Same Store Sales Trends
Economic Distortions Continue to Flow-Thru Sales Trends
- Final 1Q:20 same store sales results for the $1B+ Chains were down -2.2% (-0.4% QSR and -8.3% FSR) while total restaurant industry sales declined -4.8% during the quarter (-0.8% QSR and -9.2% FSR).
- While the lock-downs were regressive in that those who lost their jobs were mostly from the lower income demo (retail jobs, etc.), their unemployment benefits often provide for higher income than their former jobs.
- Resultantly, we see the chains most oriented towards a lower income demo reporting astounding May results with Papa John’s up +33.5%, Domino’s up +20.9% and Popeyes up +42% (during the week of 5/24).
- In any case, grocery store sales increased +13.4% during 1Q20 and +14.5% in April (latest data). With food stamp (SNAP) usage likely at an all-time high (previous peak was in 2013), this would help explain a significant increase in grocery sales share relative to the restaurants.
- Greater demand for groceries translates into the fact that April’s Food at Home CPI exceeded Food Away From Home CPI for the first time since 4Q:14.
Free Delivery Substitutes for Declining Value Offers
- While the $1B+ Chains backed-off a record high value promotional mix in May (QSR declined -4.6% to 55.0% and FSR declined -1.2% to 50%), the percentage of $1B+ chains offering free delivery jumped to 33% from 18% in April).
- Rising average checks continue to reflect large family meal offers.
Stimulus Checks Bolster Income, but Consumers Save More
- Real GDP 2Q outlook continues to deteriorate with the GDPNow model forecasting a -52.8% decline (compared to an initial projected -16.6% decline last month).
- While government stimulus checks have reached most consumers, a large increase in the April savings rate (33%) suggests they are holding on to their money (at least for the time being).
- ~38 million filed for unemployment between mid March and the end of May (+8 million since last month).
Key Cost Trends & Forecasts
Margins Continue to Benefit from Lower Commodity Costs
- Commodity costs remain under pressure but are starting to rebound.
- While record high ground beef prices should begin to ease as plants started re-opening mid-May, it may take several months before supplies & prices normalize.
- Higher chicken egg prices (through April), which were driven by stock piling, are expected to moderate.
Franchisee EBITDA Valuations
Valuation Outlook Turns Slightly Bullish, Favors QSR
- While M&A activity remains limited to distressed/forced sales currently, it is expected to rebound once restaurants are fully opened and sales stabilize.
- Based on a recent survey of 17 national lenders, 11 indicated they are selectively making new loans, 2 only to existing borrowers and 4 are not originating but expect to start again in late summer/early fall. New loan terms reflect higher equity requirements and more conservative leverage levels.
- QSR valuations are expected to hold up relatively well and even increase for some of the best performing QSR brands.
- A more bearish outlook for FSR valuations reflects recent under-performance and lender apprehension for this segment.
- More long-time franchisees may exit and retire, resulting in further industry consolidation.
Stocks Extend April’s Rebound
- Stocks extend April’s sharp rebound as more states loosen dine-in restrictions and sales outlooks improve.
- In any case, the RR Index is down -19.5% for the YTD period through 5/30 with FSR stocks down -35.9%.