Same Store Sales Trends

Building Momentum should Benefit from More Value

• 4Q:20 comps are off to a promising start for the chains that have reported despite a slow-down late in the year. Fortunately, January sales appear to be strengthening, consistent with our most recent TraffiCast Consumer Survey with a +3.9% y/y monthly improvement representing an inflection point after the Index declined sharply over the previous 2 months.
• RR’s survey results revealed that the problem remains among the 25-34 age cohort and our monthly promotional tracker (product sample) indicated that QSR is fortunately beginning to respond with more value after QSR CPI prices ramped steadily higher through December.
• This key point was reinforced by McDonald’s internal research which reveals that economic uncertainty is by far the single biggest consumer concern. This is why McDonald’s will remain prudently focused on affordability throughout 2021.

Promotional Composition

More Value is Just What the Doctor Ordered

• Promotional value mix for both QSR and FSR were at the high-end of the recent range and the average price point fell sharply reflecting more low priced offers during January.
• Also, the number of FSR new product intros jumped sharply and included several new bowl platforms at Denny’s, IHOP, Panera and Qdoba.

Economic Outlook

Recent GDP Expansion is Poised to Increase

• 4Q:20 GDP increased +4% and the outlook for 1Q:21 growth (+6% GDP Now Model forecast) looks even more favorable.
• While the new stimulus package is still being negotiated and ranges from a $1.9 trillion package ($1,400 per person) to a smaller $618 billion package ($1,000 per person), this would be on top of the $600 per person direct payment that was sent out in January. In addition, expanded federal unemployment benefits (up to $300/week through 3/14/21) could be extended until September.
• Interest rates are creeping higher with the 10-year treasury increasing from 0.93% on 1/4/21 to 1.10% as of 2/2/21 (compared to a low of 0.52% 8/4/20).

Key Cost Trends & Forecasts

Ramping Labor Costs, but Deflationary Food Prices

• The outlook for commodity costs is mixed with the BLS Foodstuffs index posting a new high for the 3rd consecutive month (+9.5% y/y) and the highest level since June 2017 although the 2021 USDA outlook remains mostly deflationary.
• Rapidly rising corn and wheat prices could impact feeding costs for livestock which could eventually translate into higher meat prices.
• Labor costs are pressured by rising minimum wages at the state and federal level (a move to a $15 federal minimum wage by 2025 includes an immediate increase to $9.50 up from $7.25 currently). Proposed legislation also calls for the end of the tipped minimum wage/tip credit by 2027. The bill would also index future wage increases to median wage growth.

Franchisee EBITDA Valuations

Improving FSR Valuations

• RR’s 2H:20 valuation survey results indicate a broad-based improvement in franchisee EBITDA multiples with every segment increasing.
• Specifically, QSR EBITDA valuation multiples are bullish, but leveling out, while the FSR outlook is improving. The $1B+ chains stand to benefit from the closures of independents and easing dine-in restrictions.

Stock Performance

FSR Rebound Drives RR Index’s Outperformance

• The January RR Index benefited from strong FSR gains as sit-down chains stand to benefit the most from easing dine-in restrictions.
• QSR managed to break-even during the month, holding onto prior gains.

Marcus & Millichap Cap Rates

Cap Rates Fell Sharply Because of Lower QSR Supply

• Cap rates fell sharply despite higher interest rates reflecting a limited supply of mostly QSR properties (transaction volume was down -13.5%).