An aggregation of financials from public companies grouped by segment reveals the power of the franchise model in terms of profitability with the QSR EBITDA margin (heavily weighted by McDonald’s) significantly outperforming the other food & retail-related segments. All the same, QSR sales growth was the slowest during 3Q22 and the fast-food chains were unable to pass along inflationary pressures to their customers as evidenced by an EBITDA y/y decline. Notably, EBITDA growth for food suppliers & grocery stores demonstrates more pricing power while FSR EBITDA growth reflects the rebound of a depressed segment that suffered disproportionately in the past because of its sit-down dining format. Retail EBITDA stress reflected the discounting needed to move inventory as some consumers trade down from nice-to-haves to food essentials.
In any case, January was a great month for fast food stocks, reflecting analyst expectations for a strong 2023 rebound. This is consistent with indications that the low-end consumer is hanging-in-there while the QSR chains are beginning to enjoy moderating food & labor inflation. Notably, McDonald’s just reported that while the consumer remains resilient, there is a decline in units per transaction with some trade-down. Further, even though frequency is increasing among low-income consumers, they are keeping their spending to a fixed dollar amount.
We see even more of a rebound in FSR stocks during January which may reflect the same fundamentals for the QSR segment to go with attractive valuations which are much more compelling relative to the fast-food stocks.