Same Store Sales Trends
Possible Pause From Astounding 2Q Results
- 2Q sales results are significantly exceeding 2019 levels (+11.9% for 18 out of the 27 chains that have reported so far) due to pent up consumer demand, additional stimulus, menu price increases, a rebound in lunch business and less discounting.
- However, RR’s August Intent to Eat Out Index (RR’s survey of consumers’ plans to eat-out over the next month) suggests a pause, consistent with the 2Q21 GDP release which reported a -26% decline in disposable personal income (after increasing +58% during 1Q21), primarily reflecting a decrease in government stimulus.
Total food service sales increased in June by +8.4% on a 2-yr. stacked basis, but continue to lag grocery stores (+14.4% 2-yr. stacked) as grocery stores continue to price more aggressively than restaurants.
Stock Performance
Drive-Thrus Back in Favor
- The RR $1B+ Index declined for the 3rd consecutive month as investors are concerned about the possibility of new lockdowns, pressuring FSR & favoring drive-thrus.
Promotional Composition
FSR Feels Need to Discount More So Than QSR
- QSR value mix continues to decline to its lowest level in at least 4.5 years, with the average promotional price point increasing +5.6% y/y.
- FSR value mix is trending higher, helping lower its average promotional price point. An increase in new news around alcoholic beverages is consistent with growing dine-in trends (pent-up demand).
Economic Outlook
GDP Forecast Holds Steady Though Consumer Looks Weaker
- 3Q GDP is forecast to grow at a similar rate to 2Q despite less stimulus (although new child care tax credits rolled-out in July).
- Notably, consumer confidence is at its highest level since 2/20 although 2Q disposable income declined sharply as previously discussed.
- Also, gas prices have increased for the last 8 consecutive months and are now +44% higher than last July.
- The ENTRÉE Act was introduced in July in an effort to add $60B to the Restaurant Revitalization Fund after 64% of eligible applicants were originally denied funding
Key Cost Trends & Forecasts
Food Inflation & Labor Shortages are a Thing
- Inflation as reflected by the BLS Foodstuffs index appears substantial.
- Chicken & coffee are at all-time highs and the 2021 PPI forecast was revised higher again for chicken, beef, pork & wheat.
- According to Wingstop, elevated bone-in wing prices reflect the challenges of poultry producers to staff sufficiently more so than higher demand. Fortunately, hatchability rates are expected to improve in 2022.
- Fortunately, block cheese prices continue to fall (-38% in July & -13% YTD)
- Job openings continue to ramp-up as sales volumes surge, reflecting that the end to supplemental unemployment in certain states & higher wages are not easing labor shortages as anticipated, probably reflecting an increase in other forms of government stimulus and changed behaviors
Franchisee EBITDA Valuations
2H21 Valuation Outlook Pauses
- The decline in RR’s July valuation outlook reflects increasing concerns over accelerating costs & more difficult y/y sales comparisons.
- Notably, this is somewhat off-set by an improving financing environment including favorable interest rates and some new lenders entering or ramping-up in the restaurant lending space.
Marcus & Millichap Cap Rates
Cap Rate Spread Widens to Highest Level of the Year
- The cap rate spread widened to its highest level of the year in July, reflecting increasing supply given the possibility of unfavorable tax changes.
- The number of transactions increased to the highest level of the year.
