Restaurant Brands Rides On Franchising Amid Competition

Restaurant Brands International Inc. (NYSE:QSR) has been undertaking various sales-boosting initiatives that should continue to drive the company’s top line.

However, intense competition and tricky consumer demand continue to be potential headwinds. The company’s shares have lost 7% in the past year, underperforming the industry’s gain of 1.8%. Moreover, downward estimate revisions for the current quarter reflect ongoing pessimism in the stock’s prospects. Earnings estimates for the current quarter have gone down 6% over the past month.

Sales-Building Efforts to Drive Top-Line Growth

Restaurant Brands continues to focus on improving its level of service through comprehensive training, improved restaurant operations, reimaging efforts and attractive menu options to enhance overall guest satisfaction, and thereby drive comps. It believes that new product development is a key driver of long-term success for its brands, and will continue to be in focus in 2018 and beyond.

This is expected to drive traffic of the company by expanding its customer base, spreading out into new dayparts, and continuing to build brand leadership in food quality and taste.

The company has unwavering focus on its goal to drive traffic and revenues at its restaurants through core product platforms, continual focus on a balanced menu design, expansion of delivery business, promotional offerings, efforts to grow breakfast daypart and product launches. Growth across each of its breakfast, lunch and dinner dayparts, supported by new products, is driving incremental sales at Tim Hortons restaurants. Its coffee, cold beverage, wraps and breakfast sandwich platforms, particularly continue to reflect strength.

In 2017, the company launched espresso-based beverages in all Tim Hortons restaurants across Canada. Management expects this platform to continue growing, given the meaningful innovation it can introduce around its base products.

Restaurant Brands is also taking initiatives to re-image its restaurants to a more modern décor. In March 2018, Restaurant Brands announced a new Tim Hortons restaurant design called the welcome image, which entails a redesign of Tim Hortons restaurants. The company plans to re-image a majority of its restaurants across Canada over the next four years.

Franchised Model Safeguards Earnings but Limits Operations

Given that almost 100% of Restaurant Brands’ current system-wide restaurants are franchised, its expenses are considerably low. Since the company signs franchise agreements for all its restaurants instead of operating them itself, this puts the cost burden on the franchisees that operate the businesses.

Thus, the reduced capital requirements are expected to facilitate earnings growth and ROE expansion for the company. Notably, Restaurant Brands have witnessed year-over-year earnings growth in each of the trailing four quarters.

However, despite such positives, a fully-franchised model has its share of drawbacks and risks. Under this business model, the company’s prospects depend on its ability to attract new franchisees for all its brands, and the willingness of the franchisees to open restaurants in the existing and new markets. The company has a limited influence over its franchisees, as a result of which its ability to control its restaurants’ operations, and implement operational initiatives and business strategies is restricted.

Cutthroat Competition Remains a Headwind

Intense competition among fast-casual, quick-service and casual dining segments of the restaurant industry is expected to remain fierce with respect to price, food quality, service, location and concept, which may in turn impact Restaurant Brands’ revenues. The company is increasingly facing competitive pressure from restaurant bigwigs like McDonald's (NYSE:MCD) , Domino's (NYSE:DPZ) and YUM! Brands (NYSE:YUM) .

If this Zacks Rank #3 (Hold) company does not make pragmatic use of advanced technologies to innovate across value chains, it has high chances of fading out like many other restaurant retailers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>