Restaurant Brands: Increase In New Restaurants And System-Wide Sales Drives The Growth For Q1 2019

Restaurant Brands International (NYSE: QSR), one of the world’s largest quick service restaurant companies, announced its Q1 2019 results on April 29, 2019, followed by a conference call with analysts. The company missed consensus for revenue which was recorded at $1.3 billion, up by 1% year on year. The increase was driven largely by the addition of new restaurants (65 new in Q1 2019) and system-wide sales growth (6.4% year on year in Q1 2019). The earnings also missed consensus and was recorded at 0.53, lower than $0.60 per share in the same period of 2018.

Restaurant Brands International reported $5.3 billion in Total Revenues in 2018. This included 3 revenue streams:

• Burger King Revenue: $1.6 billion in 2018 (30.8% of Total Revenues). This includes royalty income from Burger King restaurants across the world.
• Tim Hortons Revenue: $3.3 billion in 2018 (61.5% of Total Revenues). This includes royalty income from Tim Hortons restaurants across the world.
• Popeyes Louisiana Kitchen Revenue: $0.4 billion in 2018 (7.7% of Total Revenues). This includes royalty income from Popeyes Louisiana Kitchen restaurants across the world.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – What Has Driven Restaurant Brands International’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full Year 2019? In addition, here is more Consumer Discretionary data.

Key Factors Affecting Earnings:

Revenue expected to continue growth:

• Restaurant Brands Total Revenue has continuously increased over the quarters in 2018. In Q1 2019 revenue was recorded at $1.3 billion, up 1% year on year.
• The increase is primarily due to the continuous additions of new restaurants. Burger King added more than 1,000 in 2017 and 2018. Tim Hortons added an average of more than 100 restaurants annually in 2017 and 2018. While, Popeyes Louisiana Kitchen added 210 restaurants in 2018.
• In Q1 2019 growth was led by a total of 65 new restaurants and system-wide sales growth at 6.4% year on year.

Trend in Expenses:

• The Total Expenses have moved in tandem with the Total Revenue except for Q4 2018 due to a tax benefit received by the company.
• Cost of Sales on company restaurants has remained in the range of 76-78% of Company restaurant revenues in the last two years and continued at 77.8% in Q1 2019.
• Franchise and property has seen a steady decrease along with increasing revenue from the segment. This has pushed down the expense margin of Franchise Expenses to Franchise revenue from nearly 21% in 2017 to 14% in 2018. In Q1 2019 the franchise expenses were 17.9% of Franchise revenue.
• In 2018 the Selling, General and administrative expenses have gone up nearly three times compared to the same period in the previous quarter, primarily due to the inclusion of advertising fund expenses from the application of ASC 606. The same continued in Q1 2019.

Full Year Outlook:

• For the full year, we expect gross revenue to increase by 7% to $5.7 billion in 2019.
• Growth is expected to be pushed by continuous addition of restaurants. Trefis estimates 1400+ new restaurants by the end of 2019 (all segments).
• Highest revenue contribution is expected from Tim Hortons segment at $3.5 billion.
• EBITDA margin is expected to increase back to 2017 level, i.e. around 42%.

Trefis has a price estimate of $68 per share for Restaurant Brands International’s stock. The value is backed on the expectation of growth from all three segments of the company.

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