Restaurant Stock Performance Says it All

• QSR stocks have come a long way from March crisis lows as the chains have proved their ability to generate healthy profits with just their drive-thrus. In fact, some chains have found that profits can be actually higher with this model calling into question the role that dine-in and dining rooms will play going forward.

• While the FSR recovery has not been nearly as robust as QSR, Wall Street has been lenient to this segment in the hope that re-opened dining rooms will be the gravy on new found off-premise sales that promise to remain for the long-term.

• The love affair with the stocks we group together under the fast casual banner are excelling as evident by valuations which are appropriate for companies with a long runway of fast growth in front of them.

CDC’s Comorbidity Data is Very Helpful

• For 6% of the deaths, COVID-19 was the only cause mentioned according to the CDC (as of 8/26/20).
• For deaths with conditions or causes in addition to COVID-19, on average, there were 2.6 additional conditions or causes per death.
• The more information, the better! Now we request that they run statistical modeling in order to quantify the incremental risk that the virus poses to the at-risk population (very old, very ill).

Source: https://www.cdc.gov/nchs/nvss/vsrr/covid_weekly/#Comorbidities

Assessing the Lockdown’s Impact

• While the economy is rebounding nicely, we still have a very long way to go to get everyone back to work.
• The implications of 13.6 MM unemployed on the restaurant industry is profound as it dramatically limits consumer purchasing power that is critical to restore industry sales levels.
• To put this number in perspective, it is notable that only 5.8MM were unemployed pre-lockdown in February 2020.

• Some off-setting factors that help with the industry’s positioning include: (1) a restructuring of business models which have sharply improved store-level profitability; (2) the closure of marginal restaurants that acted as a drag on comp growth for the healthy stores; and (3) the decrease in real estate and construction costs which helps improve ROI for new builds, relocations & remodels.
• With regard to the first point, we note that Fridays has enjoyed a post-lockdown silver lining, discovering a new operating model that has resulted in a +6% EBITDAR/+2.5% EBITDA margin improvement. Further, a sharp increase in off-premise sales has brought system comps to down just -10% to -15% with preliminary results suggesting a retention of off-premise sales even as dine-in capacity ramps-up.

Burger King – RR Executive Summary

Burger King’s well-conceived brand equity emphasizes flame grilling (over an open flame), highlighting a clear difference from griddling. The brand’s prominent burger platform (100% beef without fillers or preservatives) includes signature Whopper configurations and various “King” varieties. Its menu is bolstered by an upgraded chicken line and BK is testing a variety of products that can now be made on its new broiler. Further, popular meatless protein versions of signature menu items and healthful ingredient improvements are designed to expand the brand’s reach. The brand’s value position is strengthened by: an above-average value promotional mix; value offers laddered across every price point from $1 to $6; and new news generated by rotating products on its mix-and-match value platforms. Creative ads and strength in social media provide the brand with effective marketing solutions and enhanced customer experience reflects process/equipment improvements and tighter quality control initiatives. In any case, while annual comps have been positive from 2014 – 2019, it is notable that sales under-performance reflects the brand’s challenge to expand beyond its historical heavy QSR user orientation. Also, post-lockdown 1H20 comp under-performance may reflect the chain’s traditional heavy QSR user orientation (a demo which has been disproportionally impacted by unemployment). In conclusion, while Burger King is doing a solid job executing around the fundamentals, the brand must continue to find ways to expand its market reach towards new, more affluent consumers willing to pay for a good burger.

Jersey Mike’s – RR Executive Summary

Jersey Mike’s “Sub Above” brand positioning is based upon: freshly sliced cold subs & grilled hot subs made with quality ingredients; signature Mike’s Way sandwich topping option, including a drizzling of “The Juice”; a great customer experience built upon conversational hospitality & fast service speed; and a charitable culture of “giving to give”. Its Northeast-style cold subs are made-to-order with private labeled meats sliced in front of customers and fresh-sliced cheeses & produce piled high on bread baked in-store. Hot subs emphasize grilling of Cheesesteaks (USDA choice top round roast beef cooked in-house) and Chicken Cheesesteaks. The system’s goal is to establish each location as a local neighborhood sandwich shop which “makes a difference” and it is notable that the system seeks to resist a multi-unit mentality. The goal is to reach consumers where they are (FB, Instagram, etc.) and corporate reported that it increased its aided brand awareness by 25 points during 2019 which is key given the brand’s size disadvantage relative to Subway & Jimmy John’s. Marketing tactics have evolved from emails to texts to data mining currently and texting has been successfully tied to double point loyalty promotions. Its mobile app has order & quick pick-up functionality, pay, loyalty and Doordash delivery capabilities and it is notable that its loyalty program generates 45% of sales (yielding a key source of customer data). Heavy cause-related marketing efforts reinforces the brand’s Millennial friendly service and community (giving to give) positioning. Rapid unit growth helps build scale which is key given the chain’s limited marketing spend compared to its national chain competitors. In conclusion, it is notable that this chain has been able to sustain sales out-performance with a quality positioning during an extended operating environment marked by discounting and it is our opinion that this reflects: a compelling quality/service positioning; a brand commitment to give back to its customers & to its communities; and effective digital marketing efforts.