Executive Summary: Last week we discussed the significant unit-level challenges of the publicly traded restaurant companies. However, the aggregated financial condition of these publicly traded QSR companies tells a different story. As we can see in the table, the brands are hanging-in there with decent revenue growth (albeit with a downward post-covid trend) and margins that have been mostly stable before one-time write-offs (like McDonald’s 2Q22 $1.2B charge related to the sale of its operations in Russia).
The difference between store-level and corporate-level financial performance is explained by the “asset light” franchise model which currently insulates the publicly traded franchisors who collect royalties from their franchisees who run most, if not all, of system restaurants. While this might seem like a good deal for the public franchisors, the reality is that if their franchisees are not profitable, the franchisors won’t be profitable for long. Franchisees & franchisors are linked, and it is not unreasonable to assume that the value of public restaurant companies is closely related to the sum value of the individual franchised units. Resultantly, investors do well to keep a close eye on the unit-level financial performance of the franchise system as franchisees often serve as the proverbial canary in the coal mine for the restaurant industry.
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