The three biggest U.S. burger chains have reported their earnings, giving investors a look at their 2023 U.S. performances. It sheds light on who is making out the best as the companies fight for consumers’ attention in today’s inflationary economy.
The Golden Arches are winning on all grounds.
Wendy’s
sells more than Burger King, but is growing more slowly and is less profitable. Burger King is getting smaller and more efficient, but its growth in same-store sales may have been bumped up by restaurant closures implemented over the past year.
McDonald’s and Restaurant Brands International, Burger King’s parent, didn’t respond to requests for comment. Wendy’s had no immediate comment.
Shake Shack,
meanwhile, is a rising contender, with great growth prospects and a stock that appears overvalued.
Unusual Times
The competition played out in an economy in which price increases had slowed down, but continued to put pressure on consumers’ already tight budgets. While the cost of dining out is rising faster than the cost of groceries, prices at fast-food chains are increasing still more rapidly.
In January, prices for food away from home were 5.1% higher than a year earlier, while the cost of groceries rose by 1.2%. Prices for fast food increased by 5.8%.
While lower-income consumers are making fewer visits to their favorite burger chains and cooking at home instead, many middle-class families are trading down from more expensive sit-down restaurants.
The Playing Field
McDonald’s is by far the largest fast-food chain in the U.S., with a footprint of more than 13,000 stores across the country. Wendy’s has just over 6,000 stores, while Burger King is slightly larger with nearly 6,800 locations at the end of 2023.
Despite having fewer locations, Wendy’s beat Burger King in sales. In 2023, the former sold $12.3 billion worth of fast meals to American eaters, while the latter reported just $11.5 billion.
McDonald’s didn’t offer a region-by-region breakdown of sales in its latest earnings report, but it has disclosed that information in previous quarterly filings with the Securities and Exchange Commission. Those typically come a few weeks after the earnings reports.
Extrapolating from results for the first three quarters of 2023, Barron’s estimates that McDonald’s had about $53 billion in U.S. sales for the full year.
That means each of McDonald’s domestic locations generated roughly $3.9 million in sales last year, while Wendy’s and Burger King had an average of $2 million and $1.7 million per store, respectively.
But Burger King is catching up. In 2023, it increased its total U.S. sales by 6.8%, while Wendy’s domestic business only grew 5.1%. McDonald’s boosted its global systemwide sales by 10%, but didn’t disclose a U.S.-specific number.
The Growth Game
Thanks to higher menu prices, fueled in part by inflation, most fast-food chains posted stronger same-store sales in 2023, but the pace of growth was different. Sales at McDonald’s U.S. locations increased 8.7% from a year ago, Burger King’s same-store sales improved 7.4%, and Wendy’s rose by 3.7%.
Unlike packaged-food companies, which usually disclose data on pricing and sales volume, restaurant companies don’t reveal details like menu prices, foot traffic, and check sizes in their earnings reports. Still, their earnings calls with Wall Street analysts offer clues about what is happening.
McDonald’s said it raised prices by roughly 10% in 2023 and noted a drop in traffic at its U.S. locations. Wendy’s also said that traffic across the burger industry is “soft,” but that the company has maintained its share of the pie.
In last week’s earnings call, Wendy’s CEO Kirk Tanner, who took the helm this month, laid out his plans to accelerate growth this year. The company will invest heavily in advertising to boost its breakfast sales, roll out new flavors, and offer more deals to attract customers, said Tanner.
In contrast, Burger King said on its fourth-quarter earnings call that its same-restaurant foot traffic is finally improving for the first time since 2021. But that could be partially due to the company closing hundreds of stores last year, driving consumers to the remaining ones in the same region.
Burger King shut down nearly 300 underperforming locations in 2023 in an effort to boost efficiency and profitability. As part of a larger turnaround plan, its parent company, Restaurants Brands international, also announced hefty investments on advertising and to renovate its stores.
Revenue and Profits
Fast-food companies generate revenue from a few different channels: sales at restaurants directly run by the company, along with royalties, fees, and sometimes rent received from franchisees.
McDonald’s increased its revenue by 10% last year, but didn’t disclose the figure by region in the latest earnings report. In the first nine months of the year, U.S. revenue grew by 12%, outpacing the gain of 11% for the company as a whole.
In comparison, Burger King’s U.S. revenue increased 8.4% in 2023, while Wendy’s—with nearly 90% of its stores in the U.S.—boosted revenue by 4.1%.
Last but not least, Wendy’s posted $382 million in operating profits, representing 17.5% of its total revenue of $2.2 billion. Burger King’s operating income for its U.S. restaurants was a similar $386 million, derived from much lower revenue of $1.3 billion. That means a higher margin of 30%.
In the first three quarters of 2023, McDonad’s U.S. restaurants posted $4.3 billion in operating income from $7.8 billion of revenue. That gives the chain an operating margin of 55%.
How Shake Shack Stacks Up
One interesting company to watch is Shake Shack, a burger chain that got its start in New York City two decades ago. Although Shake Shack is much smaller than McDonald’s, Wendy’s, and Burger King, its growth has excited investors.
In 2023, Shake Shack had total sales of $1.7 billion, including both its domestic and overseas locations. That amounts to only 12% of global sales at Wendy’s and 3% of McDonald’s U.S. sales.
Still, since 2019, Shake Shack has nearly doubled its store count to more than 500. Sales increased by 23% in 2023 alone.
Same-store sales grew by 4.4% in 2023, weaker than McDonald’s and Burger King, but better than Wendy’s. Sales per store averaged $3.3 million, slightly below McDonald’s but much higher than Wendy’s and Burger King.
In 2023, Shake Shack posted $208 million in operating profits on $1.1 billion in revenue. That represents an operating margin of 19%, which beats Wendy’s but trails behind Burger King and McDonald’s.
Despite the growth, investors should be cautious about the stock’s valuation, especially after shares jumped 26% last Thursday following the company’s latest earnings report.
Analysts polled by FactSet expect Shake Shack to post 64 cents in earnings per share in 2024. With the stock trading at $98 now, that means a price/earnings ratio of 154 times. McDonald’s and Wendy’s are priced at 23 times and 18 times their forward per-share earnings, respectively.
Write to Evie Liu at evie.liu@barrons.com
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