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November 2017


Modest 3Q:17 Comp Growth Tempered by Hurricanes

  • Modest +1.4% 3Q:17 comp growth for $1B+ chains was tempered by hurricanes (-30 bps. to -100 bps headwind) as the large chains continue to struggle for top-line growth.
  • While the $1B+ QSR chains are keeping pace with their smaller peers, the $1B+ FSR chains are losing ground to regional and mom-and-pop sit-down competitors according to government data. This contrasts with the idea that delivery and carry-out platforms are helping the national casual chains to take share from the smaller players in the same fashion as the pizza category.
  • Surprisingly, CPI data reveals that the overall QSR segment lost traffic during 3Q while the overall sit-down category has been steadily gaining traffic since 2Q:10. Further, sit-down industry sales outperformed QSR industry sales by 80 bps during the quarter according to government data.
  • CPI for food-away-from-home turned positive for the first time since 4Q:15 which is good news for the restaurant industry. All-the-same, grocery food price increases remain very muted (under +0.5%) with grocery sales growth somewhere between QSR and FSR industry sales growth.  
  • C-store sales growth (ex. gas)  is outpacing restaurants and grocery stores.



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


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iSpot TV's Ad Analysis

  • Family TV airings growth (+29.3%) was off-set by fewer Panera & casual ads.
  • Slowing QSR TV airings growth reflects fewer Dunkin' and Starbucks ads (-60% each y/y) in November.



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Menu Innovation

  • FSR innovation turns sharply positive y/y for the first time since July while QSR doubles down on value.



Source: RR Menu Report





Economic Outlook

  • 3Q:17 GDP increased +3.3% and GDPNow model is forecasting +3.5% 4Q growth. New tax plan is expected to provide further economic tailwind.
  • Due to the continued improvement in the economic outlook, a December rate hike is widely expected. 
  • Pros: increasing disposable income, low unemployment (October's 4.1% rate was the lowest since Feb. 2001), declining savings rate and a correspondingly strong consumer confidence level.
  • 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, particularly for eggs (which represents a headwind for breakfast), proteins and vegetables.
  • USDA projections indicate 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 multiples expanded further in November, reflecting a more bullish economic outlook and increased M&A activity (including recent Buffalo Wild Wings acquisition).
  • However, valuations (particularly FSR) still face significant headwinds which reflects ongoing EBITDA margin pressure.


Source: RR 1H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

  • The RR Index advanced sharply in November and out-performed the broader market - pushing it into positive territory.
  • However, the RR index is up 1.0% YTD vs +18.3% for the S&P.
  • Restaurant stocks (currently trading at 11.7x EV/EBITDA) have been propelled by 2017 private buyout transactions, but at declining valuations (PLKI ~19x 2/17, PNRA ~16x 4/17, RT ~8x 10/17 and most recently BWLD at ~10x EV/EBITDA).



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Marcus & Millichap Cap Rates

  • Cap rates eased and transaction volume picked-up slightly during November. Transaction volume typically ramps up in 4Q as sellers look to close deals by year end.


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Recently Completed Reports

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Dunkin Donuts        KFC       Pizza Hut


Annual RR Databook



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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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