Burger King Holdings Inc. (BKC) says it believes it can outrun rising commodity costs by continuing to grow sales, but acknowledges that the tight economy is giving it little room to raise prices.
Unlike archrival McDonald's Corp. (MCD), which last week said its U.S. comparable sales were flat in December, Burger King reported Thursday that sales in the U.S. and Canada rose 4.2% last month.
January's performance remains on that track. "We have not and are not seeing a slowdown," Chief Executive John Chidsey said on a conference call, after the world's second-largest hamburger chain reported fiscal second-quarter earnings that beat Wall Street expectations.
Shares of Burger King were trading recently up $1.39, or 5.8%, to $25.55 at about three times the normal volume.
Sales got a boost from promotion of the 50th anniversary of its flagship Whopper sandwich. Its comparable sales were up double-digit, in part, the company said, because of what it labeled its "freakout" TV commercial showing customers' shocked responses when told the Burger King they were visiting wasn't selling Whoppers any longer. (One restaurant actually did that temporarily while hidden cameras recorded reactions.)
The fast-food purveyor said higher costs for beef, chicken and cheese hurt profit margins by about 110 basis points in the latest quarter, but "we think we can outrun those commodity costs with increased sales," Chidsey said.
Although company-operated domestic restaurants raised menu prices by 75-80 basis points last November, he said, "given the macro environment, we want to be very careful, measured, in what we do." Many of its franchisees raised prices even higher.
Chief Marketing Officer Russ Klein added that "given the large disadvantage we faced versus McDonald's on value-for-the-money rating, we've been able to claw back and narrow that gap. But we still have a long, long way to go."
Given as much as a 35% sales increase at a brand new restaurant, the Miami company intends to rebuild or remodel about 30 units in the U.S. between now and July. As a result, management projected that revenue could be down by $10 million to $12 million in the second half.
Capital spending for the 2008 fiscal year was put at $140 million.
"Our strong cash flow allows us to pursue multiple initiatives," among them higher quarterly dividends and share repurchases, Chief Financial Officer Ben Wells said. Plans call for taking advantage of current market conditions for stock buybacks.
Fiscal second-quarter earnings rose 29% to $49 million, or 36 cents a share, compared with $38 million, or 28 cents a share, a year earlier. Revenue for the three months ended Dec. 31 grew 10% to $613 million. Analysts were expecting per-share earnings of 32 cents.
For the full year, the company said it expects per-share earnings growth to exceed 15%. Analysts have estimated growth between 12% and 15%, with a per-share consensus of $1.29.
Source: Richard Gibson; Dow Jones Newswires; 515-282-6830; dick.gibson@dowjones.com