Same Store Sales Trends

2Q20 Hopefully Could Represent a Sales Bottom

  • According to preliminary RR estimates, 2Q:20 same store sales declined & hopefully troughed at -16.1% (-39.5% FSR & -9.1% QSR).
  • Sales have been recovering since April as overall trends improve (albeit not necessarily in a linear fashion).
  • QSR brands with strong drive-thru, delivery and digital platforms have fared best (especially chicken +19.6% & pizza +14.1% which are well suited to families & groups).
  • While FSR remains under the most pressure, sales are moving in the right direction (-64% in April, -48% in May and -29% in June – based on 11 public $1B+ casual & family chains).
  • A second round of government stimulus programs are currently under discussion to help augment the first program that expired at the end of July.
  • Grocery store CPI has been accelerating since April (+4.8% 2Q:20) and currently exceeds the food away from home CPI (+2.9% 2Q:20) which benefits restaurants.

 

Promotional Composition

Value Mix Reflects Segment Realities

  • The mix of QSR value promotions declined -3.6% to 47% as this segment’s outlook improves, but edged up +0.7% to 52.9% for FSR.
  • The average promotional price point for both QSR & FSR declined further after a pronounced drop in June due to a shift away from family bundles.
  • The percentage of chains offering free delivery continues to decline (to 9% in July from 18% in June and 33% in May) as chains focus on more cost effective off-premise solutions.

 

Economic Outlook

More Stimulus is Coming

  • The GDPNow model estimate for sequential q/q real GDP growth (seasonally adjusted annual rate) in 3Q:20 improved to +19.6% on 8/3 up from +11.9% on 7/31 due to a larger increase in real personal consumption expenditures growth and real gross private domestic investment growth.
  • Extension of extra $600/week federal unemployment benefits beyond the end of July is currently in negotiations (although the amount may be reduced to $200/week). A second stimulus check for up to $1,200 is also anticipated which could provide a short term boost to consumer spending.
  • While a second iteration to the Paycheck Protection Program (PPP) (The Senate HEALS Act) is also under negotiation, it is likely to be limited to small businesses with fewer than 300 employees and that can demonstrate a 50% loss in quarterly gross receipts over the previous year.

 

Key Cost Trends & Forecasts

Commodity Prices Remain Volatile

  • The BLS Foodstuffs Index declined for the 5th consecutive month in July (-11.6%) but the pace of decline appears to be slowing.
  • Ground beef prices continued plummeting to $1.43/lb. after peaking at $4.84/lb. in May as meat production facilities resume operations.
  • Block cheese prices continue to soar +46% y/y ($2.65/lb. which is the highest price in at least 12 years) with implications for the pizza chains.

 

Franchisee EBITDA Valuations

1H:20 Valuations In-Line with Sales Trends

  • 1H:20 franchisee valuation multiples compressed 7% based on RR’s recent valuation survey with QSR (-4.2%) fairing better than FSR (-13.3%).
    • Pizza fared the best (+3.1%) and family the worst (-17.9%).
  • 2H:20 outlook indicates significant pressure remains.
  • Based on RR’s 1H:20 lending survey, there has not been a significant change to QSR lending terms since the beginning of the year and 88% of survey respondents indicated they can fund new business. However, capital for FSR is scarce with significantly more stringent underwriting requirements and higher borrowing rates.

 

Stock Performance

Restaurant Stocks Weighed Down by FSR

  • The RR Index rebounded with the broader market, but continues to under-perform by -10.7% on a YTD basis as a result of very weak FSR results.

 

Marcus & Millichap Cap Rates

Record Gap Remains Between Cap Rates & 10 Yr.

  • While cap rates inched back down, the gap between the 10-year remains close to the historical high.