EUR 850.00 For Business Accounts Only

Morningstar | Restaurant Brands Stumbles Out of the Gate in 2019, but Long-Term Comp Growth Building Blocks Remain

Two items stood out to us from narrow-moat Restaurant Brands' first-quarter update: (1) the slowdown in Tim Hortons' comps after a strong finish to last year; and (2) weaker-than-expected unit growth and comps for Burger King U.S. While specific items were behind the uneven results and we still maintain a positive long-term bias, the update underscores the competitive backdrop facing restaurants in 2019. Tim Hortons' concerns are garnering the most headlines, including a 0.4% decline in Canada. We believe that the explanation for the Canada softness has merit--unfavorable weather impacted results by a point, and it did not see the traffic lift it was expecting from this year's Roll Up the Rim promotion--but management also cited "enhanced competitive activity." We expect a rebound in Tim Hortons' sales trends the next few quarters via loyalty program adoption and "Welcome Image" format openings, but we expect full-year comps will come in around 1% (versus earlier expectations around 2%). On Burger King, management attributed the drop-off in net new store openings to a higher number of closures as it rolls out its "BK of Tomorrow" format (with greater color on long-term unit targets expected at Restaurant Brands' inaugural investor day on May 15). Burger King U.S. comps of 0.4% were softer than expected due to competition and tepid response to a new grilled chicken sandwich. We forecast improvement as the year progresses through its BK Café breakfast push, expanded delivery coverage, and a stronger product pipeline (including the nationwide launch of the plant-based Impossible Whopper later this year). Despite 2019's slow start, we remain comfortable with our 10-year assumptions of 4%-5% annual net new unit growth, 2%-3% global comps, and adjusted EBITDA margins growing to the mid-40s and plan to maintain our $65/CAD 87 fair value estimates. We'd prefer a wider margin of safety but still see the firm as an attractive long-term growth/capital allocation story.