Interpreting Public Stock Valuations

• Stock prices in the restaurant/grocery space have come-off their 52-week highs as investors pause to better assess long-term fundamentals in the new world. All-the-same, stock recoveries from their 52-week lows are substantial.

QSR

• QSR names have come-off the most from their 52 week highs as dine-in restrictions continue to ease, helping FSR to catch-up. Also, gains in FSR off-premise partially diminishes the QSR access advantage.
• In any case, QSR valuations are very strong with drive-thru access and asset light models continuing to appeal.

FSR

• Sit-down chain EBITDA continues to recover from peak drawdowns. In any case, investors have awarded these solid brands with a substantial EV/EBITDA multiple premium (compared to QSR) as the market witnesses a healthy rebound in dining habits, with a return to normal propelling sit-down profitability, further boosted by new found off-premise sales and market share gains at the unfortunate expense of independent restaurants.
• Darden just reported that Olive Garden’s comps were up +5.7% during the last week of its FY3Q21 with dine-in capacity restricted at 50% – 60%.

Fast Casual

• Fast casual valuations also reflect rebounding EBITDA as this segment leverages good progress in the transition to off-premise (albeit typically without the benefit of drive-thru conveniences) while addressing a higher income demo that proved more resilient to the post-lockdown economy.

Grocery Store Chains

• Grocery stock valuations remain stable despite a material post-lockdown share gain relative to restaurants. Grocery share of total foodservice sales was at 48.9% pre-lockdown (4Q19), increased to a high of 60.1% during 2Q20 before moderating somewhat to 54.3% during 4Q20.
• An eventual return to normal share levels could help restore restaurant traffic, a point which is likely reflected in the restaurant valuation premiums relative to grocery stocks.
• Notably, the 4Q19 +2.3% CPI price gap for food-away-from-home (vs. food-at-home or groceries) tapered-off to nearly flat by 4Q20 as grocery stores were able to increase prices because of consumer concerns about eating-out.