Dashboard - NoBullEconomics

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.

Unit-Level Dashboard

• Comps must be interpreted through a prism of mid to high single digit menu price increases, suggesting QSR traffic losses while FSR benefits from an ongoing return to normal dine-in habits.
• The average price of food in the United States surged +10.4% in the 12 months ended June 2022 (+13.1% 2-yr. stack), the most since February 1981.
• Unit-level operating margins for the corporate owned stores of the publicly traded companies that have so far reported declined by -3.9% y/y during 2Q22.

Capital Markets Dashboard

• 2Q GDP decline of -0.9% represents the second consecutive quarterly contraction and is consistent with a slight +1% increase in personal consumption expenditures which is falling behind a supply shock driven +9% inflation rate.
• July’s restaurant stock performance suggests that investors called a bottom at the end of June.
• Unit-level buyers are increasingly wary of rising borrowing rates and deteriorating unit economics.

Capital Markets Dashboard

• What does stagflation look like?
• Given the economic backdrop, how do investors find the bottom for restaurant stocks?
• How low can the cap rate spread vs. the 10-yr. treasury go?

Unit-Level Dashboard

• RR’s consumer survey (which measures intentions to eat-out over the next month) reveals a deteriorating sales outlook after showing signs of improvement during the previous 2 months.
• Both QSR & FSR operators are losing their grip on value as inflation continues to spiral out-of-control.
• According to government data, total net unit growth for the restaurant industry improved each quarter throughout 2021 (versus 2019).

RR Dashboard: Volatile Capital Markets Looking for Fair Value

• Restaurant stocks on average are down -40% from their 52-week high, trading at ~15x EV/EBITDA, as investors continue to struggle to assess the impact of out-of-control inflation on consumers’ ability to maintain their dine-out habits.
• Given current inflation rates, interest rates should be much higher.
• The spread between cap rates and the 10-yr. approached the record low set in April as real estate has become the most attractive asset class to NNN investors.

RR Dashboard: Sales Look Good, but Looks Can Be Deceiving

• FSR 1Q:22 comp performance for $1B+ chains outperformed the annual average for the 3-year stack comp as the sit-down concepts continue their recovery.
• Conversely, QSR comps are slowing, mirroring recent industry commentary about how the higher income demo (FSR) has been more resilient to current economic conditions relative to the lower income demo (QSR).
• Record highs for many commodities and wages have prompted most of the public restaurant companies to raise their cost outlooks for 2022.

RR Dashboard: Capital Markets & Economy Apr 2022

• April was a difficult month for equities with both the RR $1B+ Index and S&P losing more than -8%. QSR stocks were hit hardest, evening-out some over-size gains during 2021 (relative to FSR).
• A -14.9% y/y decline in disposable income reflects: a tough compare with last year’s government stimulus benefits; exploding inflation (CPI for all items up +8.5%); and higher borrowing costs.
• Concerns about sales, labor, inflation and interest rates are beginning to weigh more heavily on valuations with both the QSR & FSR indexes falling into bear territory.

RR Dashboard: Sales Not Keeping Up with Cost Inflation

• Initial 3-year stack comp performance for the $1B+ chains reveal that QSR is still outperforming FSR despite less impressive headline sales numbers for 1Q:22 alone. Going forward prospects are less optimistic as indicated by RR’s recent consumer survey which measures intentions to eat-out over the next month.
• The BLS Foodstuffs Index notched another all-time high in April and is up +109.3% y/y on a 2-year stacked basis.
• While operators are working hard to lower controllable costs, they cannot drive sales sufficiently to maintain their store-level margins in the current inflationary environment.