VALUATION HIGHLIGHTS

1. Tim Hortons constitute 60% of the Trefis price estimate for Restaurant Brands International's stock.
2. Burger King constitutes 17% of the Trefis price estimate for Restaurant Brands International's stock.
3. INTL Restaurants constitute 12% of the Trefis price estimate for Restaurant Brands International's stock.

WHAT HAS CHANGED?

QSR Missed Q3 Estimates

The company's increased sales and profits in Q3 did not improve as much as the market anticipated. QSR's Q3 revenues grew 25% y-o-y to $2.3 billion, driven by an increase in system-wide sales primarily in the International and Tim Hortons segment. The company's consolidated comparable sales came in at 0.3% compared to 7% a year ago. Among the five reporting segments, the company saw a notable decline across all segments - a negative 0.7% for Burger King, a negative 4.0% for Popeyes Louisiana Kitchen, Tim Hortons comp sales fell to 2.3% from 7.6% previously, and Firehouse Subs same-store sales fell to negative 4.8%. On the bottom line, the company's earnings were flat y-o-y at 79 cents in the third quarter (while adjusted profits increased 4.6% to $0.93).

Note: QSR's FY'23 ended on December 31, 2023. Q3 FY'24 refers to the quarter that ended on September 30, 2024

Outlook

The company introduced a new Restaurant Holdings (RH) segment which includes the performance of Popeyes China and the restaurants it acquired from Carrols, which was Burger King’s largest U.S. franchisee before Restaurant Brands bought it. This new segment's performance was included in the Q3 2024 report.

Looking ahead to 2024, QSR continues to expect adjusted interest expense between $565M and $575M and consolidated capital expenditures of ~$300M. SG&A, including the new segment, is expected to range between $640M to $650M, including share-based compensation and non-cash incentive compensation expense between $170M and $175M.

BUSINESS SUMMARY

QSR is one of the largest fast-food restaurant chains in the world and it is a combination of Burger King, Tim Hortons, Popeyes, and, since late 2021, also Firehouse Subs. As of December 31, 2023, Burger King had 19,384 stores, Popeye's Louisiana Kitchen had 4,571, Tim Hortons had 5,833 stores, whereas Firehouse Subs had 1,282 restaurants.

Burger King's restaurants fall into the quick service restaurants category that features flame-grilled hamburgers, fish and chicken combos, french fries, soft drinks, and other affordable food items. Burger King restaurants appeal to a wide range of consumers, with multiple dayparts and product platforms appealing to varied customer groups. The fast-food chain competes with McDonald's and Wendy's in the Fast Food Hamburger Restaurant (FFHR) category.

Tim Hortons restaurants are quick-service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, bagels, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more.

Popeyes Louisiana Kitchen is a chain of quick-service restaurants that distinguish themselves with a unique Louisiana style menu that features spicy chicken, chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items. Popeyes is a highly differentiated QSR brand with a passion for its Louisiana heritage and flavorful, authentic food. Restaurant Brands International acquired Popeyes Louisiana Kitchen (PLK) in March 2017.

Firehouse Subs is a leading player in the QSR sandwich category in North America. This brand was acquired by QSR on December 15, 2021.

SOURCES OF VALUE

Franchises' profit margins are four times that of company-operated restaurants

Company-operated restaurants are low-margin businesses (~10-15% operating margin) as compared to franchised restaurants (~70% operating margin). The difference in margins is mainly because of the extra costs involved with company-operated restaurants, such as employees and operational costs, which are absent from franchised restaurants.

As Restaurant Brands International looks to become a 100% franchised model, it will mean lower revenues but higher margins for the company.

KEY TRENDS

Rising popularity of fast casual restaurants

The fast-food industry faces strong competition from Fast Casual Restaurants. Restaurants such as Chipotle Mexican Grill and Panera Bread are more likely to appeal to health-conscious customers. They claim to offer fresher, healthier, and better quality food.

Aggressive international growth as the U.S. market saturates

More than 50% of Burger King restaurants are in the U.S. This figure is expected to remain stagnant in the next few years, owing to the saturation of the fast-food industry in the country.

Burger King has entered into joint venture agreements in various parts of the world to expand its business. In countries like China, Australia, Colombia, and South Africa, the company is set to open numerous new restaurants without deploying its capital. Going forward, most of the expansion will come from international markets where the company is expected to earn only royalties. Thus, the growth of the company in the next few years depends on its performance in the international markets.