary support – cash which might otherwise fund growth or be returned to shareholders via dividends and buybacks. In that sense, TH is a fine business, though it has had some issues in recent years. Specifically, the average TH store generated around C$280,000 in EBITDA last year, roughly C$40,000 less than in 2018. While margins and cash-on-cash returns are still solid, franchisees haven't been thrilled with the erosion in earnings. TH franchisees own four stores on average, so they've seen around C$160,000 in EBITDA disappear over the past five years. That may partly explain why TH's domestic store count has remained relatively flat over this period. There is also a size issue. TH is somewhat unusual for a quick-service restaurant in that it has built up a huge domestic market share. We're talking 60-70%-plus in brewed coffee and baked goods, and around the same in certain breakfast foods. While you could point to pockets of potential growth (TH 'only' has a 9% share in afternoon foods, for example), a business as dominant as TH is naturally going to find it harder to lay on meaningful organic growth. Even so, this is a good business. QSR generates revenue from TH by selling supplies to franchisees plus charging them royalty fees and rent, and it earns a ~30% EBITDA margin from this. Turning to Burger King ('BK'), the brand's domestic position remains precarious. Third quarter comparable sales fell 0.7%, weaker than results at peers Wendy's (WEN) and McDonald's. The overall restaurant count also fell, sending BK system sales down 1.5% to $2.89 billion.   Data Source: Restaurant Brands International Quarterly Releases Lackluster unit economics remains a major issue at BK. Earlier in the year, QSR acquired Carrols, the largest domestic Burger King franchisee. The segment that houses these restaurants reported a store-level EBITDA margin of 12.4% last quarter. This implies the average BK outlet is making around $210,000 in annual EBITDA. While up from $140,000 in 2022, it still doesn't point to particularly strong cash-on-cash returns. I mentioned above that weaker store-level economics also increase the likelihood that the head company will have to provide monetary support. This is the case at BK. Via the ongoing \"Reclaim the Flame\" plan, management has committed several hundred million to support BK via increased marketing, technology investments, store refurbishments and so on. Management is aiming for $230,000 in store-level profitability by 2026, with a longer-term goal of hitting $300,000. This might help stabilize BK in North America, but don't expect to see much growth in this segment. Popeyes performance was disappointing last quarter. Comparable sales were down a weighty 4% and system-wide sales fell 0.6%. Last year, the average domestic Popeyes outlet earned ~20% more in EBITDA than the average domestic Burger King. That uplift is driving better cash-on-cash returns and, ultimately, restaurant growth. North American units increased 4.1% year-on-year last quarter to 3,465. Circling back to comps for a minute, management was more upbeat on Popeyes' Q4 performance on the recent earnings call. Given this is the main U.S. growth driver for QSR, trends here will need to be monitored closely. Data Source: Restaurant Brands International Quarterly Releases Performance abroad is generally stronger. International comparable sales grew 1.8% last quarter, and there was also 7.6% net unit count growth. As a result, international system-wide sales increased over 8% to $4.8 billion. This segment is going to be the major growth driver for QSR going forward. Positively, BK comps look good outside of North America, where comparable sales increased 1.9% for the brand last quarter. That was better than McDonald's, which saw declines in its non-U.S. segments. With comps weakening, QSR is currently underperforming relative to certain medium-term goals. These goals include ~3% annualized comparable sales growth and ~8% growth in systemwide sales and operating income. Year-to-date comps are running ~80bps below target, with system-wide sales almost ~270bps below target. More positively, year-to-date adjusted operating income growth of 7.9% was about in line. Valuation QSR stock trades for ~21x consensus 2024 EPS. I don't think that is particularly expensive for a cash-generative franchise business with high single-digit growth ambitions.  Based on the current $69.10 share price, there is a credible path to double-digit annualized returns here over the next couple of years. This consists of a relatively flat 20x multiple on current consensus 2026 EPS (~$4.15), plus around $5 per share from expected dividends. Based on those figures, investors could bake in ~2x in P/E contraction and still walk away with a roughly 10% annualized total return. While I'm tempted to upgrade the stock to 'Buy' on the back of this, current comparable sales growth trends keep me cautious for now.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485442005"}