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October 2017


MCD's Out-sized 3Q Comps Make Industry Look Bad

  • 3Q:17 average industry comp performance could be pressured by McDonald's out-sized +4.1% growth during the quarter. 
  • McDonald's reported that while it does not have to win on value, it can't lose on value. Notably, 2018 plans to be fully competitive on value will focus on $1, $2 and $3 price points for everyday value to compliment LTO deals.  
  • Broader government data indicates a 3Q restaurant sales rebound in August and September despite the hurricanes and strengthening grocery store sales.



Source: RR Quarterly Same Store Sales, Hedgeye & US Census Bureau


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iSpot TV's Ad Analysis

  • Sharp rebound in FSR TV airings reflects resurgence in casual grill & bar chain ad spend (Chili's, Outback, Red Robin and Friday's posted double digit Y/Y increases) which more than off-set declines in the family segment and at Panera.



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New Product News: Value Still Main Focus

  • QSR innovation picked-up in October, but value offers still going strong with a focus on $5 meals in QSR and deals under $10/person in casual.



Source: RR Menu Report


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Economic Outlook

  • 3Q:17 GDP increased +3% (versus +3.1% in 2Q) and GDPNow model is currently forecasting +4.5% 4Q growth, partly driven by real consumer spending growth and real private fixed investment growth.
  • The October Consumer Confidence survey (highest reading in ~17 years) indicated that consumers are more upbeat about the short-term outlook due to a strong job market and the prospect of improving business conditions. 
  • The Fed left a key interest rate unchanged at its November meeting but called the economy “solid” which could mean a rate hike in December. 
  • Pros: increasing disposable income, low unemployment (September's 4.2% rate was the lowest since Feb. 2001), declining savings rate and strong consumer confidence.
  • Cons: Higher gas prices, commodity costs and interest rates. Rent CPI increases also continue to outpace income growth. 


Source: Government Data


Key Cost Trends & Forecasts

  • Commodity costs continue to ramp-up Y/Y with all but vegetables, corn and coffee (new LTM low) showing significant increases.
  • Higher egg prices (CPI +77% in Oct & +15% to +16% increase projected for 2018) could have an adverse impact on breakfast focused chains.
  • The USDA is currently projecting that most major commodity costs will pull-back or level-out in 2018.


Source: RR Commodity & Labor Database


Source: NOAA


Franchisee EBITDA Valuations

  • Estimated Franchisee EBITDA multiple valuations edged slightly higher in October reflecting limited supply and strong demand, off-set by rising interest rates, flat sales trends and increasing store-level margin pressure (driven by rising commodity & labor costs).
  • However, the supply of available units may be poised to increase and Rob Hunziker (Advanced Restaurant Sales) indicates he has "received a substantial number of inquiries by groups wanting to explore putting their multi unit restaurant companies on the market in the past month. Most have experienced some softening of profitability and want to sell while the Market is still strong! More supply likely means a top in Multiples, particularly with softer EBITDA."
  • According to Manny Armesto (Praetorian Group), Buffalo Wild Wings valuations have fallen to 5x but should quickly bounce back to the high 5s once a new CEO is named and the express concept is proven out.


Source: RR 1H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

  • The RR Index advanced slightly in October but significantly under-performed the broader market. The RR index is down -3.1% YTD vs +15% for the S&P - consistent with the industry's sub-par comp performance.



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Marcus & Millichap Cap Rates

  • Cap rates ticked-up slightly and transaction volume was basically flat on a Y/Y basis during October. Transaction volume typically ramps back up in November and December as sellers look to close deals by year end.


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Recently Completed Reports

(Click Links for Outline)


Carls Jr     Hardees     Pizza Hut


Industry Data Report - Unit Economics


Report Highlights
  • RR’s Industry Data Report on Unit Economics provides: (1) FYE 2016 unit level AUV along with COGS, labor, royalty, advertising, other operating and EBITDAR margin estimates for 46 chains; (2) a 5-year history of unit economic performance; (3) an analysis of food and labor cost drivers; and (4) aggregate G&A margins, rent margins and leverage ratios based on RR’s annual lender survey.  
  • Report highlights: (1) Average 2016 EBITDAR margin for the $1B+ chains declined -40 bps as lower COGs were more than off-set by an AUV decline and higher labor & operating costs; (2) flat G&A and higher rent expense based on our lender survey suggests 2016 EBITDA (post G&A) also contracted; (3) franchisee leverage levels decreased and coverage ratios remain solid with lenders reporting minimal delinquencies; and (4) the outlook for 2017 EBITDAR margins is negative as a result of tepid sales growth, escalating labor costs and rising commodity prices. ​


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Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research’s analysis and opinions are not a guarantee of the future performance of any company or individual franchisee.  RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment. Copyright 2017.


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