Same Store Sales Trends

3Q Same Store Sales Rebound Nicely

  • 3Q20 investor calls certainly reflect growing optimism by the leading chains as sales rapidly rebound to pre-lockdown levels. On a weighted average basis, QSR 3Q comps should come in about +3.6% and FSR -15.1% for a very respectable $1B average of -0.6%.
  • The resilient US consumer is back and eager to return to normal. Starbucks reports that added seating capacity turns into immediate comp growth and we hear similar themes from many of the sit-down chains.
  • While there is likely to be many permanent operational improvements from the learnings over the last ~8 months, restaurant fundamentals have withstood the most difficult trial in the industry’s history as Americans prove their unwavering desire to break bread with friends & family at restaurants of all different formats.

  • Government data continues to indicate restaurant sales improved through September despite an uptick in grocery store sales.

  • Higher QSR menu prices may face headwinds as the Food at Home CPI trends down.

Promotional Composition

Less Value for Now…

  • Higher prices & less discounting are intended to help off-set lower traffic and higher operating costs.
  • The percent of $1B+ Chains offering free delivery declined sharply to 16% versus 25% in September.
  • Menu innovation picked-up slightly for fast casual and family.

Economic Outlook

3Q Economy Grows at Fastest Pace on Record

  • Real GDP expanded at its fastest pace on record (+33.1%) during 3Q:20, driven by increases in personal consumption expenditures (including strong growth in food services, accommodations & motor vehicles).
  • Preliminary 4Q GDPNow forecasts a return to normal growth.
  • Consumer confidence in October remained near its post-lockdown high.

Key Cost Trends & Forecasts

Commodity Prices Continue to Ramp-up

  • The BLS Foodstuffs Index continues to rebound (+2.6% in October) with cheese, chicken wings and pork at LTM highs while both ground beef prices and potatoes fell to new LTM lows.
  • Rising corn prices could increase feed costs and pressure beef & chicken prices down the road.

  • +5.9% growth in job openings exceeded +5.7% growth in total separations during August (first time since Jan. 2019).

Franchisee EBITDA Valuations

Valuations Trend Slightly Lower

  • While franchisee valuations slipped slightly for the 2nd consecutive month, we expect an up-tick in 2021 M&A activity as the operating environment stabilizes and would be sellers come off the sidelines.
  • It remains to be seen whether the recent run-up in valuations for chicken & pizza will be sustainable once the current environment normalizes.
  • Lending environment remains mixed with capital available for strong brands/borrowers (albeit more conservative) but little appetite for FSR.

Stock Performance

RR Index Follows Market Lower

  • The RR Index trended lower with the broader market while growth restaurant stocks fared the worst.
  • Dunkin’s sharp increase reflects that it will be acquired by Inspire brands for $11.3B (including debt), creating the 2nd largest U.S. restaurant holding company by domestic sales after McDonald’s Corp.
  • Currently, private chains represent xx% of total $1B+ system sales.
  • Contact RR for info about how to order reports on the private brands.

Marcus & Millichap Cap Rates

Spreads Widen to Highest Level Since April