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July 2017


2Q:17 Comp Sales Recovery Still on Track

  • 2Q:17 comp outlook improved slightly to +2.5% from +2.3% last month and was bolstered by strong performance at Domino's (+9.5%) and McDonald's (+3.9%).  
  • Food services and drinking places retail sales growth also improved for the 2nd consecutive month (through June) and outpaced grocery stores.



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


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iSpot TV's Ad Analysis

  • Sharp decline in July FSR TV airings was broad-based and reflects limited new product news. 
  • QSR TV airings growth was positive, but tempered by steep declines from segment leaders (-50% McDonald's, -28% KFC and -9% Pizza Hut).



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New Product News

  • Significant increase in QSR new product news after long focus on value, driven by sandwich and coffee/bakery innovation. 



Source: RR Menu Report


Economic Outlook

  • According to the BEA "advance" estimate, 2Q:17 real GDP growth was +2.6%. However, the 1Q:17 GDP figure was revised down to +1.2% from +1.4% last month.
  • Pros: increasing disposable income, low unemployment, low gas prices and strong consumer confidence (July had the 2nd highest reading in 16 years).
  • Cons: slightly higher interest rates, rising commodity costs, and rent CPI increases outpacing income growth. 


Source: Government Data


Key Cost Trends & Forecasts

  • The pace of commodity cost inflation continues to pick-up, with all but cheese, corn and coffee registering higher y/y prices during the month.
  • However, the overall USDA outlook (for both 2017 and 2018) is still manageable and commodities remain low on a historic basis. 


Source: RR Commodity & Labor Database


Source: NOAA


Franchisee EBITDA Valuations

  • 1H:17 Franchisee EBITDA multiple valuations took a breather and declined for the first time since 2H:11 but remained at the same level in July.


Source: RR 1H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

  • The RR Index plunged again in July with every segment in the red and particular weakness in the casual segment. The index is now down -5.2% YTD July compared to +10.3% for the S&P.
  • As valuations have traded higher than many expected (particularly among the heavily franchised names), investors are showing little patience for companies that don't have sales and earnings momentum. Notably, the EV/EBITDA multiple for the RR Index is now lower than the S&P 500. 
  • Also, it is possible that investors fear the impact from McDonald's market share gains and the possibility of lost wallet share from another big Amazon Prime Day. Rising food costs also may be weighing on the earnings outlook.



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Marcus & Millichap Cap Rates

  • July cap rates were unchanged from June and transaction volume picked-up due to the sale of a portfolio of corporate Bob Evans properties (pressuring cap rates with 11 properties selling at an average 5.61% cap rate).


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Recently Completed Reports

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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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