2Q20 Investor Calls: Key Points & Analysis

• Hopefully the trough of a shocking Black Swan event, 2Q20 gave us an average comp decline of -15.4% for 23 $1B+ chains under coverage. Notably, there was a very wide dispersion of results with a comp high of +32% (Wingstop) all the way to a low of -59% (IHOP) as consumers decidedly shifted away from dine-in to low-contact off-premise solutions.
• In any case, the good news for dine-in is that preliminary 3Q20 comps are beginning to rebound back to approximate break-even levels (-15%), clearly showing that consumers are not nearly through with their love affair of a sit-down meal enjoyed with friends and family. If the sit-down chains can rebound with 50% capacity limitations at best, what can they do at 75% or 100% (hopefully soon)?
• The silver lining to this disastrous cloud has been that the chains have been forced to accelerate changes that have been needed for some time. Menus have shrunk, helping operations and speeding-up service. Digital strategies have been placed front-and-center, training consumers to better appreciate the nascent conveniences offered by the brand’s emerging tech platforms.
• However, perhaps one of the most important lessons learned must be kept hushed for now. Many chains have discovered that expensive TV advertising may not be necessary to drive sales in an increasingly digital world. The possibility of what to do with a new found 3% to 5% of sales tickles the fancy.
• Hopefully, this savings can find its way into higher labor investments which seems like a solid strategy for the restaurant industry which, after all, is a hospitality business.

Digital/Off-Premise Overview

• Digital and off-premise to the rescue! One thing we have learned from this lock-down is that those chains with superior digital/off-premise capabilities have performed the best as consumers crave con tactless convenience more than ever.
• It is our opinion that digital scheduling, ordering & payment solutions also must be adapted to the dine-in experience such that there is less waiting in crowded areas, faster service and less human contact in the process. This could help achieve not only greater social distancing but increased throughput as well.
• We also believe that the economics of 3rd party delivery must still be worked out although the chains are currently at a disadvantage to the DSPs in the current operating environment.
• In any case, digital is here to stay and its post-lock-down acceleration certainly provides a vast improvement in overall convenience and cost-effective, personalized marketing reach sufficient to drive higher checks and increased frequency.

Casual Segment Overview

• Casual is beginning to recover as players are given a little breathing room to open their dining rooms.
• All-the-same, they must figure out how to navigate 50% capacity limitations for the time being.
• Fortunately, consumers do seem eager to dine-out and Outback reported that, of the 527 restaurants open for dine-in service at limited capacity during the full week ended 7/19/20 (92% of total system), comps were down just -10.7% y/y. This is notable given that break-even for casual chains may approximate -15% depending on the size of their restaurant footprints.
• In any case, back-of-the-house capacity is helped by strong growth in off-premise and we really like Chili’s launch of a virtual “It’s Just Wings” delivery brand which has the potential to exceed $150MM in new annual sales (sourced by DoorDash) with strong flow through.
• We are confident that as fear continues to subside and as consumers return to their love affair with dining out, they will find stronger casual brands that have been forced to accelerate needed strategic and operational improvements.

Family Segment Overview

• Family segment players remain the hardest hit segment as these dine-in, sit down chains primarily address breakfast (while they continue expanding to other dayparts).
• While growth in off-premise is helping to the extent that it applies to breakfast, these chains are waiting for a return to normal to reignite their economic models.

QSR Burger Segment Overview

• The QSR burger segment fared well during the quarter, with the 3rd best performance out of 7 categories.
• This reflects the advantage of a drive-thru business model that is well suited to current market condition.
• Notably, the burger chains have learned that they can generate higher margins with their dining rooms closed and with smaller, more focused menus. Lower labor costs and faster drive-thru speeds (from smaller menus and a greater labor allocation to this channel) translates into solid results.
• Also, the burger chains are improving their digital strategies & execution which is translating into higher checks, increased frequency, faster speeds and labor efficiencies.
• At some point segment players may have to reconsider the role for dining rooms in a normal operating environment.

Pizza Segment Overview

• If pizza is the perfect answer for a quasi-lock-down, how much more when the chains are able to further their appeal by offering no contact solutions?
• Strong segment results also reflect the turnarounds of both Papa John’s and Pizza Hut.

Chicken Segment Overview

• QSR chicken was the strongest performing segment during the quarter which reflects consumer appreciation for: 1) all things wings in good times & bad; 2) chicken in buckets/boxes that not only works well for off-premise but also for larger groups at home; and 3) Popeyes’ Chicken Sandwiches!

Mexican Segment Overview

• Mexican continues to get squeezed by pizza and chicken which serve larger groups with well-established home meal replacement options to go with packaging well-suited for off-premise.
• As life returns to normal, we would expect the strong appeal of the Mexican players to return segment sales to pre-lock-down levels.

Coffee Segment Overview

• Coffee is tied to a very ritualistic morning routine that has been completely upended by the lock-down.
• This is especially true to as it relates to telecommuting corporate workers who are not even going to their offices where many of these coffee shops are located.
• This requires a pivot by the coffee brands who must promote beverages better suited for the daytime rather than early morning (i.e. lattes as opposed to black coffee).