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Maybe it’s not so good to be the king. While announcing its Q4 and FY 2010 earnings, Carrols Restaurant Group (TAST) announced plans to separate its Hispanic brands from its Burger King franchises (Q&A transcript here). The new company will operate the Pollo Tropical and Taco Cabana restaurants while Carrols will continue to run Burger King franchises, where, with over 300 hundred stores, it is the largest franchisee in the country. The spinoff is expected to be completed by the end of the year, but few other details have been released at this point.
Pollo Tropical and Taco Cabana had combined revenues of $439.1 million in 2010 and are really the ‘growth’ engine within Carrols. Comp restaurant sales for 2010 increased 7.4% at Pollo Tropical and 0.3% at Taco Cabana while Burger King witnessed a decline of 6.1%. Looking ahead, the trend is expected to continue next year at the Hispanic brands as the company projects 3-5% comp sales for Pollo Tropical and 1-2% for Taco Cabana. The forecast is a bit murkier for Burger King, but the company does expect improvement there. Part of the problem is that Burger King has been “negatively impacted by aggressive competition, discounting, harsh winter weather conditions, and higher beef costs.” While the winter will surely pass, beef costs and competition are unlikely to subside anytime soon.
The company believes the spin will allow for a greater focus on the BK franchises, which haven’t gotten as much attention recently. According to Paul Flanders, Carrols’ CFO, the company hasn’t been investing in Burger Kings “predominantly because as we allocate capital we’re getting higher rates of return on invested capital on the Hispanic brands. So we have been using the cash flow from Burger King not because we’re not bullish on the brand long term but simply it’s a capital allocation issue. I think as a separate business we believe that Burger King does in fact have opportunities to continue to grow and that we can leverage that as we go forward.”
The restaurant sector has seen some other transaction activity recently, notably when the Wendy’s/Arby’s Group (WEN) announced plans to sell off Arby’s in order to focus on the hamburgers at Wendy’s. Additionally, Jack In The Box (JACK) could spin off Qdoba, a fast-growing Mexican chain burdened by a languishing burger chain.
Carrols currently has a market cap of only $175m so the two companies (especially the Hispanic brands) will be rather tiny. That creates some additional risk for investors and means the likelihood of ‘forced sellers’ is low. Jefferies owns a sizable piece of the company and it is always possible that it could take one of the companies private down the line. We will keep you updated as more information is released.
Disclosure: Author holds no position in any stock mentioned.
