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December 2017


Improving 4Q:17 Comp Outlook Helped by FSR

  • Improving 4Q:17 comp outlook reflects an FSR rebound driven by a stronger value equation. In any case, FSR sales continue to be volatile.
  • Hopefully, increased consumer spend at Christmas will not offset going forward restaurant spend so long as federal tax savings come-in as planned.  


Source: RR Quarterly Same Store Sales & Hedgeye


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iSpot TV's Ad Analysis

  • Ramped-up TV airings support value focus.



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Menu Innovation

  • Menu innovation on holiday as the chains continue to focus on value.



Source: RR Menu Report


Economic Outlook

  • Healthy 4Q:17 GDPNow model forecast of +3.2%.
  • Pros: increasing disposable income (November's +3.0% y/y increase was the largest since April 2016), low unemployment rate (lowest since 2001), declining savings rate and strong (but declining) consumer confidence level.
  • Cons: Higher gas, home heating prices, commodity costs and interest rates. Also, cold weather could keep people at home. 


Source: Government Data


Key Cost Trends & Forecasts

  • Mixed commodity cost changes and the USDA is projecting a commodity cost pull-back/leveling-out in 2018.
  • As of 2018, the minimum wage increased +4.4% in 18 states and across ~20 cities/counties (including 12 in CA & 3 in WA).

Source: RR Commodity & Labor Database


Source: NOAA


Franchisee EBITDA Valuations

  • Estimated Franchisee EBITDA multiples declined slightly during 2H:17 and are expected to face further downward pressure in 1H:18 reflecting higher labor costs & interest rates.
  • The fast casual and sub-sandwich segments experienced the largest EBITDA multiple declines while casual and chicken were also weak. 


Source: RR 1H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

  • While Darden's value renaissance offers hope for sit-down chains, the RR Index was unable to keep-up with the broader market in December and noticeably under-performed the consumer discretionary sector.
  • Perhaps consumers substituted a sit-down dining experience for gifts this year? Nobody can figure out these Millennials…



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Marcus & Millichap Cap Rates

  • December cap rates declined to their lowest level since the March 2017 historical low (5.71%) and transaction volume remained robust as sellers looked to close deals by year-end. Cap rates are expected to remain around 6% through 1Q:18.
  • Real estate may have more appeal than operating companies for now...


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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 2018.


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