Sales Recovery Getting Industry Back to 2019 Levels
Key points from Olive Garden’s fiscal 4Q21 results (through 5/30/21): comps increased +90.4% (-0.5% on a 2-year stacked basis) & Darden’s blended comps were up +2.5% during the 1st 3 weeks of June, in-line with May’s results; OG broke its all-time single day sales record on Mother’s Day & achieved the highest quarterly segment profit in its history during fiscal 4Q21; and 2020 sales for the casual & fine dining categories were $189B vs. $222B in 2019 – management is confident that demand will return to 2019 levels & beyond while supply has declined -10%.
RR’s July Intent to Eat Out Index (our survey of 1,500 consumers’ plans to eat-out over the next month) suggests a slowdown in July which could temper 3Q:21 results. This may reflect the industry’s disregard for value during a period of consumer economic vulnerability, as outlined below.
Total food service sales increased in May by +4.4% on a 2-yr. stacked basis, but continue to lag grocery stores (+13.8% 2-yr. stacked) as grocery stores continue to price more aggressively than restaurants.
FSR Stock Profit Taking Continues
While investors continued to cool on restaurants (particularly FSR) during June, the sector enjoys very strong YTD performance.
Restaurant stock performance has opened a window for Krispy Kreme (DNUT) which completed an IPO and Sweetgreen & Dutch Bros Coffee which both recently filed for IPOs.
Sharply lower cheese prices (-42% in June) contributed to Papa John’s & Domino’s strong stock performance during the month.
Value Out-of-Favor for Now
The QSR value mix continues to trend down and reached its lowest level in at least 4.5 years.
FSR value mix was the lowest since March 2018 while the average promotional price point continues to ramp-up due to more $11+ offers.
A diminished value equation may help explain tempered results for July’s TraffiCast.
How will the Consumer do without Government Help?
+8.3% GDPNow 2Q:21 forecast translates into a -23.1% decline on a 2-year stacked basis. This compares with +1.4% 2-year stacked results during 1Q21.
36MM+ families are expected to benefit from the first advance child tax credit (CTC) which is scheduled to be paid out 7/15 (monthly payments up to $250 per school-age child and up to $300 per child under 6 from July through Dec. 2021). The other half will be paid in a lump sum when parents file their 2021 taxes (max benefit up to $8k for one dependent and $16k for two or more).
Perhaps to this end, June Consumer Confidence rose to its highest level since Feb 2020.
However, occupancy costs continue to skyrocket with home prices rising in April by +14.6% y/y – the largest increase in the history of the index after 11th consecutive month of growth.
The nationwide ban on evictions was extended for one month from 6/30 to 7/31 and is expected to be the final extension of the moratorium. As of 6/7, ~3.2 million people in the U.S. said they faced eviction in the next two months, according to the U.S. Census Bureau’s Household Pulse Survey.
Notably, the SBA will officially shut down the Restaurant Revitalization Fund 7/14. ~$28.6B was funded through the program (105k funded loans & 307k applications). A 2nd round $60B proposal was introduced to Congress but has yet to be approved.
Key Costs Trends & Forecasts
Lumber & Cheese Prices Tank Despite Broader Inflation
The June BLS Foodstuffs index increased for the 11th consecutive month (+68% y/y & +43% YTD 6/21), representing the highest level since 2011.
Commodity costs extending last month’s highs include: pork (+287%/7-year high); ground beef (+50% & highest level since May ’20); chicken (+45%/3-yr. high); and coffee (+42%/4-year high).
The 2021 PPI forecast was revised higher again for chicken, beef, pork & wheat, but was lowered for vegetables.
Lumber futures tanked more than -40% in June (now down more than -18% for 2021).
Block cheese prices fell -42% to its lowest level in a year.
Job openings continue to ramp-up as sales volumes surge, reflecting that a large pool of unmotivated unemployed (June’s total unemployment rate increased +0.1% to 5.9%) makes it increasingly difficult to staff restaurants and is forcing operators to increase wages.
The average non-supervisory hourly restaurant wage jumped more than 11% to $15.21/hr. in May versus the same period last year.
Franchisee EBITDA Valuations
Valuations on Track for Full Recovery
Preliminary 1H:21 franchisee EBITDA valuation multiple estimates for the $1B+ Chains indicate almost a full recovery to 2H:19 levels and the 2H:21 outlook is slightly positive (+1.3%).
The Coffee segment fared best and only the pizza segment declined slightly (as this segment faces increasingly difficult y/y comparisons as consumers allocate more restaurant dollars to dining out)
Marcus & Millichap Cap Rates
Strong QSR Property Demand Remains in Tact for Now
Cap rates fell more than the decline in interest rates, reflecting strong demand for QSR properties.
Notably, a potential repeal of the 1031 exchange could force a significant repricing of real estate.