Burger King Franchise Revenue of $1M+ worth the high Franchise Cost?
Introduction
You probably have heard of big name restaurant franchises such as Taco Bell and Olive Garden, but who actually owns these companies? Restaurant businesses can take many forms — they can be publicly traded, with the majority of units company owned, like Starbucks. They can also be franchised concepts with a majority of restaurants owned and operated by franchisees.
Did you know that companies can be franchisees as well? Not all franchisees are individuals, there are corporations that are set up for the purpose of owning and operating thousands of restaurants. One such corporation is Carrols Restaurant Group. You may have never heard of them, but you probably have heard of the restaurant brands that they own — Burger King and Popeyes.
Carrols Restaurant Group is a restaurant franchiseA franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business model, brand and rights to sell its products and services. The franchisee signs a contract (franchise agreement) with the franchisor to acquire the franchise and generally has a territory granted to operate. What is a Franchise?… More corporation that is also the largest Burger King franchisee in the world, and according to their website, they currently own and operate over 1,000 restaurants under the Burger King and Popeye brand names. At the same time, Carrols Restaurant Group is a publicly traded company, meaning that it is listed on the stock market under the ticker symbol $TAST.
As an individual investor, on the surface it may seem as if you do not have a lot in common with large corporations like Carrols Restaurant Group. But looking at this franchisee’s financials can provide valuable insight into the success of the franchisor in the industry, as well as projected revenues, costs, and profits. Keep reading to find an in depth analysis of Carrols Restaurant Group and what their stake in Burger King means for interested investors.
Burger King Franchise Cost, Revenue and Profit: Quarterly Earnings (Q1 2021)
Carrols Restaurant Group is one of the largest restaurant franchisees in North America. It currently operates 1,010 Burger King restaurants in 23 states as well as 65 Popeyes restaurants in seven states. Carrols has been operating Burger King franchises since 1973 and Popeyes restaurants since 2019. Below is a chart of their income statementOne of the major financial statements focused on a business’s revenues and expenses in a particular period. It is also known as the profit and loss statement. The income statement includes the gross profit, earnings before tax, and net profit.Tax Returns: The forms a business makes on an annual statement of income and personal circumstances sent to the IRS to… for Q1, as well as some key takeaways.
Quarterly EarningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of… (in thousands)
| Three Months Ended | ||
|---|---|---|
| April 4, 2021 | March 29, 2020 | |
| Restaurant SalesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. | $ 389,993 | $ 351,558 |
| Costs and Expenses | ||
| Cost of Sales | $ 113,790 | $ 102,297 |
| Restaurant Wage and Related Expenses | $ 129,646 | $ 124,575 |
| Restaurant Rent Expense | $ 30,314 | $ 29,454 |
| Other Restaurant Operating Expenses | $ 61,419 | $ 57,978 |
| Advertising Expenses | $ 15,369 | $ 13,876 |
| General and Administrative Expenses | $ 21,369 | $ 20,787 |
| DepreciationA reduction in the value of an asset over time, due to wear and tear…. and Amortization | $ 20,609 | $ 21,031 |
| Impairment and Other Lease Charges | $ 353 | $ 2,881 |
| Other expenses, net | $ 227 | $ 56,787 |
| Total Costs and Total Expenses | $ 393,096 | $ 373,565 |
| Loss from Operations | $ (3,103) | $ (22,047) |
| InterestA payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. In Vetted Biz, it is typically the additional rate of a loan a business buyer would pay off over time to borrow in purchasing a business…. Expense | $ 6,726 | $ 7,140 |
| Loss before income taxes | $ (9,829) | $ (29,187) |
| Benefit from income taxes | $ (2,661) | $ (9,978) |
| Net loss | $ (7,168) | $ (22,209) |
| Basic and diluted net loss on share | $ (0.14) | $ (0.44) |
| Basic and diluted weighted average shares outstanding | $ 49,824 | $ 50,821 |
Supplemental Information (in thousands)
| Three Months Ended | ||
|---|---|---|
| April 4, 2021 | March 29, 2020 | |
| Revenue | ||
| Burger King Restaurant Sales | $ 368,488 | $ 329,637 |
| Popeyes restaurant sales | $ 21,505 | $ 21,881 |
| Total Revenue | $ 389,993 | $ 351,518 |
| Change in comparable Burger King restaurant sales | 14.7% | (5.7)% |
| Change in comparable Popeyes restaurant sales | 0.5% | —- |
| Average weekly sales per Burger King restaurant | $ 28,094 | $ 24,614 |
| Average weekly sales per Popeyes restaurant | $ 25,458 | $ 25,978 |
| Adjusted Restaurant level EBITDA | $ 39,484 | $ 22,797 |
| Adjusted Restaurant level margin | 10.1% | 6.5% |
| Adjusted EBITDA | $ 19,866 | $ 3,972 |
| Adjusted EBITDA margin | 5.1% | 1.1% |
| Adjusted Net Loss | $ (6,500) | $ (19,317) |
| Adjusted Diluted Net Loss per share | $ (0.13) | $ (0.38) |
| Number of Burger King Restaurants | ||
| Restaurants at beginning of period | 1,009 | 1,036 |
| New restaurants (including offsets) | 2 | 3 |
| Restaurants closed (including offsets) | (1) | (11) |
| Restaurants at end of period | 1,010 | 1,028 |
| Average Number of Burger King resaurants | 1,009.00 | 1,030.20 |
| Number of Popeyes restaurants | ||
| Restaurants at beginning and end of period | 65 | 65 |
| Average number of operating Popeyes restaurants | 65.0 | 64.8 |
In Q1 of 2021, total restaurant revenue increased 10.9% to $390 million, compared to $351.5 million in Q1 of 2020. At the same time, comparable restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. for Burger King increased by 14.7%, in contrast to the 5.7% decrease experienced in last year’s first quarter.
Burger King makes up the majority of Carrols total restaurant sales, constituting 94.5% in the first quarter. Although revenue increased in Q1, expenses increased as well, from $20.8 million in Q1 2020 to $21.4 million in Q1 2021. Another important metric to look for in a company’s financial statement is their EBITDA, or their earningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of… before interestA payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. In Vetted Biz, it is typically the additional rate of a loan a business buyer would pay off over time to borrow in purchasing a business…., taxes, depreciationA reduction in the value of an asset over time, due to wear and tear…., and amortization. There was a significant jump in Carrol’s EBITDA in Q1, from $4.0 million in Q1 2020 to $21.4 million in 2021. In 2020, Carrols lost a lot of their franchises, decreasing from 1,036 restaurants in the beginning of Q1 to 1,028 at the end for a net loss of 8 restaurants in just one quarter. However, for 2021, Carrols was able to retain all of their restaurants from the beginning of the quarter.
Top Burger King Franchisee Makes Over $20 million in Profits: Annual Report
Despite the economic downturn brought about by the COVID 19 pandemic, Carrols Restaurant Group proved their resilience throughout the fiscal year of 2020, as top line restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. grew by 6.5% to about $1.5 billion, thanks in part to their large scale acquisition activity in 2019.
There was only a modest decline in comparable restaurant sales for both Burger King and Popeyes, 2.8% and 0.1% respectively. Furthermore, their delivery platform served as an important success factor, going from contributing nothing to approximately 5% of restaurant sales by the end of 2020. At the same time, Carrols was able to dramatically improve their operating margins in 2020, increasing their Adjusted Restaurant Level EBITDA by almost $25 million and Adjusted EBITDA by just over $20 million.
The following charts are a modified version of the financial statements provided by the annual report, and what they indicate about the financial health of the largest franchisee of Burger King.
Annual Earnings: Income Statement
| (thousands of dollars) | |||
|---|---|---|---|
| January 3, 2021 | December 29, 2019 | December 30, 2018 | |
| Revenue | |||
| Restaurant salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. | $ 1,547,502 | $ 1,452,516 | $ 1,179,307 |
| Other revenue | —- | 10,249 | —- |
| Total revenue | 1,547,502 | 1,462,765 | 1,179,307 |
| Costs and Expenses | |||
| Restaurant Wages and Related Expenses | $ 498,127 | $ 485,278 | $ 382,829 |
| Restaurant Rent Expense | $ 118,444 | $ 107,147 | $ 81,409 |
| Other Restaurant Operating Expenses | $ 236,059 | $ 227,364 | $ 178,750 |
| Advertising Expenses | $ 60,735 | $ 58,689 | $ 48,340 |
| General and Administrative Expenses | $ 84,051 | $ 84,734 | $ 66,587 |
| DepreciationA reduction in the value of an asset over time, due to wear and tear…. and Amortization | $ 81,727 | $ 74,674 | $ 58,468 |
| Impairment and Other Lease Charges | $ 12,778 | $ 3,564 | $ 3,685 |
| Other income | (1,271) | (1,911) | (424) |
| Total Operating Expenses | $ 1,543,388 | $ 1,471,508 | $ 1,145,952 |
| Income (Loss) from Operations | $ 4,114 | $ (8,743) | $ 33,355 |
| InterestA payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum, at a particular rate. In Vetted Biz, it is typically the additional rate of a loan a business buyer would pay off over time to borrow in purchasing a business…. Expense | $ 27,283 | $ 27,856 | $ 23,638 |
| Gain on bargain purchase | —- | —- | $ (230) |
| Loss on extinguishment of debt | —- | $ 7,443 | —- |
| Income (Loss) before income taxes | $ (23,169) | $ (44,042) | $ 9,947 |
| Provision (benefit) for income taxes | $ 6,294 | $ (12,123) | $ (157) |
| Net income (loss) | $ (29,463) | $ (31,919) | $ 10,104 |
| Basic and diluted net income (loss) per share | $ (0.58) | $ (0.74) | $ (0.22) |
| Weighted average common shares outstanding | |||
| Basic | $ 50,751,185 | $ 43,421,715 | $ 35,715,372 |
| Diluted | $ 50,751,185 | $ 43,421,715 | $ 45,319,971 |
| Comprehensive income (loss), net of tax | |||
| Net income (loss) | $ (29,463) | $ (31,919) | $ (10,104) |
| Other comprehensive income (loss) | $ (5,284) | $ (1,268) | $ 564 |
| Comprehensive income (loss) | $ (34,747) | $ (30,651) | $ (10,668) |
Annual Cash Flows Statement
| (thousands of dollars) | |||
|---|---|---|---|
| April 4, 2021 | March 29, 2020 | March 29, 2020 | |
| Cash flows from operating activities | |||
| Net income | $ (29,463) | $ (31,919) | $ 10,104 |
| Adjustments to reconcile net income to net cash provided by operating activities | |||
| Loss (gain) on disposals of property and equipment | (994) | (74) | 312 |
| Stock based compensation | 5,223 | 5,753 | 5,812 |
| Gain on bargain purchase | —- | —- | (230) |
| Impairment and other lease charges | 12,778 | 3,564 | 3,685 |
| Depreciation and amortization | 81,727 | 74,674 | 58,468 |
| Amortization of deferred financing costs | 2,170 | 1,694 | 1,202 |
| Amortization of bond premium and discount on debt | 539 | (80) | (913) |
| Amortization of deferred gains from sale-leaseback transactons | —- | —- | (1,584) |
| Deferred income taxes | 6,026 | (11,982) | (483) |
| Non-cash loss on extinguishment of debt | —- | 129 | —- |
| Changes in other operating assets and liabilities | |||
| Refundable income taxes | 115 | (284) | 55 |
| Trade and other receivables | (6,417) | (523) | (2,275) |
| Accounts payable | (5,927) | 1,196 | (926) |
| Accrued interest | (245) | (2,917) | 146 |
| Accrued payroll, related taxes and benefits | 18,103 | (538) | 2,084 |
| Other liabilities | 10,993 | 238 | 3,998 |
| Changes in operating right of use assets and operating lease liabilities, net | 10,196 | 3,980 | —- |
| Other | (1,589) | 5,797 | 1,314 |
| Net cash provided by operating activities | 103,945 | 48,708 | 80,769 |
| Cash flows used for investing activities | |||
| Capital expenditures | |||
| New restaurant development | (17,824) | (53,596) | (23,171) |
| Restaurant remodeling | (15,317) | (50,383) | (31,951) |
| Other restaurant capital expenditures | (13,064) | (18,922) | (15,726) |
| Corporate and restaurant information systems | (10,685) | (11,978) | (4,887) |
| Total capital expenditures | (56,890) | (134,879) | (75,735) |
| Acquisition of restaurants, net of cash acquired | —- | (130,646) | (38,102) |
| Proceeds from insurance recoveries | 2,071 | 323 | 642 |
| Properties purchased for sale-leaseback | (15,537) | (1,207) | (2,123) |
| Proceeds from sale-leaseback transactions | 22,499 | 48,364 | 8,424 |
| Net cash used for investing activities | (47,857) | (218,045) | (106,894) |
| Cash flows from financing activities | |||
| Proceeds from issuance of Term Loan B and B-1 Facilities | 71,250 | 422,875 | —- |
| Repayments of Term Loan B and B-1 Facilities | (4,625) | (2,125) | —- |
| Retirement of 8% Senior Secured Second Lien Notes | —- | (280,500) | —- |
| Borrowings under prior revolving credit facility | —- | —- | 17,000 |
| Repayments under prior revolving credit facility | —- | —- | (17,000) |
| Borrowings under revolving credit facility | 150,000 | 436,000 | —- |
| Repayments under revolving credit facility | (195,750) | (390,250) | —- |
| Payments on finance lease liabilities | (1,617) | (2,170) | (1,811) |
| Proceeds from lease financing obligations | —- | —- | 2,692 |
| Costs associated with financing long-term debt | (3,303) | (11,516) | (154) |
| Purchase of treasury shares | (10,053) | (4,017) | (—-) |
| Net cash provided by financing activities | 5,902 | 168,297 | 727 |
| Net increase (decrease) in cash and cash equivalents | 61,990 | (1,040) | (25,398) |
| Cash and cash equivalents, beginning of period | $ 2,974 | $ 4,014 | $ 29,412 |
| Cash and cash equivalents, end of period | $ 64,964 | $ 2,974 | $ 4,014 |
| Supplemental disclosures | |||
| Interest paid on long-term debt | $ 24,714 | $ 29,055 | $ 23,098 |
| Interest paid on lease financing obligations | $ 104 | $ 104 | $ 105 |
| Accruals for capital expenditures | $ 1,241 | $ 15,062 | $ 7,605 |
| Common stock issued for consideration in acquisition | (—-) | ($ 145,333) | (—-) |
| Non-cash reduction of lease financing obligations | —- | —- | $ 2,538 |
| Income taxes paid (refunded) net | $ 153 | $ 144 | $270 |
Although Carrols had relatively impressive revenue numbers, they are surprisingly NOT a profitableWhen the earnings in a given period of time is more than the expenses in a business…. company as measured by net income. Their net income since 2019 has been at a loss, although in 2020 they were able to minimize this loss by a few million dollars. So why is their net income at a loss? For one thing, Carrols has very high total operating expenses, which takes a huge chunk out of their original earningsTotal earnings received by a business based on the U.S. Income Tax Return. The financial numbers of these earnings depend on the type of business, but can include income, guaranteed payments, compensation, interest, depreciation, elective deferrals, and contributions.For further details on how to calculate earnings and where to find financial numbers on tax return forms based on the type of…. For example, looking at 2020, they made a little over $1.5 billion in total revenue, specifically $1,547,502,000. But total operating expenses amounted very close to this number, at 1,543,388,000.
Burger King Franchisee makes less than 1% profit margin in 2021
Income after operations expenses is only $4,000,000, a measly number compared to how much they brought in originally. Interestingly enough, Carrols Restaurant Group still recorded positive cash flowThe net profit before taxes plus payments to the owner(s), interest, and depreciation of assets…., indicating an increase in the company’s liquidity. However, looking at the modified cash flow statement above, it becomes clear that the reason why Carrols Restaurant Group has such a high cash flow relative to their net income is because they borrowed money from a credit facility — this is what “issuances” and “borrowing” means in the above statement.
Comparison to Average Burger King Franchisee
One possible reason for the lack of profitability of Carrols Restaurant Group is that Burger King is an expensive franchiseA franchise is when a business (franchisor) allows a party (franchisee) to acquire its know-how, procedures, processes, trademarks, intellectual property, use of its business model, brand and rights to sell its products and services. The franchisee signs a contract (franchise agreement) with the franchisor to acquire the franchise and generally has a territory granted to operate. What is a Franchise?… More concept. When analyzing Burger King’s 2020 FDD, the estimated total initial investmentThe amount of funds necessary to begin operations of a business or franchise including the first three months of operation…. for a traditional Burger King facility ranged from $1.8 million to $3.3 million. In comparison, for traditional franchise owned Burger King restaurants, mean average salesThe total amount in dollars made in the business before expenses are deducted. See also Gross Revenue…. were slightly below this initial investment fee, at $1.4 million. However, this does not mean that one should avoid a Burger King investment entirely. After all, the estimated initial investment contains many one time fees, so even if investors are unable to make a profit the first year, that does not mean this will be a trend for future years. According to Vetted Biz analysis, their franchise failure rate is on the lower end, at 6.3%. This means that the vast majority of franchises have the financial means to survive.
Are you thinking about investing in a Burger King franchise, or interested in exploring more options? Make sure to check out Vetted Biz’s website for listings of other similar franchises in the burger, fast food, and Food and Beverage industry.
