Restaurant Brands (“QSR”) (QSR, Financial)
QSR’s franchised business model is a high-quality, capital-light, growing annuity that generates high-margin brand royalty fees from its four leading concepts: Burger King, Tim Hortons, Popeyes, and Firehouse Subs.
In November, Patrick Doyle, the legendary CEO who led Domino’s Pizza’s turnaround, joined as Executive Chairman. Under his tenure, Domino’s became the #1 pizza company by doubling systemwide sales and franchisee profitability driving a 23-fold increase in its share price over eight years. We believe that Patrick can accelerate growth at QSR and help the company achieve its full potential. He has purchased $30 million of QSR shares in the open market and has accepted a compensation arrangement that is entirely tied to QSR’s share price. QSR also recently promoted Josh Kobza to CEO, who will help execute on Patrick’s strategic vision in his new role.
QSR is continuing to make progress in positioning each of its brands for sustainable, long-term growth. To reinvigorate growth at Burger King in the U.S., the company launched a $400 million program to “reclaim the flame,” which includes $150 million in advertising and digital investments and $250 million in modernizing its restaurants. While the program was only recently launched, Burger King U.S.’s performance has started to improve, with the most recent quarter’s same-store sales 4% above pre-COVID-19 levels. Tim Hortons Canada has also improved to 9% same-store sales above pre-COVID-19 levels, despite Canada’s reopening significantly trailing the U.S. Meanwhile, Burger King International, Popeyes and Firehouse continue to generate strong same-store sales relative to pre-COVID-19 levels, with results that are in-line or above their peers.
We believe that QSR’s franchised-based royalty model is particularly attractive in today’s inflationary environment as the company’s revenues benefit as its franchisees increase prices, while the company’s cost structure is generally not subject to the same degree of inflationary pressures. QSR can continue to grow its business with minimal capital required as its franchisees open new units. Despite idiosyncratic issues in certain countries, QSR’s unit growth has returned to its historic mid-single-digit growth rate and is poised for an acceleration this year. As a result of its improving same-store sales coupled with strong unit growth, QSR’s earnings are now greater than prior to COVID-19 and are increasing at an attractive rate.
Despite improved brand performance and continued strong unit growth, QSR still trades at a wide discount to both its intrinsic value and its peers, which have lower long-term growth potential. As each of its brands return to sustainable growth, QSR’s share price should more accurately reflect our views of its business fundamentals over time. In light of higher interest rates and to increase its financial flexibility, the company is currently reducing leverage rather than share repurchases. We expect the company to return to repurchasing shares once it has reached its leverage target.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2022 annual letter.
