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Restaurant Brands Banks on Digital Efforts Amid Debt Woes

Zacks Equity Research
·5 min read

Restaurant Brands International Inc. QSR is likely to benefit from digitalization, re-imaging and innovative initiatives and expansion strategies. However, dismal comps at Tim Hortons and Burger King due to the global pandemic and high debt margins pose concerns. Notably, shares of the company have declined 14.6% in the past three months compared with the industry’s fall of 0.4%.

Let us delve deeper into factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Restaurant Brands continues to focus on the expansion of delivery via digital platform amid the pandemic. Currently, the company has more than 10,000 active restaurants across its three brands, with most offering delivery via its digital platforms. Since February 2020, the company has added approximately 3,000 new restaurants onto delivery in the United States and Canada. In Canada, the company provides delivery services from nearly 1,200 restaurants compared with nearly 200 restaurants at the beginning of the year. Restaurant Brands’ announced that delivery sales have increased significantly compared with their pre-crisis levels.

Moreover, the company’s loyalty program, Tim's Rewards, is gaining popularity. The company said that following a rapid ramp-up phase, nearly half of the customers pay through Tim's Rewards.  Also, Restaurant Brands is presently testing a loyalty program in Canada across different markets as high loyalty card adoption rates have been witnessed in these test markets. Moreover, it plans to integrate loyalty cards into the digital channel, basically through their mobile app. The company is focusing on digital as well as other valuable tools to drive digital adoption and guest registration for the Tim's Rewards Program.

Meanwhile, Restaurant Brands is also taking initiatives to re-image its restaurants to more modern décor. In 2020, the company intends to revolutionize the drive-through experience at Burger King and Tim Hortons through the rollout of outdoor digital menu boards on an expedited basis. It plans to complete the rollout to approximately half of Burger King locations in the United States and a majority of the Tim Hortons systems in Canada.

Coming to reimaging initiatives, the company is focusing on improving its level of service through comprehensive training, improved restaurant operations and attractive menu options to enhance overall guest satisfaction, and thereby drive comps. Notably, the company expects to drive traffic by expanding the customer base, spreading out into new dayparts and continuing to build brand leadership in food quality and taste.

Restaurant Brands believes that there is a huge opportunity to grow all its brands around the Notably, the company continues to evaluate opportunities to speed up the international development of all the three brands by establishing master franchisees with exclusive development rights as well as joint ventures with new and existing franchisees.

Evidently, the company has formed master franchise joint venture partnerships for the brand in Mexico and Spain. The company is optimistic about the major expansion opportunity that lies ahead for the brand in the United States. Furthermore, the company is confident about Tim Hortons’ long-term growth prospects and remains committed to delivering on its growth strategy of expanding the brand worldwide.

Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and Restaurant Brands has also fallen prey. Although the company has reopened the majority of its restaurants, it is likely to witness dismal traffic due to social-distancing protocols. Sales form EMEA and LAC regions are likely to be affected.

Due to this, comparable store sales at both Tim Hortons and Burger King declined sharply during the second quarter of 2020. Comps at Tim Hortons declined 29.3% against growth of 0.5% in the prior-year quarter. The decline was primarily led by a decrease in system-wide sales. It was also negatively impacted by FX movements on a reported basis. Moreover, comps at Burger King declined 13.4% against growth of 3.6% in the prior-year quarter.

A strong balance sheet will help the company tide over the ongoing crisis. On Jun 30, 2020, the company’s long-term debt stood at $13.7 billion compared with $13.1 billion as of Mar 31, 2020. As a result, the company’s debt-to-capitalization increased to 78.4% from 77.9% as on Mar 31, 2020. Moreover, the company ended second-quarter fiscal 2020 with cash and cash equivalents of $1.5 billion compared with $2.5 billion at the end of first-quarter 2020, which may not be enough to manage the high-debt level.

Zacks Rank & Key Picks

Restaurant Brands currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. EAT, Papa John's International, Inc. PZZA and Chuy's Holdings, Inc. CHUY. Brinker and Papa John's sport a Zacks Rank #1, while Chuy's Holdings carries a Zacks Rank #2 (Buy).

Brinker has a trailing four-quarter earnings surprise of 52.7%, on average.

Papa John's has a three-five year earnings per share growth rate of 8%.

Chuy's Holdings’ 2021 earnings are expected to surge 180%.

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