Business at Restaurant Brands International and Alimentation Couche-Tard is still worse than it was in 2019. Despite this, the companies beat analyst earnings forecasts.
Given restrictions on travel and social gatherings, investing in restaurants or fuel retail may feel less appealing, but some companies have surprised in the new normal, and convenience is king.
Business at two of BMO Capital Markets analyst Peter Sklar’s favourites, Restaurant Brands International Inc. (TSX—QSR; NYSE—QSR) and Alimentation Couche-Tard Inc. (TSX—ATD.B), is still far worse than it was in 2019. (Mr. Sklar covers consumer and retail stocks for BMO from Toronto.) Despite this, in both cases, the companies exceeded analyst earnings forecasts in the most recent quarters for which they have reported.
Mr. Sklar assigns both Restaurant Brands International and Alimentation Couche-Tard “outperform” recommendations and names them on his “top 15” stocks list at BMO, equivalent to a “best buy” endorsement.
RBI sales down but exceed analysts’ projections
Restaurant Brands International is the parent company of Tim Hortons, Burger King, and Popeye’s.
The company generated adjusted diluted EPS (earnings per share) of $0.33 in the three-month period ended June 30, 2020. Although that was a far cry from the $0.71 that was reported 12 months earlier, Mr. Sklar notes that BMO and a consensus of other analysts had predicted EPS of $0.29.
Year-over-year, business at Tim Hortons dropped nearly 30 per cent and fell 13.4 per cent at Burger King in the quarter, but rose almost 25 per cent at Popeye’s.
The analyst says the figures generally matched his expectations, although he had expected sales at Tim Hortons to have been down only by about 10 per cent. According to the analyst, the company attributed the relatively slower recovery at Tim Hortons to a higher proportion of coffee-led sales, affected by the pandemic’s disruption of regular workday routines and a generally slower pace of economic reopening in Canada.
In Canada, only two-thirds of Tim Hortons locations have drive-thru windows, compared to 90 percent of US locations.
“These factors were even more impactful in Ontario, which comprise 50 per cent of total restaurants, and where only 50 per cent of Tim’s locations have drive-thrus,” adds Mr. Sklar, stressing the particularly disruptive effect of daily routine changes in the Greater Toronto Area, unsurprisingly home to a large proportion of Ontario Tim’s locations.
Looking ahead, the analyst says, “We continue to recommend RBI as its brands will likely continue to fare well due to their heavy weighting in drive-thru. Both Burger King and Popeye’s remain well-positioned as preferred delivery and drive-thru options as the pandemic continues, and we foresee that the company will benefit from some stickiness post-COVID-19 as share shifts from casual dining to QSR into the new normal, especially for Popeye’s.”
Fuel margins, merchandise sales sustain Couche-Tard
International fuel retailer and convenience-store operator Couche-Tard reported adjusted diluted EPS of US$0.71 for its fiscal 2021 first quarter, the 12-week period ended July 19, 2020.
Remarkably, this was a 47.9 per cent increase compared to a year earlier, even though the company’s overall first-quarter revenue fell 31.4 per cent to US$9.71 billion year-over-year. BMO had forecast adjusted diluted EPS of US$0.39, while the consensus averaged US$0.41. Mr. Sklar says most of the difference resulted from a stronger-than-forecast margin on US fuel.
Referring to Couche-Tard’s conference call on the first quarter, Mr. Sklar comments, “Management indicated that the robust US fuel margin was due to Couche-Tard’s geographic mix as some regions had stronger fuel margins and volumes than others, as well as the effectiveness of its fuel procurement team.”
Even so, road transportation fuel revenue as a whole fell 44.4 per cent between the first quarter of fiscal 2020 and fiscal 2021, to US$5.77 billion. In contrast, the company managed to increase merchandise and service revenues by seven per cent to US$3.86 billion comparing the same two periods.
An Alimentation Couche-Tard press release on the quarterly results states, “This increase is primarily attributable to growth in basket, which more than offset continued softness in traffic. We saw strength across many categories, especially tobacco products, alcohol, packaged beverages and various grocery items.”
Same-store merchandise revenue rose by 7.7 per cent in the US, 3.4 per cent in Europe, and 19.9 per cent in Canada year-over-year.
Meanwhile, Couche-Tard’s “Fresh Food, Fast” program, a major merchandising initiative for its US business, promises to add another boost to same-store sales, predicts Mr. Sklar, who visited pilot stores in St. Louis last year. As of the beginning of September, there were 875 locations operating under the program; management expects that number to rise to 1,500 by October.
This is an edited version of an article that was originally published for subscribers in the October 16, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •11/9/20 •