Restaurant Brands Int’l Earnings: Sales Momentum Encouraging, but Franchise Health Concerns Linger

Narrow-moat Restaurant Brands International QSR, or RBI, posted solid first-quarter earnings, with every brand but Tim Hortons Canada seeing acceleration in sales momentum relative to the comparable 2019 period. While the near-term restaurant macroenvironment provides plenty of reasons for trepidation, we derive cautious optimism from modest early signs of improvement at Burger King U.S. and RBI’s growing Tim Hortons and Popeyes international businesses. On balance, the quarter clocked in largely in line with our expectations, and we expect to raise our $65 fair value estimate by a low-single-digit percentage, consistent with time value.

More concretely, RBI’s $1.59 billion in sales and $0.61 in diluted EPS effectively mirrored our $1.55 billion and $0.61 estimates, respectively. While results varied by operating segment, we found ourselves particularly encouraged by Burger King U.S. comparable store sales of 8.7%, which represented a strong sequential acceleration (from 4% in the fourth quarter) and meaningfully narrowed the firm’s underperformance with McDonald’s (to 3.9% from 5.3% a quarter ago). While we’re unwilling to budge on our long-term prognosis for low-single-digit long-term same-store sales at that brand—given the complexity of a brand turnaround and anemic home-market unit-level economics—we’ll be closely monitoring results over the balance of the year for signs of a durable inflection point. Growing sales are a leading indicator of franchisee health, and if nothing else, 300-400 planned store closures during 2023 in the U.S. should result in a smaller, healthier system.

Finally, Tim Hortons and Popeyes generated 18% of systemwide sales from international markets during the quarter (up 2 and 3 points annually, respectively), attesting to encouraging momentum abroad. We continue to view a 6% sales CAGR and 7% operating profit CAGR over the next five years as attainable for the operator, with long-term operating margins between 31.5%-32%.