Same Store Sales Trends

Sales Recovery Getting Industry Back to 2019 Levels

• Key points from Olive Garden’s fiscal 4Q21 results (through 5/30/21): comps increased +90.4% (-0.5% on a 2-year stacked basis) & Darden’s blended comps were up +2.5% during the 1st 3 weeks of June, in-line with May’s results; OG broke its all-time single day sales record on Mother’s Day & achieved the highest quarterly segment profit in its history during fiscal 4Q21; and 2020 sales for the casual & fine dining categories were $189B vs. $222B in 2019 – management is confident that demand will return to 2019 levels & beyond while supply has declined -10%.
• RR’s July Intent to Eat Out Index (our survey of 1,500 consumers’ plans to eat-out over the next month) suggests a slowdown in July which could temper 3Q:21 results. This may reflect the industry’s disregard for value during a period of consumer economic vulnerability, as outlined below.

• Total food service sales increased in May by +4.4% on a 2-yr. stacked basis, but continue to lag grocery stores (+13.8% 2-yr. stacked) as grocery stores continue to price more aggressively than restaurants.

Stock Performance

FSR Stock Profit Taking Continues

• While investors continued to cool on restaurants (particularly FSR) during June, the sector enjoys very strong YTD performance.
• Restaurant stock performance has opened a window for Krispy Kreme (DNUT) which completed an IPO and Sweetgreen & Dutch Bros Coffee which both recently filed for IPOs.
• Sharply lower cheese prices (-42% in June) contributed to Papa John’s & Domino’s strong stock performance during the month.

Promotional Composition

Value Out-of-Favor for Now

• The QSR value mix continues to trend down and reached its lowest level in at least 4.5 years.
• FSR value mix was the lowest since March 2018 while the average promotional price point continues to ramp-up due to more $11+ offers.
• A diminished value equation may help explain tempered results for July’s TraffiCast.

Economic Outlook

How will the Consumer do without Government Help?

• +8.3% GDPNow 2Q:21 forecast translates into a -23.1% decline on a 2-year stacked basis. This compares with +1.4% 2-year stacked results during 1Q21.
• 36MM+ families are expected to benefit from the first advance child tax credit (CTC) which is scheduled to be paid out 7/15 (monthly payments up to $250 per school-age child and up to $300 per child under 6 from July through Dec. 2021). The other half will be paid in a lump sum when parents file their 2021 taxes (max benefit up to $8k for one dependent and $16k for two or more).
• Perhaps to this end, June Consumer Confidence rose to its highest level since Feb 2020.
• However, occupancy costs continue to skyrocket with home prices rising in April by +14.6% y/y – the largest increase in the history of the index after 11th consecutive month of growth.
• The nationwide ban on evictions was extended for one month from 6/30 to 7/31 and is expected to be the final extension of the moratorium. As of 6/7, ~3.2 million people in the U.S. said they faced eviction in the next two months, according to the U.S. Census Bureau’s Household Pulse Survey.
• Notably, the SBA will officially shut down the Restaurant Revitalization Fund 7/14. ~$28.6B was funded through the program (105k funded loans & 307k applications). A 2nd round $60B proposal was introduced to Congress but has yet to be approved.

Key Costs Trends & Forecasts

Lumber & Cheese Prices Tank Despite Broader Inflation

• The June BLS Foodstuffs index increased for the 11th consecutive month (+68% y/y & +43% YTD 6/21), representing the highest level since 2011.
• Commodity costs extending last month’s highs include: pork (+287%/7-year high); ground beef (+50% & highest level since May ’20); chicken (+45%/3-yr. high); and coffee (+42%/4-year high).
• The 2021 PPI forecast was revised higher again for chicken, beef, pork & wheat, but was lowered for vegetables.
• Lumber futures tanked more than -40% in June (now down more than -18% for 2021).
• Block cheese prices fell -42% to its lowest level in a year.

• Job openings continue to ramp-up as sales volumes surge, reflecting that a large pool of unmotivated unemployed (June’s total unemployment rate increased +0.1% to 5.9%) makes it increasingly difficult to staff restaurants and is forcing operators to increase wages.
• The average non-supervisory hourly restaurant wage jumped more than 11% to $15.21/hr. in May versus the same period last year.

Franchisee EBITDA Valuations

Valuations on Track for Full Recovery

• Preliminary 1H:21 franchisee EBITDA valuation multiple estimates for the $1B+ Chains indicate almost a full recovery to 2H:19 levels and the 2H:21 outlook is slightly positive (+1.3%).
• The Coffee segment fared best and only the pizza segment declined slightly (as this segment faces increasingly difficult y/y comparisons as consumers allocate more restaurant dollars to dining out)

Marcus & Millichap Cap Rates

Strong QSR Property Demand Remains in Tact for Now

• Cap rates fell more than the decline in interest rates, reflecting strong demand for QSR properties.
• Notably, a potential repeal of the 1031 exchange could force a significant repricing of real estate.