RR’s 4Q:19 comp forecast improved to +3.6% from +3.2% last month primarily due to strong results at McDonald’s (+5.0%) and Starbucks (+6.0%).
Government data shows improving FSR trends and Darden reported that industry comps (excluding OG & LongHorn) increased +0.3% with a -2.3% traffic decline during its fiscal quarter ended 11/24/19.
Darden reported that consumers are willing to visit brands with compelling value & strong in-store execution and that it faces more pressure on some promotional constructs that have now become permanent parts of menus.
Weather cooperated during 4Q:19 and December was the 6th warmest on record.
FSR follows QSR with Plant Protein & Pivots to Premium
The average QSR promotion price point declined -4.2% while the average FSR promotion price point increased +12.7% due to more $12+ promotions.
FSR product innovation benefited from several new bowl options and plant-based meat alternatives (as sit-down seeks to follow-on QSR’s success with this new protein option).
1Q:20 GDP Growth Outlook off to a Good Start
1Q:20 GDP growth outlook is off to a good start and the markets seem to be discounting a muted impact from the Coronavirus.
Key Cost Trends & Forecasts
Lower Beef & Turnover Helps with Cost Inflation
While the costs for the vast majority of RR’s tracked commodities remain elevated, beef prices are fortunately subdued.
Lower quits suggest lower turnover rates.
Franchisee EBITDA Valuations
Valuation Index Turns Bullish
RR’s Valuation Index turned slightly bullish reflecting favorable financing environment (low rates & ample supply of capital from both traditional lenders and private equity), somewhat offset by cost inflation.
Buyouts Continue to Support Remaining Restaurant Stocks
RR’s $1B+ Chain Index increased almost +2%, with FSR slightly outpacing QSR and growth restaurant stocks strongly rebounding after a difficult 2019.
Acquisition tailwinds help the smaller chains and a +33% increase in Habit Burger reflects Yum Brands buyout plans announced on 1/6.
Marcus & Millichap Cap Rates
Cap Rates Fall to Lowest Level Since 2008
The single-tenant net-lease market remains strong due a large supply of private investors looking to place 1031 funds and cheap debt that is available for properties associated with national chains.
In addition, the high level of franchisee consolidation and subsequent sale of underlying real estate over the last several years has improved the strength of guarantors (larger & more diversified).