Burger King profit up, shares off on margins

LOS ANGELES (Reuters) - Burger King Holdings Inc (BKC.N) posted a stronger-than-expected profit on Thursday, but its shares fell more than 4 percent as renovations and higher food costs at the world's No. 2 hamburger chain eroded margins.

Burger King, which has more than 11,500 restaurants worldwide, has been sprucing up old outlets, adding value menu items and expanding business hours to catch up with rivals.

Global company restaurant margins fell to 13.1 percent in the fourth quarter from 14.8 percent a year ago, hurt by higher commodity costs and expenses tied to remodeling outlets.

The company had warned previously that the renovation work and lost sales from temporarily closed units would reduce margins, but investors were not fully prepared for the drop.

"Margins were worse than anticipated," said UBS Equity Research analyst David Palmer.

Burger King, best known for its Whopper hamburgers, said net income rose to $51 million, or 37 cents per share, in the quarter ended on June 30, from $36 million, or 26 cents per share, a year earlier.

Analysts, on average, had been expecting it to earn 34 cents per share, according to Reuters Estimates.

The Miami-based company's tax rate fell from a year ago, adding about 5 cents per share to earnings, analysts said.

"If they didn't have that, they would have missed. Commodity costs got them," Stifel Nicolaus analyst Steve West said.

Total revenue rose 9 percent to $646 million. Sales at stores open at least a year rose 5.3 percent worldwide, marking the 18th consecutive quarter of positive same-store sales, with a 5.5 percent rise in the United States and Canada.

Movie tie-ins such as the Indy Whopper -- a promotion for the release of the hit film "Indiana Jones and the Kingdom of the Crystal Skull" -- also bolstered sales in the quarter.

Those efforts have helped the chain post stronger same- store sales growth than big rivals such as McDonald's Corp (MCD.N) and Yum Brands Inc (YUM.N).

COMMODITY COSTS PEAK

Commodity costs are putting a squeeze on the entire restaurant industry. Fast-food companies are reluctant to raise prices at the same rate as costs increase because their customers are hard hit by a weak U.S. economy and higher food and fuel costs.

Burger King Chief Financial Officer Ben Wells said commodity prices appear to have peaked in July and the hamburger chain expects its commodity costs over the next six months to decline 2 percent to 3 percent from current levels.

"The general economy is likely to support a decline in food cost," Wells said during a conference calls with analysts.

U.S. farmers are expected to produce the second-largest grain crop, but demand should still remain high, he said.

"Over the next six months, we expect our commodity costs to decline 2 to 3 percent from where they are today, but still up 5 to 7 percent over the prior year," Wells said.

Burger King forecast 2009 earnings in a range of $1.54 to $1.59 per share, within Wall Street's expectations. On average, analysts expected $1.56 per share, according to Reuters Estimates.

Burger King shares were down $1.45 at $26 in midday trading on the New York Stock Exchange.

(Additional reporting by Aarthi Sivaraman in New York; Editing by Dave Zimmerman and Andre Grenon)