Lack of Burger King Visibility Noted by Franchisee

Carrols Restaurant Group (TAST) reported earnings today, with a much cooler and undefined outlook on its Burger King business. Carrols operates 312 Burger Kings, 91 Pollo Tropicals and 156 Taco Cabanas, and is a publicly traded franchisee/franchisor, in multi-states.

For the quarter ending January 3 2010 its Burger King same store sales were down 3%, but the trend for the first six weeks of the Q3 was –8. Of course negative winter weather was present, but BK was noted to be more negative. Some sales and traffic gains were noted in October and November 2009, but then falloff thereafter. Carrols executives noted their concern that the BKC focus on “extreme affordability” had turned consumers into “extreme bargain seekers”, and that they felt the current strategy put the classical barbell menu approach out of balance, with so much of the core product mix being discounted. For the quarter, Burger King unit sales were down 3.0%, with traffic up 2.1% but average check down 5.1%. Carrols noted lower French fry/drink sales than hoped. The most often mentioned phrase regarding Burger King in the call was “lack of visibility”. They were uncertain when the SBC coffee rollout would occur, and noted the Burger King purchasing co-op was generally not hedging, and expected commodity cost inflation of 3-5% in 2010, on the high end of companies we track. Average Burger King remodel sales upticks of 5-8% were noted, but considerable variability existed unit to unit. The total “scrape and rebuild” sales were higher.

On the positive side, while the new BKC SBC coffee thrust wasn’t thought to be a near term sales driver, it was recognized as part of a welcome breakfast daypart reemphasis. And the price movement from $1.00 to $1.19 later on the double cheeseburger would improve that items food cost percentage to the mid 50% range (that’s still pretty high). And Carols year end Burger King segment EBITDA rose to 8.5% (versus 7.9%). The potential $1 promotion effects were as we previously noted on Seeking Alpha in 2009 (November 17, September 28).

Overall, we know remodeling restaurants, adding/enhancing new products and the dayparts and building new units is the right thing generally to do, as Burger King is working. However, we are not sure that the point of customer reaction is near, where massive numbers of new customers flood these stores. And it seems confirmed now there must be a marketing balance between low price and margin offerings to drive both traffic and maintain average check.