Same Store Sales Trends

Sales Volatility Picking-Up

• Darden’s fiscal 4Q21 results tell an important story about the state of the industry with Olive Garden’s 2-year stacked comps down -1.6% vs. a +20.4% increase at LongHorn. The difference reflects: Olive Garden’s orientation towards a lower income demo vs. LongHorn’s more upscale positioning; and LongHorn’s ability to staff at higher levels (with higher tips helping in recruitment/retention).
• RR’s Intent to Eat Out Index (RR’s survey of consumers’ plans to eat-out over the next month) indicates positive September results but a weaker October (consistent with a post-stimmy economy).

• Ramping food prices at both restaurants and grocery stores are starting to be a drag on overall food sales.

Stock Performance

Just-in-Time IPO’s

• Restaurant stocks reflect increasing sales volatility. In any case, previous strength in YTD results has made room for several IPOs, including: Dutch Bros Inc. (471 coffee drive-thrus in 11 states); First Watch (420 fast casual breakfast & lunch restaurants in 28 states); and Portillo’s (67 fast casual restaurants across 9 states) which registered for an IPO in September.

Promotional Composition

QSR Finally Ramps-up Value Amid Record Core Price Hikes

• QSR value mix rebounded +10.4% off the August low and the average promotional price point declined -9.9% y/y (lowest level since Feb. 2020) which may be necessary to combat recent aggressive core price increases.
• New product mix also jumped +6.0% to 12.5% and was primarily driven by sandwich segment innovation (new chicken sandwiches).

• FSR promotional price point hit the lowest level in almost 4 years.
• New product mix jumped +8.9% to 11.8%, primarily driven by new drink specials and seasonal family promotions.

Economic Outlook

Consumer Weakness + Inflation = Higher Value Mix

• The 3Q:21 GDP outlook was lowered to +2.3% (down from +6.3% in July) as the outlook for consumer spending continues to deteriorate (post-stimmy and amidst ramping inflation).
• The economy is rolling off and starting to lap ~$1 trillion in stimulus benefits ($500B in stimulus check payments, $250 – $300B in unemployment benefits, $50 – $60B in elevated SNAP benefits, and $90B in Child Tax Credit payments including direct payments through December 2021) which will create significant headwinds in 1H:22 and disproportionately hurt lower-income households.
• Inflation continues to surge (the CPI for all items has been running above 5% y/y since May) reflecting problems in the supply chain and a +9.6% increase in rents during July.
• Consumer confidence fell for the 3rd consecutive month in September and is down -15% from the June peak.

Key Cost Trends & Forecasts

Material Food Inflation & Labor Shortages Continue

• The BLS Foodstuffs Index continues to moderate, but remains significantly elevated on a y/y basis.
• The current 2022 PPI outlook is manageable with most commodities projected to increase +1% to +5%.

• Unfilled job openings continue to ramp-up despite higher pay.
• The average hourly wage for nonsupervisory restaurant workers continues to surge (+14.8% y/y in July and +8.2% YTD).
• Brinker plans to increase hourly employee earnings (including tips) to $18 by FY23 (average $16.95 in FY21) and increase Chili’s general manager pay to an average of $100K by FY25 (average $87K in FY21).

Franchisee EBITDA Valuations

Labor Issues and Difficult Comparisons Weigh on QSR

• According to Alex Blanton from AB Advisory & Analytics, labor & supply disruptions are impacting valuations. Also, buyers are inclined to adjust multiples lower for chains with unsustainable AUVs (like pizza chains). High development costs are driving significant interest in acquisitions as an alternative to development.
• According to Rob Hunziker from Advanced Restaurant Sales, there is a lot of concern in the QSR world about labor shortages, and higher wages if they can find people at all. It is having a negative effect on QSR comps, since they are going against last year’s strong sales results.

Marcus & Millichap Cap Rates

Cap Rates Reach All-Time Low Despite Higher Interest Rates