Same Store Sales Trends
QSR Continues to Deliver as FSR Starts 2021 Recovery
- Preliminary 4Q:20 $1B+ Chains same store sales results were down -1.0% which is roughly in line with 3Q:20 results (-0.6%) and reflects that October’s strength was mostly off-set by FSR weakness in November & December.
- 2021 sales have been improving due to: +14.4% January increase in disposable income ($600 stimulus checks); and easing dining restrictions. Going forward results should further benefit from another $1,400/person stimulus payment targeted for 3/14.
- All-the-same, a sharply rising QSR price gap could represent an increasing headwind for the healthiest industry segment as government stimulus inevitably runs-out.
Stock Performance
Rotation from QSR to FSR as Dine-In Restrictions Ease
- The February RR Index benefitted from a +15.0% FSR gain which reflected improving sit-down performance as dine-in restrictions ease.
- QSR stocks underperformed as investors rotated into FSR.
Promotional Composition
Now is Not the Time to Move-Off Value
- QSR reacted to the temporary consumer spending boost with higher promotional price points.
- Prudently, the FSR segment continues to manage promotional prices down.
Economic Outlook
Hopefully Economic Boost & Easing Restrictions Take Root
- The GDPNow model estimate for 1Q:21 real GDP growth improved from +6% last month to +10% and the unemployment rate declined to 6.3% in January after hovering at 6.7% in November & December.
- $1.9 trillion American Rescue Plan Act of 2021 bill (passed by House & headed to Senate) would provide an additional $1,400 in direct payments, increase in the Child Tax Credit ($3,000 per child/$3,600 for children under 6) and extend other programs until 9/30 including an extension of federal unemployment benefits from $300 to $400 per week, a 15% increase in SNAP benefits and an extension of eviction and foreclosure moratoriums.
- Included in the bill is the $25 billion Restaurant Revitalization Fund (RRF) which is intended to help small businesses (<20 locations). Grants (up to $10 million per entity, or $5 million per physical location) are determined based on sales losses between 2019 – 2020 and the funds can be used for essential operating expenses (payroll, mortgage, rent, utilities, etc.)
- The PPP program has disbursed more than $662B in forgivable loans in three iterations over the past 11 months (including ~$5.6B to the $1B+ Chains) – refer to RR’s 2021 Restaurant Finance & 2H20 Valuation Report outline.
- Interest rates are rising with the 10-year treasury increasing from 1.09% on 2/1/21 to 1.42% as of 3/2/21 (compared to a low of 0.52% 8/4/20).
Key Cost Trends & Forecasts
Commodity Inflation Has Everyone’s Attention
- Commodity costs escalated in February with several reaching LTM or multi-year highs including: wings (all time high); corn (7-year high); wheat (6-year high); pork (18-month high); coffee (3-year high); and chicken (LTM high).
- The February BLS Foodstuffs index (+23.4% y/y) represents the highest level since September 2014.
- Rapidly rising corn and wheat prices could impact feeding costs for livestock which could translate into even higher meat prices.
- Hourly restaurant wage growth slowed to +1.4% in December and we may have dodged a bullet as the $15 minimum wage component was excluded from the American Rescue Plan Act of 2021 bill.
Franchisee EBITDA Valuations
The Trick is to Forecast a True Normalized EBITDA
- Franchisee EBITDA multiple valuations continue to improve with FSR approaching neutral territory and QSR firmly bullish.
- According to Alan Gallup from National Franchise Sales, the most challenging part of valuations is determining the appropriate normalized EBITDA figure to apply.
Some things to consider when assessing 2020 EBITDA include:
- Was EBITDA adversely impacted by periods of full or partial closure?
- Did government restrictions benefit the business as it relates to 3rd party delivery positioning, drive-thrus, or a product line compatibility with “to go” orders?
- How did these matters impact cost of goods and labor costs?
- What is sustainable?
- How will the loss of competition impact future sales?
Click here for more info on RR’s 2021 Restaurant Finance & 2H:20 Valuation report
Marcus & Millichap Cap Rates
Cap Rates Move Higher with Interest Rates
