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Burger King (BKC) is in a fast food battle. It's hoping its target market of adults ages 18 to 34 can lead it back to the revenue castle: double-digit revenue growth. To attract this market, the company will have to demonstrate meal uniqueness, value, service, and ambiance to up its share of a shrinking fast food market.The fast food chain reports Q2 FY2010 earnings Thursday, Feb. 4, before the market opens. The Thomson/Reuters First Call Q2 earnings per share consensus estimate for BKC is 34 cents and the FY2010 earnings per share estimate is $1.38. Thomson/Reuters First Call also expects BKC to earn 32 cents and $1.57 cents in Q3 FY2010 and in FY2011, respectively. BKC also pays a dividend of 25 cents per year.

The obstacles facing Burger King are not so much its problems as they are the problems of the entire sector as the United States enters a new era. That new period is the "frugal consumer" era -- one in which, for many, eating meals out is "out" and eating meals in is "in." It's economical -- a prudent habit in these budget-conscious times.

Eating "in" is also healthier, another meal trend that's accelerated in the U.S. since the recession started in December 2007. If this new habit takes, one can see how fast food chains in general, not just Burger King, will face an uphill struggle to re-attract customers.

That's because even though fast food chains have made their offerings leaner and healthier over the past 10 years -- including adding a variety of salads -- salads are not Burger King's forte. In other words, salads won't adequately move the revenue and earnings needle, which is among the reasons why BKC will likely post its third consecutive quarter of same-store sales declines in Q2 FY2010.

Ages 18 to 34 Niche: A Winning Strategy?


Is there a viable way back to double-digit revenue and earnings growth for fast food chains? For Burger King, that remains an unresolved question. About five years ago Burger King shifted to a strategy that focuses on its core customer -- those who visit the restaurant most often – adult males and females ages 18 to 34. In theory, the strategy can work -- it's been successful in other business models -- if the overall pie is not shrinking.

But unlike the halcyon days for U.S.-based fast food chains in the 1960s, 70s and 80s, the fast food pie is shrinking: In this environment not every fast food chain can win -- one chain's sales gain is another chain's sales loss -- and there will be chains that fail. Unless Burger King can show why it should exist on a meal uniqueness, value, service, and ambiance basis in the quarters and years ahead, it may not be one of the survivors.

Technically, Burger King's stock chart displays all of the institutional investor uncertainty that one would associate with a business model that's struggling. After selling off from $24 to about $19 in May 2009, the stock has meandered -- failing on numerous times to rise and stay above the key, 50-day moving average. Further, the stock has cycled listlessly for the past six months between $16 and $19. In sum, it's a stock chart that's indicating that the business model is going to require much longer than a quarter or two to get on a sound footing.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

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