Restaurant Brands International (QSR) reported a 15.2% increase in revenues in the first quarter, $40 million better than the $1.41 billion analyst estimate. Despite the good news, QSR stock fell 2% in May 3 trading.

The restaurant conglomerate’s growth has been driven by its Burger King restaurants outside the U.S. The chain’s international same-store sales rose 20% during the quarter. That’s double its global same-store sales growth in Q1 2022. 

Before I get into the one reason I’d think twice about buying QSR stock, let’s look at what Restaurant Brands’ four concepts did well in the quarter. 

3 Concepts Had Same-Store Sales Growth

One of the leading financial metrics to evaluate a restaurant brand’s success in any given quarter is same-store sales growth. In descending order, Burger King’s same-store sales grew 10.3% in Q1 2022, Tim Hortons (8.4%), Firehouse Subs (4.2%), and Popeyes Louisiana Kitchen (-3.0%). 

Once upon a time, Popeyes was the company’s strongest brand. In 2020 and 2019, its same-store sales growth was 13.8% and 12.1%, respectively. In 2021, they fell to -0.4%. The numbers haven’t gotten any better early in 2022.

But if you’re a glass-half-full kind of person, it’s fair to say that all four of its concepts have had moments of greatness mixed in with periods of disappointing results. It does tend to be part of the business. 

Overall, however, the company delivered global same-store sales growth of 8%, considerably higher than its Q1 2021 results. 

The company’s newest addition, Fireside Subs -- it acquired it for $1.03 billion in December 2021 -- had tough comps to beat this quarter. In Q1 2021, Fireside’s same-store sales jumped 24.2%, so it’s not surprising to see a bit of a comedown from last year. 

Overall, its business is relatively healthy at the moment. The company certainly thinks this is the case.

“Tim Hortons Canada and Burger King International had standout sales performances, both with double digit comparable sales growth during the first quarter, while Burger King U.S. continued to lay the foundation to return to long term, sustainable growth,” the company stated in its Q1 2022 press release. 

Analysts Have a Mixed View

Of the 29 analysts covering QSR stock, just 12 rates it an outright Buy with a 12-month average target price of $66.67, 20% higher than where it’s currently trading. That’s the good news. 

The bad news is that the average analyst estimate for 2022 earnings per share is $2.99, down a few pennies from three months ago. In the days ahead, it’s possible analysts will provide revised earnings forecasts that are higher than $2.99 a share.  

In the meantime, the company did say that it had a record number of restaurant openings in the first quarter, led by Popeyes in the U.S. The brand opened 276 restaurants over the past year through March, a 7.9% increase. Unfortunately, that growth was tempered by a 4.6% same-store sales decline at its U.S. locations in the first three months of the fiscal year.

Burger King remains the biggest breadwinner of its four concepts in terms of profitability. In Q1 2022, it generated $229 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) from $443 million in revenue, good for a 51.7% adjusted EBITDA margin. 

By comparison, Tim Hortons adjusted EBITDA margin in the quarter was 27.9%, Popeyes was 37.8%, and Firehouse Subs’ was 45.2% from just $31 million, or 2.1% of overall revenues. 

Burger King’s adjusted EBITDA is the same as Tim Hortons but from a little more than half the revenue. As Burger King goes, so goes Restaurant Brands International.

The Big Reason QSR Stock Might Not Be a Buy

To buy Firehouse Subs, the company used $533 million of its term loan facility. The company finished the first quarter with $14.42 billion in long-term debt on its balance sheet. This includes $1.41 billion in operating and finance lease liabilities. 

That’s 56% of its market cap. By comparison, McDonald’s (MCD) long-term debt is 27% of its market cap, suggesting that Restaurant Brands International is twice as leveraged on a relative basis. 

I believe this differential has something to do with MCD stock being up 70% over the past five years compared to a 6% decline for QSR stock. 

Investors will want conservatively financed restaurant stocks that generate significant free cash flow as interest rates push higher. On that front, McDonald’s also has QSR beat. Based on 2021 results, the Golden Arches had a free cash flow margin of 30.6%, 850 basis points higher than Restaurant Brands International.

The company paid $127 million in interest on its debt in the latest quarter, $3 million higher than a year earlier. On an annualized basis, that’s more than half a billion dollars. 

So, while the company is growing top-line revenue by 15.2%, it’s only increasing net income by a little over 2%. If it ever wants to reduce its leverage, it would be better for the company if those two numbers were reversed. 

Restaurant Brands International continues to be a company that talks a good game but never really delivers for shareholders. There are better restaurant stocks to own for the long haul.