Carrols Restaurant Group is paying a bigger price for Burger King’s weak performance than the chain’s parent company, at least on Wall Street.
The Syracuse, N.Y.-based Carrols operates more than 1,000 Burger King locations. Its stock is down 47% so far this year, making it one of the worst performing publicly traded restaurants in any sector. It now trades at $1.57. The company’s stock has been on a steady trajectory downward since early last year. In fact, since its now-former CEO Dan Accordino vociferously defended the company’s valuation, Carrols’ stock is down 75%.
It does not require a rocket surgeon to figure out why Carrols’ stock has declined so much. Carrols operates more than 1,000 Burger King locations, to go with a small number of Popeyes units. It relies heavily on Burger King’s sales and profitability for its overall performance. And Burger King’s sales and profitability have been weak lately.
By contrast, Restaurant Brands International stock is down about 18% so far this year. RBI owns Burger King. And while it’s not exactly a home run to be down by 18%, it is roughly on par with the broader markets and is actually a better-than-average performance in the restaurant space.
It also makes sense that RBI would do better than Carrols because RBI depends less on the performance of Burger King than Carrols does.
Restaurant Brands International operates four major, quick-service brands: Tim Hortons, Popeyes, Firehouse and Burger King. It relies most heavily on Tim Hortons, which has sped its recovery from the pandemic after the Canadian market opened up. It also relies more on Burger King’s international performance than it does Burger King’s U.S. performance—and international sales have thrived even as domestic sales remain challenged.
One of the more underrated benefits of industry consolidation is it protects the company from weakness at one brand or the other. RBI has been able to do OK despite problems at Tim Hortons, and then Burger King U.S., and maybe tomorrow Popeyes, because it owns four concepts.
The difference in performance highlights one simple fact in the franchisee-franchisor relationship. The franchisee takes on most of the risk. If a brand underperforms, franchisees go first. And the current environment is increasing the concern about the state of franchisee finances.
Burger King’s same-store sales fell 0.5% last quarter. But it has also underperformed top rival McDonald’s two-year same-store sales by at least 11 points for the past several quarters. Burger King’s unit volumes are more than $2 million less than McDonald’s despite the fact that they run similar kinds of restaurant companies.
Carrols, like most Burger King franchisees, operates with a lot of debt. With rising costs, its profits have shrunk. Carrols’ adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, margin was less than 5% for the full year 2021 and was 3.3% in the fourth quarter last year. Wall Street tends to have a problem when companies’ sales are weak and their profitability shrinks like that.
Carrols could probably use rapidly increasing sales at Burger King. But the environment right now is such that such improving sales don’t always translate into better profits.
Being a publicly traded franchisee is generally troublesome and most operators would be better off avoiding it—at least until they can get large enough and diverse enough to take more control of their futures. Franchisees have little control over the state of their brand.
In Carrols’ case, the situation is worse because the company relies almost entirely on a single brand that has been struggling at a time of high inflation.
The company likely needs another brand (or preferably more than one) so it isn’t so dependent on that single concept. It’s a lesson that NPC International, once the country’s second-largest franchisee, learned too late when it tried to diversify and get into Wendy’s—though it had too much debt from that, plus some leveraged buyouts, that ultimately became a real problem when Pizza Hut’s sales slumped.
Carrols did, in fact, try diversifying years ago when it bought into Popeyes. But the company’s debt became too problematic and it had to stop acquisitions for a time so it could start generating some cash.
To be sure, almost no franchisee will go public anytime soon. Yet the Carrols’ experience offers a lesson in risk for larger operators regardless of ownership. Go ahead and put all your chips in with one brand, but beware if that brand begins to struggle.