While Jimmy John’s has taken important steps to improve its relevancy, a sustained sales rebound for the chain would certainly benefit from a return of office workers and an increase in the availability of affordable delivery drivers sufficient to support the chain’s “freaky fast” core equity that distinguishes in a crowded field.
• April was a difficult month for equities with both the RR $1B+ Index and S&P losing more than -8%. QSR stocks were hit hardest, evening-out some over-size gains during 2021 (relative to FSR). • A -14.9% y/y decline in disposable income reflects: a tough compare with last year’s government stimulus benefits; exploding inflation (CPI for all items up +8.5%); and higher borrowing costs. • Concerns about sales, labor, inflation and interest rates are beginning to weigh more heavily on valuations with both the QSR & FSR indexes falling into bear territory.
• Initial 3-year stack comp performance for the $1B+ chains reveal that QSR is still outperforming FSR despite less impressive headline sales numbers for 1Q:22 alone. Going forward prospects are less optimistic as indicated by RR’s recent consumer survey which measures intentions to eat-out over the next month. • The BLS Foodstuffs Index notched another all-time high in April and is up +109.3% y/y on a 2-year stacked basis. • While operators are working hard to lower controllable costs, they cannot drive sales sufficiently to maintain their store-level margins in the current inflationary environment.
Chili’s recent sales strength reflects its ability to distinguish itself in a crowded FSR space with an attractive Tex-Mex menu, fun experience, leading value and digital strength which looks like a winning formula in the casual segment which is otherwise challenged by a stressed consumer in pursuit of a discretionary purchase.
• 4Q:21 same store sales for the $1B+ Chains increased +11.5% (+10.4% 2-yr. stack) and increased +16.7% for full year 2021 (+11.0% 2-yr. stack). • $1B+ Chain market share of the total foodservice industry (food away from home & grocery) increased +0.06% to 17.61% (-0.85% below its 2016 peak).
• April RR Intent to Eat Out Index plunged -13.7% y/y due to difficult comparisons with April 2021 when consumers benefitted from $1,400/person government stimulus payments. • The Food at Home (grocery stores) CPI expanded at its fastest rate in 40 years (+8.6% y/y during 2/22) – surpassing both the QSR and FSR CPI for the first time since 7/20. • The price for regular gas increased +$0.70/gallon (+20%) to $4.22 compared to last month (+50% y/y) and represents the highest price ever.
While Jack has done a good job of reviving an iconic West Coast brand in a crowded field, it remains to be seen what impact its premium positioning will have on traffic and sales given the current inflationary environment squeezing consumer income.
Dunkin’s work is to finish executing its move upscale in pursuit of adding the purchasing power from a new, younger clientele to layer onto a stream of loyal sales from the brand’s core base of middle America.
In this issue of our Insights Journal we explore impact of gas hikes on traffic by looking at comp sales correlations and franchisee comments. While the economic data suggests that consumers have some cushion to deal with the gas price shock, franchisees have a different opinion.
• 4Q21 comps for the $1B+ Chains increased +11.5% and +10.5% on a 2-year stacked basis (’21 vs. ’19), but is it sustainable? • Investors piled into FSR stocks as mandates are lifted across the country while weak QSR performance reflects concerns about the impact of record inflation on lower income consumers. • 1Q:22 GDP outlook was already flat before the Ukraine and oil price shock (crude up +43% YTD to $110 on 3/2) added further headwinds to an already fragile consumer.
While Panera is well positioned for the long-term with a healthy halo and digital strength, near-term results may be tempered by the need for: more value in a difficult economy; a return to normal dine-in habits; and a solution to relatively high labor costs.
• Record breaking 2021 restaurant financing volume driven by pent-up borrower demand and increased consolidation. • Lenders indicate a much stronger financial condition for QSR borrowers with FSR showing some improvement since July. • 2H:21 valuation survey results indicate a further increase in franchisee EBITDA multiples with FSR outperforming QSR.
• 2021 restaurant system sales were record highs for both the $1B+ chains and, shockingly, for the independents and smaller chains according to government data. • Stocks were particularly hard hit in January as concerns over inflation and rising interest rates were most worrisome for consumers & restaurants. • While franchisee EBITDA multiples for the $1B+ Chains declined -1.7% according to RR’s preliminary 2H:21 valuation survey, they are expected to rise to 2019 levels during 1H22.
Sonic’s positioning works well in the current operating environment and, hopefully, will translate into new development, a national footprint and sufficient marketing scale to properly communicate the brand’s strong core equities.
While Pizza Hut’s positioning is improving, the brand must still address value in a tough economic environment while it simultaneously completes its asset conversion in order to finish its evolution into a relevant competitor in the very challenging pizza segment.
It’s going on 2 years since our world was turned upside down with government lockdowns, mask mandates, social distancing, remote work & schools and eventually a steady diet of new tech vaxxes. In our opinion, there is an opportunity for our country to grow strong in unity so long as everyone is allowed to work towards their own version of the American Dream (life, liberty and the pursuit of happiness).
• While sales are off to an optimistic start, it remains to be seen what impact higher menu prices will have. • Consumer spending faces significant headwinds. • Ramping inflation prospects aggravated by elevated transportation costs.
Sky rocketing COGs & labor costs are driving sharply lower new build ROI which, in turn, is driving a move towards smaller footprint stores optimized for digital & off-premise as well as increasing use of ghost kitchens.
According to RR’s just released New Unit Investment Report, the sales-to-investment ratio for $1B+ chains declined dramatically in 2021 as higher construction costs (partially reflecting longer project completion times) more than off-set growth in new build AUVs.
Jersey Mike’s is well positioned to maintain sales outperformance by leveraging its core equities around off-premise, a compelling quality/service positioning, a brand commitment to give back to its customers as well as its communities and effective digital/loyalty marketing efforts.
• 3Q21 total restaurant industry revenues increased +30% y/y and +15.2% on a 2 yr. stacked basis. This suggests a huge rebound in the mom & pops during last quarter! • Sharp FSR Decline Triggered by Lockdown Threats • Higher Commodity & Construction Prices May Continue into 2022
Strong YTD comps through 9/21 reflect drive-thru benefit and traction with the brand’s menu and marketing improvements. All-the-same, high rent and labor costs on the West Coast make it difficult for the brand to sustain price value as a premium positioned brand in an increasingly price sensitive market post-stimmy.
YTD comps through 9/21 were positive mid-single-digits as the brand’s menu and marketing improvements gain traction while the brand continues to benefit from its QSR DT format and a return of breakfast.
• 3Q:21 Sales Strength Tempered by Labor Shortage. • Restaurant stocks sharply underperformed in October as deteriorating labor issues and near record commodity costs are squeezing margins. • 95% of restaurants have experienced significant supply delays or shortages of key food items in recent months, according to a survey by the National Restaurant Association.
Arby’s is well positioned as a QSR DT player that can serve as a credible alternative to a NY deli, the chain could benefit from strategies to bring its AUV closer to the segment average and more progress in digital.
• Denny’s unique “America’s Diner” brand positioning provides the promise of everyday value with craveable, indulgent products (comfort food) served around the clock. • Current sales benefit from off-premise stickiness and incremental sales generated by its 2 new virtual brands (Burger Den & Meltdown). • Now that Denny’s has largely returned to its 2019 unit-level financial performance, the chain must continue to contemporize by making further progress around lunch and dinner while also leveraging progress around off-premise to extend its reach to a younger demo.
• Wingstop is the only $1B+ national chain with an exclusive specialization in the hot chicken wing category. • A system high AUV translates into a near all-time high EBITDAR in absolute dollars. • Bone-in wing price volatility represents perhaps the chain’s most significant risk.
• 2Q:21 comps increased +37.9% y/y for the $1B+ Chains and +12.8% on a 2 yr. stacked basis as all segments of the industry have fully recovered. • 3Q:21 comp trends are moderating, reflecting flat disposable income (less government assistance) coupled with significantly higher menu and gas prices.
• Franchisee EBITDA valuation multiples continue to recover and are now only -2.9% below their 2H:16 peak. • Premiums for deals with $1M+ in aggregate EBITDA continue to rebound off the 1H:20 low. • Full year 2021 restaurant originations are expected to increase +19.1% compared to initial expectations in January.
• 3rd largest burger chain with a well-established brand equity around flame grilling. • Burger platforms include the signature Whopper configurations and various “King” varieties. • New Ch’King Sandwich helps BK enter into the chicken sandwich war. • BK’s challenge is to find ways to expand its market reach towards new, more affluent consumers who are willing to pay for the brand’s strong core equities and quality upgrades.
Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player (category of 1) with core equity around abundant value and craveable food with a bold flavor profile. A positive long-term sales outlook reflects: strong value equation; innovative marketing calendar; strong positioning with Millennials; ability to address multiple dayparts including breakfast, Happier Hour/snack & late night; access to expanded DSP marketplaces; and new store formats which increase capacity for off-premise digital.
• RR’s Unit Economic Report provides: (1) FYE 2020 unit level AUV along with COGs, labor, royalty, advertising, other operating and EBITDAR margin estimates for 44 chains; (2) a 5-year history of unit economic performance; (3) an analysis of food and labor cost drivers; and (4) aggregate G&A margins, rent margins and leverage ratios based on RR’s annual lender survey.
• The iconic “Love that Chicken from Popeyes” tagline emphasizes the emotional bond of loyal customers with a unique brand positioning around a flavorful Louisiana heritage. • Sales strength over the last couple of years reflects resounding social media marketing success around its chicken sandwich. • While Popeyes’ eye-popping success with its chicken sandwich has helped the brand to drive its store-level profitability to an all-time high, intense competition around all things chicken poses a current challenge to the leader of the pack.
• RR’s Intent to Eat Out Index (our survey of consumers’ plans to eat-out over the next month) continues its downward trend, consistent with today’s 2Q21 GDP release which reported a -26% decline in disposable personal income (after increasing +58% during 1Q21), primarily reflecting a decrease in government stimulus.
● Average menu size contracted -5.2% for QSR through 1H:21 given a post-lockdown focus on minimizing operational complexity and maximizing drive-thru speeds. ● Conversely, FSR menu size rebounded +6.8% (although still -21% below the 2014 peak) after declining -17.6% last year as the chains pivoted to an off-premise model.