Same Store Sales Trends

Strong 2Q21 Comp Prospects

• 2Q quarter to date sales momentum on a 2-yr. stacked basis looks strong as the vast majority of restaurants are now open for dine-in and capacity constraints diminish across the country.
  
• According to The Cheesecake Factory, QTD 5/31 comps increased +196% y/y and +7% on a 2-yr. stacked basis with off-premise accounting for 1/3 of the sales mix. Nearly all of the company’s restaurants are operating with reopened dining rooms at approximately 70% indoor capacity (75% including patios).
  
• RR’s June Intent to Eat Out Index (our survey of 1,500 consumers’ plans to eat-out over the next month) suggests strong 2Q:21 results even as June’s prospects slowed compared to May.

• Total food service sales increased in April by +3.1% on a 2-yr. stacked basis, with restaurants beginning to regain share from the grocery stores according to government data.

• The restaurant industry’s recent share gain is notable given its significant CPI increases relative to the grocery stores.

Stock Performance

FSR Stock Profit Taking

• The RR Index took a breather in May after 6 consecutive months of gains due to profit taking (especially among the FSR companies which are still up +35.7% YTD compared to +11.9% for the S&P 500).

Promotional Composition

Less Discounting = Higher Prices

• The QSR value mix continues a downward trend while the average promotional price ramps-up.
  
• We see the same trend for FSR

Economic Outlook

Uncertain Long-Term Economic Prospects

• +10.3% GDPNow 2Q:21 forecast translates into a -21.1% decline on a 2-year stacked basis. This compares with +1.4% 2-year stacked results during 1Q21.
• On an annualized basis, full-year 2021 GDP is expected to increase +2.9% on a 2-year stacked basis reflecting the benefit of ~$6T in government stimulus (which represents ~27% of 2021 GDP).
• Rapidly rising gas prices (+59% y/y 5/21), higher interest rates and an elevated savings rate represent a headwind to discretionary spending.
• The $28.6B Restaurant Revitalization Fund which started taking applications on 5/3 was closed to new applicants in mid May after more than $69B in applications.

Key Cost Trends & Forecasts

Commodity Inflation Aggravated by Act of Terror

• 5/30 cyberattack on JBS Foods (one of the world’s largest food processing companies with extensive facilities in the U.S. and accounting for ~20% of the slaughtering capacity for cattle & hogs) shut down operations, threatening both the restaurant industry and US national security.
  
• Even without this supply shock, the May BLS Foodstuffs index continued to extend its gains +57% y/y (+38% YTD 5/21), representing the highest level since 2011.
  
• Commodity costs extending last month’s highs include: pork (+200%/7-year high); chicken wings (+98%/all time high); chicken (+140%/2-yr. high); and coffee (+29%/4-year high).
  
• The 2021 PPI forecast was revised higher again for eggs, chicken, beef, pork & wheat.
  
• According to Wingstop, prices for all chicken parts (including wings) are expected to remain elevated throughout 2021 as suppliers struggle to hire sufficient people to process chickens.
  
• Soybean prices (used for both human and animal food) reached its highest level in more than 8 years in May and is +18% YTD May.
  
• Lumber prices (+90% in April & +67% YTD 4/21) show no sign of abating and will add to new store construction costs.

• Job openings continue to ramp-up as sales volumes surge, reflecting that a large pool of unmotivated unemployed makes it increasingly difficult to staff restaurants.

Franchisee EBITDA Valuations

Valuations Level Out as More Sellers Enter Market

• More sellers are coming to market, driven by improving sales & profit and by the prospect of a significant increase in the capital gains tax.
  
• Franchisee valuation outlook leveled-off with FSR holding an edge as dine-in prospects continue to improve.

Marcus & Millichap Cap Rates

More FSR Properties Coming to SLB Market

• Higher cap rates partially reflect an increase in the number of FSR properties (6.83% cap rate vs 5.71% for QSR) coming to market as this segment’s prospects improve.