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Burger King putting new focus on value products

New menu items like a chicken parmesan sandwich, sweet potato curly fries and mini Cinnabon rolls helped boost Burger King’s fourth quarter sales and profits. But the Miami based company said Friday that momentum slowed during the first quarter as competition in the fast-food industry heated up.

During the company’s earnings call, Burger King executives described first quarter sales in North America as “modestly negative.” The problem was attributed to a combination of bad weather and increasingly competitive environment, where value-conscious consumers are turning elsewhere for deals. Both McDonald’s and Wendy’s have recently boosted their dollar menu offerings.

“During the first quarter we didn’t promote enough value to compete,” Steve Wiborg, Burger King’s president of North America, told analysts.

This week Burger King launched a limited-time special featuring a $1.29 Whopper Jr.

“We need to be more aggressive on value,” Wiborg said.

While the mix may tilt in the short-term, Burger King said it still plans to stick to its “barbell strategy,” featuring a mix of low-price and premium-priced offerings. This strategy has been the focus of new management since 3G Capital purchased the company in 2010.

The fourth quarter closed out the end of a successful turnaround year for Burger King, when it dramatically changed both its menu and its marketing in North America. The additions of new smoothies, salads, desserts and snacks have helped Burger King lure back women, seniors and families with kids — groups that had in recent years shied away from the brand as it focused its marketing more on a young male demographic.

The company has seen double digit growth in these segments in terms of market share, said Daniel Schwartz, chief financial officer.

“That really confirms to us that our strategy with our marketing is resonating with consumers,” Schwartz said in an interview after Friday’s call.

Burger King also continued to see improvement in its same-store sales growth. The company reported same store sales growth of 3.2 percent worldwide for the 2012 year, compared with a .5 percent decline for the previous year. Same store sales growth in North America was slightly higher at 3.5 percent, marking the first year since 2009 that Burger King’s North American stores have seen same store sales growth.

Burger King reported net income for the fourth quarter ending Dec. 31 of $48.6 million, or 14 cents per share, compared with $25 million, or 7 cents per share, during the same period last year.

“The fourth quarter was the culmination of what has been a transformational year for the company,” Schwartz said.

For the year, Burger King earned $117.7 million or 33 cents per share, showing a dramatic uptick from the previous year’s $88.1 million, or 25 cents per share. But annual revenue declined 16 percent to $1.97 billion from $2.34 billion.

The drop in revenues was anticipated as part of Burger King’s efforts to get out of the business of running company-owned restaurants. By the end of 2012, the company was 97 percent franchised — an increase from 90 percent at the end of 2011. By the end of this year, the company will operate only 53 stores in Miami and three in Singapore, down from a total of 329 stores worldwide at the end of 2012.

To fuel future growth, Burger King last year focused on signing master development agreements for major international expansion across the globe, including in China, Mexico, Russia and Central America.

The franchisee-owned store model is designed to cut capital costs and boosting profit margins.

“This business model will generate much more sustainable free cash flow,” Schwartz said. “In the end, that’s what’s going to drive increased shareholder value.”

Burger King’s stock rose 78 cents per share Friday to close at $17.36 per share, during a heavy day of trading that saw more than five times the normal share volume change hands.

In a note to investors on Friday, analyst Jeffrey Bernstein of Barclays Capital described Burger King’s results as “favorable, with positives more than offsetting negatives.”

“We believe the brand is in the early stages of a turnaround,” Bernstein wrote.