Same Store Sales Trends

Preliminary 3Q Sales Trends Reveals Rebound Momentum

• Early 3Q:20 comp results continue to show sequential m/m improvements with this trend also evident in July government retail sales data.
• QSR is putting-up some good numbers (helped by pizza) while FSR steadily progresses towards break-even.
• A slowing rate of increase for Food at Home CPI also suggests a return to normalcy.

Promotional Composition

Value Offers are Finding Equilibrium

• QSR value promotional mix has started to rebound, reflecting the need to better compete with moderating grocery prices.
• FSR value mix decline is consistent with improving store-level profits.
• In any case, menu innovation remains extremely limited for both segments.
• Notably, only 9% percent of the chains offered free delivery in August (compared to the peak of 33% in May) as chains focus on more cost effective off-premise solutions.

Economic Outlook

Government Back-Stops Strengthening Secular Trends

• +28.5% estimated sequential q/q growth for the GDPNow model reflects expectation for increasing growth in both real personal consumption expenditure and real gross private domestic investment.
• On 9/1, the government implemented a temporary eviction moratorium through the end of the year (protecting ~40 million U.S. renters).
• Negotiations for a second round of government stimulus benefits broke down in mid-August, but are expected to begin again which could provide a short term boost to consumer spending.
• The Paycheck Protection Program (PPP) expired 8/8. Negotiations for a second program is also expected, but the next round is likely to have more restrictions and reduced benefits.
• Sky-high savings rate is starting to moderate.

Key Cost Trends & Forecasts

Increasing Commodity Prices Reflect Normalizing Demand

• The BLS Foodstuffs Index rebounded to +2.4% in August after posting 5 consecutive months of declines.
• Ground beef prices hit another LTM low ($1.41/lb.) while block cheese prices reversed course and fell -33% in August after a sharp run-up in June & July. In any case, it is notable that milk prices jumped +39.8% in August.
• Restaurant job openings are increasing as operators look to staff for increasing sales.

Franchisee EBITDA Valuations

2H:20 Valuations Outlook Grows More Optimistic

• 2H:20 franchisee valuation multiple outlook improved in August to a moderately bullish position as investors realize the strength and resiliency of this asset class.
• Also, large number of independent restaurant closings should benefit existing players while vacant real estate creates new opportunities.
• FSR valuations remain challenged due to sales headwinds and limited financing sources.
• With ~900 Pizza Hut units up for sale (driven by NPC International’s Chapter 11 restructuring), the chain’s valuations are expected to be slightly negative at first before improving as the system culls weaker stores.

Stock Performance

FSR Restaurant Stocks Stage Strong Rebound

• The RR Index rebounded sharply in August driven by strong FSR performance which helped the index turn positive on a YTD basis.
• However, despite FSR’s +28.2% rebound (all 10 companies had double digit gains), this segment remains down -14.4% on a YTD basis.

Marcus & Millichap Cap Rates

Record Gap Remains Between Cap Rates & 10 Yr.