These Burger Chains are Making the Right Moves

These Burger Chains are Making the Right Moves

Americans continue to spend their disposable income on dining outside of the home, with the Bureau of Labor Statistics reporting that average household spending on the category rose 2.2% in August 2013 versus the prior year. While the burger chains aren't the healthiest available option, they are winning their fair share of customers, evidenced by a slight increase in the total number of restaurants in 2013, according to data provider BurgerBusiness.

However, customers are increasingly gravitating toward operators that provide quality food with friendly service, putting quirky niche operators like In-N-Out Burger and Five Guys Burgers & Fries at the top of the best-of list.So, which public chains are following their lead and creating value for investors?

The king of drive-in
The drive-in may be a relic from the 1950s, but Sonic has built the largest national chain of drive-ins by leveraging its marketing message as the "ultimate drink stop" with 400,000 possible combinations of shakes and frozen beverages.It caters to the spontaneous crowd, with less than half of its sales coming from the lunch and dinner diners.While Sonic has been pruning under-performing stores from its national network over the past few years, management is looking to grow with a small-format prototype, that uses 25% to 40% less real estate, capable of profitable operations in smaller markets.

In 2013, Sonic has reported weak overall top-line growth, due to fewer total stores, but it has continued to report greater per-store productivity, with comparable store sales up 0.9% during the period.The company has been upgrading its food lineup, including adding premium beef hot dogs and burgers, which have allowed it to raise prices while keeping its value-conscious customer base satisfied.

Sonic has also benefited from some relief in commodity cost inflation, leading to a pickup in its gross margin.With an almost exclusively franchised-based model, accounting for 90% of its store network, the company's operating margin is consistently in the double-digit range, providing solid cash flow to reinvest in new store growth concepts.

The upscale burger chain
Red Robin Gourmet Burgers has tied its mast to its trademark burger, which accounts for roughly 46% of its total sales.The company straddles the line between fast-casual and casual dining, as its food delivery process is designed to get food to customers within eight minutes, but it also offers alcoholic beverages that encourage longer stays.Like Sonic, Red Robin has been piloting a smaller format restaurant concept, known as Burger Works, which it hopes will allow it to extend its brand and provide opportunities in smaller markets.

In 2013, Red Robin has continued to generate top-line growth, aided by a 3.1% gain in comparable store sales and a controlled expansion of its store network.Like its competitors, the company has benefited from moderating food commodity costs, as well as its focus on higher-margin alcoholic beverage sales.With solid operating cash flow and a restaurant base that is concentrated on the West Coast, accounting for one-third of the total, Red Robin should be able to deliver growth for investors as it continues to build out its national store base.

The house that Dave built
More so than most restaurant chains, Wendy's was built on the affable image of company founder Dave Thomas, who figured prominently in the company's advertising until his passing in 2002. Since then, Wendy's has been through several business iterations, including the 2008 acquisition and subsequent divestiture of the owner of the Arby's chain.More recently, though, Wendy's has gained traction from its restructuring initiatives, including decisions to discontinue elements of its breakfast operations and sell off some of its company-owned stores, which account for roughly 22% of its total store network.

Wendy's has dually benefited from lower commodity cost inflation and lower promotion costs, due to its elimination of breakfast marketing programs.The result has been better restaurant store operating margins, 14.8% versus 13% in the prior year period, and improved operating cash flow.While top-line growth remains weak, up 1.2% for the period, Wendy's shift to a greater use of the franchise model should continue to positively impact its operating margin and provide better cash flow for growing its global store base.

The bottom line
These profiled burger chains have been as hot as their fryers over the past twelve months, with very high double-digit stock price returns, as investors have expected greater profits from margin expansion. While future returns will undoubtedly be lower, these chains are making the right moves to improve their profitability and create value for investors. They belong on investors' watchlists as promising ideas at lower levels.

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