Same Store Sales Trends

Olive Garden was First to Report for the 4Q20 Season

  • Monthly government retail sales data indicates slowing sales momentum in November and a growing premium of QSR CPI prices vs. Food at Home.
  • Olive Garden was the first $1B+ chain to report during the 4Q20 earnings season. OG’s fiscal 2Q21 (ended 11/29) comps declined -19.9%, reflecting tightening capacity restrictions. OG began November with 56 dining rooms closed, growing to 208 by the end of the month (dining room closures during the last 2 weeks of the quarter cost -2% in quarterly comp).
  • In any case, the brand was able to generate average weekly sales at 80% of last year’s results.
  • While declining tourism impacted Georgia, Texas & FL, non-tourist markets in Florida are performing well.
  • Corporate strongly believes that demand for in-restaurant dining is going to come back really strong with some off-premise fall-off. The full-service category was ~$100B and will return to the same level or higher when things normalize (ultimately maintaining its 8% – 9% share of total restaurant sales).
  • Also, the check average remained unchanged (reflecting well on consumer strength) and week-to-week sales in dining rooms that remain open were still growing.

 

Promotional Composition

More Value is Necessary…

  • The average FSR promotional price point jumped +7.4% in December to the highest level since Oct. 2019????
  • Fortunately, the QSR value promotional mix is beginning to ramp-up although it remains elevated compared to this summer’s levels.

 

Economic Outlook

4Q Rebound Still in Progress with a Government Backstop

  • 4Q:20 GDP growth outlook pulled back slightly to +8.6% from +11.1% last month according to the GDP Now forecast, including the expectation for a slight improvement in real personal consumption expenditures growth.
  • New $900B economic relief stimulus package (including direct payments up to $600 per person) will start in January with an extension of federal unemployment benefits (up to $300/week through 3/14/21).
  • New business aid includes an additional $284B to fund another round of the Paycheck Protection Program for small businesses (<300 employees & maximum loan amount is $2M vs. $10M in the first round) that can show at least a 25% revenue loss in any calendar quarter in 2020 compared to 2019. PPP loans are forgivable when at least 60% is spent on payroll expenses and restaurants are now able to borrow 3.5X their average monthly payroll (versus 2.5x in first round – unchanged for all other businesses). Business meal deduction has also been expanded to 100% for the next two years.

 

Key Cost Trends & Forecasts

Commodity & Labor Continue to Ramp-Up

  • Commodity costs continue to rise with the BLS Foodstuffs index posting a new high for the 2nd consecutive month (+7.0% y/y) and the highest level since July 2017.
  • Wage pressure is likely to accelerate in 2021 with 20 states and 32 cities and counties increasing minimum wages on 1/1/21 with an additional 4 states and 18 cities increasing the minimum wage later in the year.
  • Starbucks increased wages for its hourly employees by at least 10% in mid-December and suggested a goal to increase hourly wages to at least $15/hour over the next 2-3 years.

 

Franchisee EBITDA Valuations

Progress on Unit-Level Valuation Rebound

  • Preliminary 2H:20 RR valuation survey indicates franchisee EBITDA multiples increased +3.1% for QSR and +2.3% for FSR (recovering almost half of the 1H:20 decline), but the 6 month outlook turned more bearish in December.
  • Lending environment is improving especially for strong QSR brands, but underwriting remains more conservative.
  • Also, new PPP program as previously discussed should add considerable liquidity to the sector.
  • M&A activity is expected to pick-up in 2021 including more distressed asset sales.

 

Stock Performance

RR Index Ends Year in the Black

  • The December RR Index added +4% to its strong +15.9% November gains, helping to propel both QSR & FSR indexes into positive territory for 2020.

Marcus & Millichap Cap Rates

Cap Rates Tick Higher with Rates