NoBull Posts
The Cost of an Extra 10 Years
Would life expectancy descend to 70 if healthcare spending was reduced to 1959 levels? Is it possible there has been significant healthcare cost inflation which has not contributed to an increased life expectancy?
This Week in Summary 9/30/2022
Check out our new corporate insights for this week!
Is FedEx a “canary in a coal mine”?
As a bellwether for the domestic & global economy, FedEx provides key insights into shipping volumes.
Currency Wars
Fed rate hikes during a recession could possibly be explained by the need to prop the US dollar.
Money Doesn’t Grow on Trees
Hopefully, the US soon will realize that real money doesn’t grow on trees! MMT is an unhinged theory that acts to undermine the confidence people have in the integrity of the US dollar.
Tech vs. People
The restaurant industry is plenty big enough for both the large brands and mom & pop restaurantuers.
Darden’s First Peak into 3Q22 Restaurant Results
The <$50k income demo is struggling and cutting back on discretionary spending, but Darden has benefitted from the higher income demo returning to fine dining.
This Week in Summary 9/23/2022
Wingstop’s solution to solving inflation.
Gas Prices Drive the Economy
Gas prices are playing a huge role in consumer spending as reported by a number of restaurant chains but also most recently by AutoZone.
Lowe’s Comments About Housing Market
90% of Lowe’s customers have existing fixed interest rate mortgages (sub 3%) & are immune to Fed rate hikes.
RR Posts
Arby’s 2022
While Arby’s is well positioned as a QSR drive-thru player that can serve as a credible alternative to a NY deli, the challenge is to expand its market reach among more affluent consumers sufficient to drive both frequency and checks.
Denny’s 2022
While Denny’s management team is executing well around a very solid strategy, the brand is held captive to currently unfavorable economic conditions which are particularly hard on its core low-income demo and which also challenge Denny’s ability to execute around its key price value objective.
Franchisee Composition & Top 10 Listing
• A 2021 spike in the franchise transfer rate reflects the need for scale in a high-cost environment facilitated by an abundance of underperforming units post-covid and the predilection of some franchisees to exit the business because of post-covid operational challenges.
• The average number of units owned by a franchisee group in the $1B+ Chains increased from 5.5 in 2019 to 5.8 in 2021. Smaller operators (like in the sub-sandwich segment) are ripe for further consolidation.
Del Taco
Del Taco is the 2nd largest Mexican QSR, positioned around a wide variety of better-quality food (use of fresh ingredients represents a competitive distinction) offered for reasonable prices. While Del Taco enjoys strong concept fundamentals, the chain is tested by a harsh California business environment aggravated by the brand’s orientation towards a vulnerable, less affluent demo.
Unit Level Dashboard – 8/22
• While 2Q comps for the $1B+ Chains increased +3.5% (+14% 3-yr. stack), RR’s consumer survey (which measures intentions to eat-out over the next month) continues to reveal a challenging 3Q sales outlook.
• Food prices continue to surge, breaking another record in July (+10.9% y/y & +14.8% 2-yr. stack).
• Recent passage of the California Fast Food Accountability & Standards Recovery Act increases QSR wages in the state by +40% to $22/hr. in 2023, aggravating labor inflation.
• Unit-level operating margins for the corporate owned stores of the publicly traded $1B+ Chain companies declined 4.5% to 16.5% during 2Q:22 vs. 2Q:21.
Capital Markets Dashboard – 8/22
• Macro-economic results continue to represent a major head-wind for restaurant stocks.
• While 2Q financial results for the public QSRs were OK, we suggest a review of current unit-level performance may provide important insight into the challenges that are weakening the franchise systems that are core to many of these public companies.
• 2H:22 EBITDA multiple outlook (-6% y/y decline) represents the biggest contraction since 1H:20.
2Q22 Investor Call Summary
2Q22 Investor Calls indicate significantly higher prices and labor shortages (impacting both operating hours & delivery service) are impeding traffic (especially for low end consumers) and not able to fully compensate for current commodity and labor cost inflation. Fortunately, several companies indicated that commodity costs are peaking and expected to moderate later this year.
Burger King 2022
Burger King is challenged to find ways to expand its market reach towards new, more affluent consumers who are willing to pay for the brand’s strong core equities and quality upgrades at a time when its core lower-income demo needs more value than ever.
Taco Bell 2022
Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player and enjoys the added bonus of being able to tap into a material COGs outperformance to go deeper into value should that be warranted.
1H22 Restaurant Valuation & Finance Update
• Aggregate 1H:22 franchisee unit-level EBITDA valuation multiples contracted slightly (-2.3% y/y) and are -3.9% below their 2H:16 peak.
• 2H:22 EBITDA multiple outlook (-6% y/y decline) would be the biggest contraction since 1H:20 and reflects weaker unit level economics; higher borrowing costs; and a growing disconnect between seller & buyer perception of going forward profitability.
• Full-year 2022 restaurant originations (excluding sale leaseback financing) are now projected to be $10.5B which is -23% lower compared to initial expectations.
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