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This week, Bloomberg Businessweek has a detailed cover story about Burger King’s (NYSE:BKW) leadership.
It is not much of a useful analytical piece. The piece did not move the market, the Bloomberg editorial standard (but BKW earnings are later this week). Deep analytics must not sell anymore in our time-starved span of attention. The piece is Wall Street personality and issue focused. Businessweek seemed more intent to send a warm kiss to the largest Burger King shareholder, Bill Ackman, who is quoted. Ackman’s Pershing Square holds 10.9 percent of Burger King shares, the largest single institutional or individual shareholder.
Bill needed a warm kiss, he had a very bad week last week, personally over promising and under delivering on his anti-Herbalife pitch.
Franchised restaurant companies require a lot more investor due diligence, on the stock equity and bond investor side, and on the franchisee side. First, franchisors unfortunately elect to not release their franchisee financial results other than same store sales. Pure franchisors with essentially no restaurants of their own, like DineEquity (NYSE:DIN), Burger King and Tim Horton’s (NYSE:THI) do not release a single franchise operation number. Popeyes (NASDAQ:PLKI), alone of the publicly traded group, releases franchisee EBITDAR—EBITDA less rent. Some limited clues may be possible from the 10Q/10K statements and the franchisor's Franchise Disclosure Document (FDD) that details unit opens/closes. The 10Qs/10Ks do not detail why units open or close but the FDD broadly classifies closings into categories.
The same store sales (SSS) metric is more visible. But focus on it in isolation as Businessweek tried (Burger King’s same-store sales gain exceeded McDonald's) is a sub par view. A .5% same store sales rise on a $2.7 million store sales base (AUV) yields a much healthier picture than 2.0% on a store with a $1.0 million AUV base. Actually, both SSS and unit opens/closings need to be examined together. It is very possible to open a lot of stores but realize negative same store sales trends (Five Guys and Smashburger are best recent examples, experiencing both conditions).
Positive same store sales are nice, but are they profitable sales (might not be if discounting is involved) and are they high enough (restaurants need about 2% growth per year typically to cover inflation?
Bad debt expense, the value of franchise royalties not paid to the franchisor and eventually aged and reported, is also a poor, lagging metric. Once bad debt expense is posted, its really late in the business cycle. The franchise model problem is very intense. The horse is out of the barn.
Franchisees don’t talk much. They are afraid to and told not to, and are constrained from communicating via franchise agreements. More research and due diligence is needed. Consider 3G Capital and Fortress experience of their astoundingly bad 2012 Quiznos investment ($350 million investor group loss and counting).
Getting franchisee EBITDA is great (it is possible, but you have to dig and hire the right people) but it’s only half of the story. Restaurants are capital expenditure (CAPEX) intense and some measure of after tax, after debt service, after loan amortization economic gain or loss number is needed.
As usual, business analysis is not what you read on the cuff—it’s not what you expect, its what you inspect.