Same Store Sales Trends

Preliminary 1Q Comps Say it All

  • Preliminary 1Q:21 average comp growth of +9.7% for the $1B+ Chains (+7.5% 2-year stacked) is a testament to the industry’s tremendous resilience in the face of impossible circumstances.
  • Initial 1Q:21 QSR comp growth of +11.2% (+10.8% 2-year stacked) certainly reflects share gains offered by a nearly contactless drive-thru access model.
  • Even FSR has been able to put-up a +3.7% 1Q comp (-4.7% 2-year stacked) with strict dining capacity limits in all but a few states.
  • For sure, the industry has been strengthened by the pressure to accelerate digital & off-premise adoption and it looks likely that many of these gains (higher checks & elevated off-premise mix) will stick even as diners rush to return to their sit-down favorites.

  • Beyond the chains, total food service sales popped +34% y/y in March (-4% 2-year stacked) with grocery sales down -14% y/y (+11.2% 2-year stacked) according to government data.
  • This suggests that there is a lot more hope for the independents than originally thought.

  • The gap between Food Away from Home and Food at Home continues to widen, with QSR price increases accelerating to almost 2x that of Food at Home (+6.5% vs. +3.3%). This is consistent with recent comp gains which are mostly all check driven.
  • Hopefully, labor pressures won’t drive menu prices beyond the reach of the lower income demos.

Stock Performance

QSR Stocks Continue to Post Strong Gains

  • The RR Index continues to outpace the rest of the market and is currently up more than 2x the S&P 500 YTD April (+28.7% vs. 11.3%) as QSR was up sharply and FSR added to its strong March gains.

Promotional Composition

QSR Finally Steps-up Value as Stimulus Tapers

  • A +7% m/m increase in the QSR value mix combined with a decrease in the average promotional price point (reflecting fewer $4, $5 & $6 offers and more $3 offers) may signal the beginning of a return to normal.
  • Consistent with the idea of a move towards normalization, FSR is discounting less and innovating more.

Economic Outlook

Economy Strong, but Prospects Hard to Read

  • +13.2% GDPNow 2Q:21 forecast reflects the highest consumer confidence reading in a year (4th consecutive monthly improvement) and the lowest post-lockdown unemployment rate. Discretionary spending continues to benefit from the distribution of the 3rd round of stimulus payments ($372B distributed since mid-March including $37B in April).
  • All-the-same, many management teams are characterizing the labor market as the most difficult ever because of their inability to recruit new staff even with 9-10MM unemployed (apparently content to live-off stimulus for the time being). Also, inflation prospects seem inevitable given massive money creation. To this point, the FED has indicated the possibility of raising rates to tame inflation.
  • Higher gas prices (+55% y/y 4/21) also represent a headwind to discretionary spending.
  • The SBA began accepting applications for grants from the Restaurant Revitalization Fund on 5/3 (up to $5MM/location & $10MM/business – based on lockdown related revenue loss).

Key Cost Trends & Forecasts

Commodity Inflation Ramps-up to Multi-Year Highs

  • The April BLS Foodstuffs index jumped +66% y/y on top of +40% in March (+33% YTD 4/21) and represents the highest level since 2011.
  • Commodity costs extending last month’s highs include: wings (+181% y/y to another all time high); corn (+124% 8-year high); pork (+161% 7-year high); coffee (4-year high); and chicken (LTM high).
  • 2021 PPI forecast was revised higher again for eggs, chicken, beef & pork.
  • Rapidly rising corn prices (feed for livestock) and difficulty hiring additional employees at processing plants could put further pressure on meat prices.
  • Notably, both KFC and Bojangles’ recently indicated supply issues related to strong demand for their chicken products.
  • Sharply higher lumber prices (+18% in 2020 & +59% YTD 3/21) show no sign of abating and will add to new store construction costs.

  • Job openings are starting to ramp-up as sales volumes surge, reflecting that a large pool of unmotivated unemployed makes it increasingly difficult to staff restaurants.

Franchisee EBITDA Valuations

QSR Valuations Take a Breather

  • FSR franchisee valuation outlook continues to improve while QSR is less bullish as dine-in prospects continue to improve.

Marcus & Millichap Cap Rates

Investors Hustle to Get In Front of Tax Hikes

  • Strong demand for triple net lease properties reflects push to complete transactions before the end of tax breaks provided by the 1031 exchange break & carried interest.

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