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Restaurant Brands Rides on Franchising Despite Competition

Restaurant Brands International Inc.QSR banks on various sales-building efforts, coupled with solid expansion strategies that drive the company's growth story. Further, increased focus on franchising aids the company's earnings. However, intense competition and tricky consumer demand are potential headwinds.

In the second quarter of 2018 , the company's earnings not only surpassed the Zacks Consensus Estimate but also increased 29.4% from the year-ago quarter on the back of continued improvement in its top line.

Driven by strong brand presence, shares of Restaurant Brands have outperformed the industry in the past three months. The company's shares have gained 1.1% compared with the industry's collective growth of 0.1%. We are further encouraged by its robust earnings trend, where earnings surpassed the Zacks Consensus Estimate for 14 straight quarters.

Sales-Building Efforts to Drive Top-Line Growth

Restaurant Brands continues to focus on improving its level of service through comprehensive training, improved restaurant operations, reimaging efforts and attractive menu options to enhance overall guest satisfaction, and thereby drive comps. The company believes that product development is a key driver for long-term success of its brands and is likely to continue to be in focus in 2018 and beyond.

The company has an unwavering focus on its goal to drive traffic and revenues at its restaurants through core product platforms, a continual focus on a balanced menu design, expansion of delivery business, promotional offerings, efforts to grow breakfast daypart and product launches. Growth across each of its breakfast, lunch and dinner dayparts, supported by new products, is driving incremental sales at Tim Hortons restaurants. In the second quarter of 2018, the company has launched Breakfast Anytime, which is expected to attract more traffic in the future.

Restaurant Brands is also taking initiatives to re-image its restaurants with a more modern décor. In March 2018, it has announced a new Tim Hortons restaurant design called the welcome image, which entails a redesign of Tim Hortons restaurants. The company plans to re-image a majority of its restaurants across Canada over the next four years. Through a market survey, the company has also learned that 75% of its customers plan to revisit the restaurants after they are re-imaged. After launching the company's Welcome Image, more than one-third of Canadian franchisees signed up more than 650 restaurants for reimaging in 2018 or 2019.

Subsequently, the consensus estimate predicts revenues of $5.4 billion for the current year, suggesting 17.9% growth from the year-ago level.

Franchise Model to Boost Earnings

Given that almost 100% of the company's current system-wide restaurants are franchised, its expenses are considerably low. Since the company signs franchise agreements for all of the restaurants instead of operating those itself, this puts the cost burden on the franchisees that operate the businesses.

Thus, the reduced capital requirements facilitate earnings growth and ROE expansion. Notably, Restaurant Brands have witnessed year-over-year earnings growth in each of the trailing four quarters, backed by strong improvement in the company's top line.

Further, the current year earnings estimates are pegged at $2.73, reflecting 30% year-over-year growth.

Concerns

Although the company's fully-franchised model has a lot of positives, it also has its share of drawbacks and risks. Under this business model, Restaurant Brands' prospects depend on its ability to attract new franchisees for all of its brands, and the willingness of franchisees to open restaurants in the existing and new markets. The company also has a limited influence over its franchisees, as a result of which, its ability to control restaurants' operations, and implement operational initiatives and business strategies is restricted.

Meanwhile, competition among fast-casual, quick-service and casual dining segments of the restaurant industry is expected to remain fierce, with respect to price, food quality, service, location and concept, which may adversely impact Restaurant Brands' revenues.

Zacks Rank & Stocks to Consider

Restaurant Brands currently carry a Zacks Rank #3 (Hold). A few better-ranked restaurant stocks include BJ's Restaurants BJRI , Darden DRI and Dine Brands DIN . While BJ's Restaurants sports a Zacks Rank #1 (Strong Buy), Darden and Dine Brands carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

BJ's Restaurants, Darden and Dine Brands' earnings for 2018 are projected to increase 50.4%, 14.4%, and 25.5%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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