Viral chicken sandwiches aren't enough for Wall Street: Morning Brief

Tuesday, February 11, 2020

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The general public isn’t the investing public

Make no mistake: Popeyes chicken sandwich is a runaway hit.

In the fourth quarter, same-store sales at Popeyes rose 34.4% and system-wide sales at Popeyes stores grew 42.3%.

As Jose Cil, CEO of Restaurant Brands (QSR) — Popeyes parent company — said on Monday, Popeyes chicken sandwich “has proven to be a game changer for the brand in every way.”

In a note to clients last week, analysts at Bank of America Global Research explored the 2019 phenomenon that became known as the chicken sandwich wars. Looking at trends on social media, BofA found that, “brand penetrations of ‘chicken sandwich’ Instagram posts and Tweets show that Popeyes has been able to take a meaningful share of conversations.”

This work led to BofA suggesting that fourth quarter comp sales growth at Popeyes would likely come in around 20%. Actual results, of course, were more than 50% better than this estimate.

Popeyes viral chicken sandwich is a marketing dream. And the results have backed up the hype.

But one viral sandwich still hasn’t been enough to get investors excited about the stock. And this episode serves as a great illustration of how the general public and the investing public look differently at brands, sales, and what makes a good investment.

The sustained buzz and hype surrounding the Popeyes chicken sandwich has very obviously led to strong sales. Following a Peter Lynch-style “invest in what you know” maxim might lead to you taking a position in the stock.

But during the fourth quarter, shares of Restaurant Brands fell over 9% during a quarter when the S&P 500 rose some 12%. For the full-year 2019, shares of Restaurant Brands rose about 19% against a gain of nearly 30% for the S&P 500.

And the story for Restaurant Brands is fairly simple: the success at Popeyes isn’t enough to paper over the struggles at its Tim Hortons brand.

Same-store sales at Tim Hortons fell 4.3% during the fourth quarter.

This Aug. 21, 2019, photo, shows Popeye's new chicken sandwich, the spicy version, in New Rochelle, N.Y. (AP Photo/Julia Rubin)

As Cil said: “At Tim Hortons, our performance did not reflect the incredible power of our brand and it is clear that we have a large opportunity to refocus on our founding values and what has made us famous with our guests over the years, which will be the basis for our plan in 2020.”

In the fourth quarter of 2018, system-wide sales at Tim Hortons totaled $1.73 billion against Popeyes sales of $934 million. In the fourth quarter of 2019, Tim Hortons sales fell to $1.68 billion with Popeyes totaling $1.33 billion during the same quarter. And so just a year after Tim Hortons had nearly double the quarterly sales of Popeyes, the brand saw quarterly revenues top those at its smaller family brand by just 30%.

These struggles are also more acute for the stock because Tim Hortons is a much larger part of the Restaurant Brands profit picture.

In the fourth quarter, adjusted EBITDA at Tim Hortons totaled $297 million, accounting for just under 48% of the company’s quarterly adjusted EBITDA. The fourth quarter of 2018, Tim Hortons recorded adjusted EBITDA of $297 million with that income accounting for more than half of the entire company’s quarterly adjusted profit.

Popeyes, in contrast, saw adjusted EBITDA rise more than 50% from the prior year, but still accounts for less than 10% of the company’s quarterly total.

Chicken sandwich virality hasn’t fundamentally changed the profit outlook for Restaurant Brands. At least not quite yet.

And while some readers might roll their eyes at being alerted to the fact that profits matter to investors, sentiment around the stock of Popeyes parent company seems divorced from consumer enthusiasm for their chicken sandwich.

To the general public, the Popeyes chicken sandwich is one of the most interesting business stories of the year. To the investing public, the chicken sandwich is just part of a profit picture that is under pressure.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

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