Restaurant Brands Earnings: Global Systemwide Sales Growth Encouraging, Modest Development Hiccup

Narrow-moat Restaurant Brands International QSR posted OK third-quarter earnings results, with $1.84 billion in sales and $0.79 in diluted EPS narrowly missing our $1.87 billion and $0.83 estimates. While development remains a near-term challenge—the firm expects 4% unit growth in 2023 and 5% in 2024, with the latter falling a bit below our preprint 5.5% estimate—we view this as a cyclical rather than structural factor, largely attributable to a handful of geopolitical issues and elevated interest rates. While shares traded down on the report (falling 4%-5%) as the firm missed consensus sales expectations, we remain optimistic regarding its long-term prospects and expect to increase our $70 and CAD 95 intrinsic valuations by a low-single-digit percentage as we balance time value, stronger-than-anticipated Burger King results, and slower near-term development. Shares look modestly undervalued.

It was good to see some improvement at Burger King U.S., which posted 6.6% comparable store sales growth (ahead of no-moat Wendy’s 2.2% print Nov. 2 but behind wide-moat McDonald’s 8.1% figure) as the firm invests behind its “Reclaim the Flame” initiative, and with reasonable signs of progress, we would not be surprised to see the firm continue those investments beyond 2024. Long-term brand turnarounds are difficult to achieve in the restaurant industry, with a slew of high-profile efforts that have met little or qualified success (wide-moat Yum Brands’ KFC U.S. and Pizza Hut U.S. investments come to mind). We maintain only modest expectations for the burger chain’s domestic prospects, penciling in a 0.25%-0.5% annual bump to same-store sales (and stabilizing U.S. restaurant closures) as investments continue—though even those quotidian results would mark meaningful progress, in our view.

On balance, we view our medium-term forecasts for mid-single-digit annual growth (6%) in revenue and high-single-digit (8%) growth in operating profit as intact for the quick-service stalwart.