3Q20 Investor Call Summary & Analysis

The innovation and resiliency of the chain restaurant industry was on full display during reported 3Q20 results as these leading players bounced back from the depths of government mandated lockdowns that essentially shut-off the US economy. Unfortunately, some part of the chains’ resurgence came at the expense of the independent restaurants that lacked scale to weather the perfect storm. However, people still must eat, and further, social humanity can only live in isolation for a short time so it was inevitable that consumers would come back to the table.

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3Q:20 Same Store Sales

RR’s 3Q:20 Same Store Sales Report provides annual, quarterly & interim sales results for the $1B+ restaurant chains as well as key economic data including retail sales, CPI, gas prices, GDP growth and unemployment rate.

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Hardee’s brand attributes as a regional chain with a Southeast & Midwest orientation include: made-from-scratch breakfast biscuits; made-to-order charbroiled burgers (with over-sized patties & Black Angus options); hand-breaded chicken tenders; charbroiled chicken line; hand-scooped ice cream shakes; and table service. Hardee’s is unique in that its high-margin breakfast business generates a material sales mix and efforts to extend breakfast hours to 2PM should increase brand appeal.

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Insights Journal: November 2020

• 2020 new build ROIs continued a declining trend, reflecting: higher construction costs; moderating new build AUV growth; and store-level margin pressure.
• A ramping build vs. buy ratio reflects the above trends in addition to declining acquisition multiples.
• This suggests that growth minded operators are more likely to buy than build for the time being.

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New Unit Investment & Franchise Fees 2020 – 2021

New Unit Investment Report highlights: (1) the sales-to-investment ratio for $1B+ chains continues to trend down after peaking in 2013 as higher construction costs have outpaced the growth in new build AUVs; (2) new build ROI is also pressured by declining unit level margins; (3) declining trends are offset by appealing franchisor development incentives; (4) RR’s New Build vs. Buy Ratio rose for the 4rd consecutive year given a decline in store level acquisition multiples; (5) cost effective conversions seem to be the way to go post-lockdown; and (6) 4 chains introduced new building prototypes.

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• RR’s Intent to Eat Out Index (our survey of 1,500 consumers’ plans to eat-out over the next month) decreased -3.4% y/y.
• With an estimated ~90% share of $1B+ chain system sales currently driven by off-premise, this decrease in sentiment is mostly concerning as it relates to economic stress & consumer spending.

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Dashboard: Oct 2020

Let’s Keep It Rolling; 3Q Same Store Sales Rebound Nicely; Less Value for Now…; 3Q Economy Grows at Fastest Pace on Record; Commodity Prices Continue to Ramp-up; Valuations Trend Slightly Lower; RR Index Follows Market Lower; and Spreads Widen to Highest Level Since April.

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Subway is the largest sub sandwich chain by far with the 2nd largest QSR ad spend behind McDonald’s. Guests move along Subway’s iconic make line, customizing sub sandwiches by choosing bread carriers, meats, cheeses, veggies and condiments/dressings. Core brand equity: customization (made-to-order); interaction between sandwich artists & guests; sub sandwiches which include lots of veggies (Subway prides itself on offering more veggies than anyone); and bread baked in-house.

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