Fast food isn't exactly a growth industry in the U.S. On the contrary, while international expansion continues to move the needle, restaurants have been in a slugfest here in the states as a myriad of new fast-casual upstarts have popped up in the last decade. And now, new challenges due to the coronavirus pandemic are presenting themselves -- chief among them, adapting to digital and delivery channels.
Against this backdrop, shares of the world's largest restaurant chain McDonald's (NYSE: MCD) are up over 90% over the last trailing-five-year stretch, and fellow burger slinger Restaurant Brands International (NYSE: QSR) (parent of Burger King, Tim Hortons, and Popeyes) shares are up a more modest 40%-plus over the same time period. With a new decade beginning -- and one that's sure to be very different from the last -- one of these fast-food empires looks like a better buy right now.
The world loves fast food
McDonald's is a massive enterprise with nearly 40,000 stores worldwide. However, while the company has had some struggles in developed markets, the golden arches still hold a special allure when they begin popping up in an emerging economy. While it's not reflected in the revenue numbers (due to the company refranchising stores in the U.S. in recent years, which means less revenue but higher profit margin), global comparable sales -- or comps, a combination of foot traffic and guest average ticket size -- have remained in positive territory up until pandemic hit. In 2019, McDonald's global comps increased by 5.9%.
By contrast, Restaurant Brands has continued to grow, although a fair amount of its advance the last few years is due to the takeover of Popeyes back in 2017 (and the ensuing fried chicken sandwich craze). In 2019, comps were negative 1.5% for Tim Hortons, positive 3.4% for Burger King, and up 12.1% for Popeyes.
Popeyes followed that up with a 26.2% comps surge to kick off 2020, but the small chain still represents just 16% of Restaurant Brands' total revenue. With Burger King and Tim Hortons struggling due to the pandemic, stellar growth from the small fried-chicken subsidiary is getting bogged down.
That's not to say McDonald's fared better in Q1 2020. Its global comps took a 3.4% tumble. However, when it comes to international opportunity, the world's largest restaurant is still managing some growth and holds the advantage against its fast-food peers. If Popeyes can sustain its momentum, perhaps that will be a game-changer for Restaurant Brands, but at this point, McDonald's wins on the development front.
Profit margins and dividends
Both McDonald's and Restaurant Brands rely on a franchised-store business model, with 93% of the former's global empire delegated to franchisees versus the latter's 100% reliance on franchise partnerships. McDonald's has been catching up to Burger King's parent, though, refranchising some of its company-operated stores to local business owners and existing partners. As a result, its operating profit margin has expanded and was an enviable 41% over the last 12 months.
Clearly, McDonald's simplicity (just one chain to manage versus three for Restaurant Brands) has merits. And as neither of these eating-out companies is in high-growth mode, McDonald's higher margins should work in its long-term favor as it manages incremental expansion efforts and the return of cash to shareholders via its dividend -- although the share-buyback program was temporarily frozen as the company manages the current crisis.
However, with share buybacks currently out of the picture, Restaurant Brands has a higher annual dividend yield at 3.8%, compared to McDonald's 2.7%. Thus, even though margins don't quite rival those of its larger peer, some 36% operating margin is nothing to balk at. I like Restaurant Brands for its capacity to return cash to owners of its stock.
Don't forget the balance sheet
As a final -- but very important -- point, it's worth noting that neither company has a squeaky-clean balance sheet. McDonald's debt at the end of March 2020 totaled $39.1 billion, and total cash and equivalents were only $5.38 billion (only about 1 1/2 quarters' worth of operating expenses at the Q1 2020 rate). Restaurant Brands was in a little better shape, with $12.9 billion in debt and $2.50 billion in cash and equivalents (good for three-quarters of a year in operating expenses). While still carrying ample liabilities, Burger King and friends gets my nod as being on more solid financial footing as it manages fast-changing times and the aforementioned dividend payout.
For the record, I'm not a buyer of either stock. I think the challenges for eating-out places in the years to come will be substantial and I personally favor smaller and more nimble restaurant chains, given the current backdrop. But if I had to choose, I'd go with Restaurant Brands over McDonald's right now.
The golden arches are instantly recognizable the world over and still has room to grow in emerging markets, but Restaurant Brands does, too. And while Restaurant Brands' profit margins are a little thinner, I think that could change if its investment in Popeyes can build on its recent success. A relatively more healthy balance sheet won't hurt along the way, as well, especially given all the disruption arising from COVID-19 and increasing demand for digital paths to ordering among consumers.
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