Everyone is familiar with the big names under the Restaurant Brands International Inc. (NYSE:QSR) umbrella. Most recently, Firehouse Subs, and before that Popeyes Louisiana Kitchen, were brought under the umbrella, and these brands helped grow sales with 1,266 net new stores operating. The company has also worked heavily on its apps and ordering services, and digital sales continue to grow strong. Food costs have been a headwind, as have labor costs.
With that said, we believe the company will be relatively recession-resistant, though the consumer is likely to weaken this year. Thus, we would not buy the stock here, only a few points off its 52-week highs. We would wait for this market to pull this stock back to more reasonable levels, perhaps to under $60, where the dividend will approach 4%, as it was just raised again. The company just reported Q4 earnings that were mixed, but we think Restaurant Brands International Inc. shares are a buy on a pullback.
Strong brand comparable sales
We think the key indicator to watch for restaurants is comparable sales. Growth in comparable sales is very telling. Overall, the company saw system-wide sales growth of 13.4%, with net restaurant growth of 4.3%, driven primarily by Popeyes Louisiana Kitchen. In fact, Popeyes delivered its strongest year of restaurant growth since the company acquired the brand in 2017. Popeyes now has nearly 4,100 restaurants worldwide.
All units are performing well, including Tim Horton’s, Burger King, Popeyes, and Firehouse Subs. Tim Horton’s saw strong comparable sales growth of 9.4% in Q4, leading all of QSR’s brands. Tim Horton’s also grew comparable sales by 10.0% for the year. Burger King really saw some strong growth, driven by volumes and pricing power. Q4 2022 comparable sales grew 8.4% while growing 9.7% for the entire year 2022. This was a win. Popeyes saw comps grow 3.8% in Q4, while growing 1.4% for the entire year. Over at Firehouse Subs, Q4 comps sales grew 0.4% and were up 0.6% for the year.
Growth in earnings
Financially speaking, the company is also operating well. Margins faced some pressure from rising food and labor costs. We believe that if the economy does finally start to soften after all of the Federal Reserve’s actions to weaken things and regain price stability, that food inflation and labor inflation should subside. With that said, the company grew revenue to $1.69 billion which was essentially in line with expectations, while the margin pressure led to a slight earnings miss. The company saw EPS of $0.72 adjusted, missing by $0.02. For the year, the company brought in $3.14 in EPS, rising 11.3% from last year’s $2.82. With $3.14 in EPS, at $67 per share, the stock trades at 21.3X TTM earnings. That is a touch stretched given the 11% growth in EPS.
Looking ahead
As we look ahead for Restaurant Brands International Inc., we believe 2023 will see flat earnings. We see sales edging higher in the mid-single digits to $6.7-$6.9 billion, but believe margin pressure will continue this year. A weaker consumer will not help, either. Based on global system comps of 2-3% but similar margin profiles to late 2022, we anticipate EPS around $3.00-$3.25 for 2023.
As such, we think you need to let the stock cool down. We will add that the balance sheet does have a lot of debt, however. As of December 31, 2022, Restaurant Brands’ total debt was $13.4 billion, and net debt was $12.2 billion. The company has $1.2 billion in cash and equivalents. Net leverage was 8.2x and adjusted EBITDA net leverage was 5.1x. This is rather high, and with interest rates higher it makes this debt more expensive and makes refinancing or securing new debt come with much higher interest payments.
Take-home
The brands are strong for QSR. The growth has been impressive, but we see EPS growth stalling in 2023. Restaurant Brands International Inc. stock is expensive because of this reality. We do see food and labor inflation cooling this year, but it will likely also come with a weaker consumer.
With that said, we like buying Restaurant Brands International Inc. shares when this market pulls back, which we see as very likely by the spring. This would be a better value and a better dividend yield. Let the Restaurant Brands International Inc. shares cool off.
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