Weekly Review Of The Restaurant Industry: Burger King, McDonald’s & Chipotle Mexican Grill

September 29th, 2014 by Trefis Team
BKW: Burger King Worldwide logo
BKW
Burger King Worldwide

According to the NPD’s foodservice market research, the restaurant industry has been negatively impacted by the changing dining habits in the U.S., primarily driven by changing economic and cultural conditions. The increasing income gap between the high-income groups and middle-class groups is taking a toll on the quick service restaurants (QSR) in the U.S. The income split is affecting the customer count in the QSRs, which include restaurant chains such as McDonald’s Corporation (NYSE:MCD), Yum! Brands & Burger King (NYSE: BKW), as well as in fast-casual restaurants such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread.

According to the report, the customer traffic growth in QSRs was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. [1] Fine dining restaurants have an average customer spend of $40 and QSRs report an average check of $5. A decrease in low-income customers, who prefer going to low-cost fast food restaurants, is affecting the revenue growth of the QSRs. Moreover, customer traffic in the fine dining restaurants is not enough to make up for the declining traffic count. As a result, these restaurant chains are depending on middle-class groups to fill the void.

Here’s a quick round up of the restaurant companies covered by Trefis.

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See Our Complete Analysis for These Companies Here

McDonald’s

McDonald’s, the leading quick service restaurant in the industry, is debatably facing a tough period, as it continues to face headwinds in its path for top-line growth. From restaurant shutdowns in Russia to poor performance in China, driven by the China meat scandal, the company is reporting sluggish growth in all its segments. To add to the woes, the company has to face the changing dining habits in the U.S., its biggest market. With increasing health concerns and an unstable economy, McDonald’s is facing a decline in customer count. According to our estimates, McDonald’s customer count decreased by 1.2% in 2013, primarily due to consumer shift to fast-casual restaurants. As a measure to keep its investors satisfied, the company announced a 5% hike in its quarterly cash dividends; a dividend of $0.85 per share payable on December 15, 2014. [2]

McDonald’s stock traded between the range $93-$95 last week. Our price estimate for the company’s stock is $103 (market cap of $102 billion) which is 10% above the current market price. For 2014, we expect McDonald’s to report net revenue of around $30 billion and non-GAAP diluted EPS of $5.97. The market consensus for EPS is $5.36. (Reuters)

See Our Complete Analysis For McDonald’s Corporation

Chipotle Mexican Grill

Chipotle Mexican Grill, which has an average check of $13-$15, has been an impressive performer over the past few years, with increase in average check and rise in customer count. Chipotle’s revenue for the second quarter rose to $1.05 billion, up 28.6% year-over-year, primarily driven by an increase of 17.3% in the comparable restaurant sales. [3] Chipotle’s shares are up 55% over the past 12 months. According to Morgan Stanley research report, Chipotle’s stores have witnessed more than a 6% increase in customer usage, the highest in the industry, over the last eight years. [4]

Chipotle’s stock traded between the range $652- $666 last week. Our price estimate for the company’s stock is $628 (market cap of $19.5 billion) which is 5% below the current market price. For 2014, we expect Chipotle to report net revenue of around $3.9 billion and non-GAAP diluted EPS of $$11.6.

See Our Complete Analysis For Chipotle Mexican Grill

Burger King

Burger King (NYSE: BKW) has been facing declining customer count in North America for the past few quarters, however, for the last two months combined, the company reported 3.7% growth in the same-store sale. [5] The merger with Tim Hortons might provide a huge platform for Burger King to expand its customer base. With more number of restaurants in its second biggest market and more variety of products on its menu, the company is bound to attract more customers. This might help Burger King in improving its customer traffic, and eventually staying strong in the tough competition. Moreover, the company is picking up the pace in its international expansion by targeting lucrative markets such as France and India, further expanding its reach in areas where its value meals might be a huge hit.

Burger King’s stock traded between $30- $31 last week. Our price estimate for the company’s stock is $28 (market cap of $10 billion) which is 6% below the current market price. For 2014, we expect Burger King to report net revenue of around $1.1 billion and non-GAAP diluted EPS of $0.97. The market consensus for EPS is $0.98. (Reuters)

See full analysis for Burger King

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Notes:
  1. Income gap and shrinking middle class take a toll on restaurant industry [↩]
  2. McDonald’s raises quarterly cash dividends by 5% [↩]
  3. Chipotle Mexican Grill: earnings call transcript, Q2 2014 [↩]
  4. This chart tells the whole story of how restaurant industry has changed over the past decade [↩]
  5. Burger King: North America same-store sales rise 3.7% [↩]