Here's Why You Should Retain Restaurant Brands (QSR) Stock
Restaurant Brands International Inc. QSR is likely to benefit from strong comps growth, menu innovation and strategic investments. Also, the focus on the Reclaim the Flame initiative bodes well. However, inflationary pressures and general softening in the consumer environment are a concern.
Let us discuss the factors highlighting why investors should retain the stock.
Factors Driving Growth
Restaurant Brands continues to impress investors with solid comps growth. In first-quarter 2024, the company’s consolidated comparable sales came in at 4.6% compared with 10.3% reported in the prior-year quarter. Comps in Tim Hortons (or TH), Burger King (BK) and Popeyes (PLK) came in at 6.9%, 3.8% and 5.7% compared with 14.9%, 8.7% and 3.6%, respectively, reported in the prior-year quarter. The upside was driven by the strengthening of core offerings and enhanced restaurant operations.
The company emphasizes foundational improvements across menu innovation, digital and operations to drive growth. In terms of advertising and digital strategies, the company allocated $6 million from its Fuel the Flame investment in the first quarter. Initiatives like the Royal Reset refresh investments, involvement in Royal Roundtables and targeted service training are cultivating a stronger culture at the restaurant level within Burger King, significantly contributing to operational improvements.
The company is progressing well towards completing nearly 400 remodels in 2024, encompassing both the Royal Reset remodel program and standard re-imaging efforts. As of the first quarter, close to 100 Royal Reset remodels have been operational, yielding impressive average uplifts in the high teens, net of control. The results instill confidence in both the company and its franchisees regarding the effectiveness of the Reclaim the Flame initiative.
The company announced an expanded co-investment plan totaling $300 million, aimed at remodeling an additional 1,100 restaurants by 2028, achieving a modern image for 85% to 90% of the establishments. The company remains committed to incentivizing better operations and higher-scope remodels. It stated solid interest among franchisees and stated plans to make it available to them in the near future.
The company focuses on Tim Hortons's positioning in Canada to drive growth. During the first quarter, the company initiated new menu options at attractive prices, featuring loaded bowls, wraps, and anytime snackers enhanced with savory pinwheels. Also, it launched new Flatbread Pizzas, leveraging its expertise in baked goods to provide heartier meals at exceptional value. This expansion follows a successful market test facilitated by an investment of approximately CAD20 million alongside franchisees to implement high-speed convection ovens across the system. The marketing and culinary teams, along with restaurant owners, are enthusiastic about upcoming menu opportunities. The new equipment paves the path for achieving a double-digit market share in evening food offerings within the next year.
Concerns
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In the past six months, Restaurant Brands’ shares have declined 4.5% compared with the industry’s 0.8% fall. The dismal performance can be attributed to a softer consumer backdrop in China, deceleration in pricing in markets in Western Europe and the repercussions of the conflict in the Middle East.
The company has been continuously shouldering increased expenses, which have been detrimental to margins. In first-quarter 2024, total costs of sales came in at $606 million compared with $550 million reported in the prior-year quarter. The upside was primarily driven by inflationary pressures, increases in supply chain sales, increases in equipment sales, an increase in supply chain bad debt expense and an unfavorable FX Impact. The company is cautious about foreign exchange volatility, rising interest rates and general softening in the consumer environment (which have been exacerbated by conflicts in the Middle East), thereby affecting the business and result of operations.
Zacks Rank & Key Picks
Restaurant Brands currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
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The Zacks Consensus Estimate for WING’s 2024 sales and earnings per share (EPS) suggests a rise of 27.5% and 36.7%, respectively, from the year-ago levels.
Brinker International, Inc. EAT sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 213.4%, on average. EAT’s shares have risen 65.8% in the past year.
The Zacks Consensus Estimate for EAT’s 2024 sales and EPS indicates 5% and 39.2% growth, respectively, from the year-earlier actuals.
El Pollo Loco Holdings, Inc. LOCO carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 19.4%, on average. LOCO’s shares have risen 11.7% in the past year.
The Zacks Consensus Estimate for LOCO’s 2025 sales and EPS indicates 3.8% and 9.4% growth, respectively, from the prior-year figures.
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