Same Store Sales Trends

Possible Pause From Astounding 2Q Results

  • 2Q sales results are significantly exceeding 2019 levels (+11.9% for 18 out of the 27 chains that have reported so far) due to pent up consumer demand, additional stimulus, menu price increases, a rebound in lunch business and less discounting.
  • However, RR’s August Intent to Eat Out Index (RR’s survey of consumers’ plans to eat-out over the next month) suggests a pause, consistent with the 2Q21 GDP release which reported a -26% decline in disposable personal income (after increasing +58% during 1Q21), primarily reflecting a decrease in government stimulus.
  • Total food service sales increased in June by +8.4% on a 2-yr. stacked basis, but continue to lag grocery stores (+14.4% 2-yr. stacked) as grocery stores continue to price more aggressively than restaurants.

Stock Performance

Drive-Thrus Back in Favor

  • The RR $1B+ Index declined for the 3rd consecutive month as investors are concerned about the possibility of new lockdowns, pressuring FSR & favoring drive-thrus.

Promotional Composition

FSR Feels Need to Discount More So Than QSR

  • QSR value mix continues to decline to its lowest level in at least 4.5 years, with the average promotional price point increasing +5.6% y/y.
  • FSR value mix is trending higher, helping lower its average promotional price point. An increase in new news around alcoholic beverages is consistent with growing dine-in trends (pent-up demand).

Economic Outlook

GDP Forecast Holds Steady Though Consumer Looks Weaker

  • 3Q GDP is forecast to grow at a similar rate to 2Q despite less stimulus (although new child care tax credits rolled-out in July).
  • Notably, consumer confidence is at its highest level since 2/20 although 2Q disposable income declined sharply as previously discussed.
  • Also, gas prices have increased for the last 8 consecutive months and are now +44% higher than last July.
  • The ENTRÉE Act was introduced in July in an effort to add $60B to the Restaurant Revitalization Fund after 64% of eligible applicants were originally denied funding

Key Cost Trends & Forecasts

Food Inflation & Labor Shortages are a Thing

  • Inflation as reflected by the BLS Foodstuffs index appears substantial.
  • Chicken & coffee are at all-time highs and the 2021 PPI forecast was revised higher again for chicken, beef, pork & wheat.
  • According to Wingstop, elevated bone-in wing prices reflect the challenges of poultry producers to staff sufficiently more so than higher demand. Fortunately, hatchability rates are expected to improve in 2022.
  • Fortunately, block cheese prices continue to fall (-38% in July & -13% YTD)

  • Job openings continue to ramp-up as sales volumes surge, reflecting that the end to supplemental unemployment in certain states & higher wages are not easing labor shortages as anticipated, probably reflecting an increase in other forms of government stimulus and changed behaviors

 

Franchisee EBITDA Valuations

2H21 Valuation Outlook Pauses

  • The decline in RR’s July valuation outlook reflects increasing concerns over accelerating costs & more difficult y/y sales comparisons.
  • Notably, this is somewhat off-set by an improving financing environment including favorable interest rates and some new lenders entering or ramping-up in the restaurant lending space.

Marcus & Millichap Cap Rates

Cap Rate Spread Widens to Highest Level of the Year

  • The cap rate spread widened to its highest level of the year in July, reflecting increasing supply given the possibility of unfavorable tax changes.
  • The number of transactions increased to the highest level of the year.