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October 2018


Same Store Sales Trends

3Q Comp Outlook Weakened by QSR, but Still Solid

  • With 78% of public chains having reported so far, 3Q comp growth for the $1B+ chains looks to be slightly below initial expectations but still above average with casual stronger than QSR this time around. 
  • 3Q government data indicates a slow-down in Total Food Service sales in September (+5.8% according to advance estimate) after very strong growth in July (+9.4%) and August (+10.8%).



Source: RR Quarterly SSS (outline), Hedgeye & Census Bureau



Promotional Composition

FSR Following QSR Promotional Play Book

  • Promotional composition for the $1B+ chains flip flopped from last month with FSR accelerating value offers (value mix reached an LTM high of 44% vs. 36% last month) as QSR eased (with the mix of value offers pulling back from a September LTM high of 61% to 54% currently which is more in-line with the recent average).
  • The QSR sandwich sub-segment is at 46% which is notably less than 56% for the casual FSR sub-segment.
  • $5 to $6 offers represent the greatest share of price point promotions for both QSR & FSR as both segments converge around value.



Source: RR Menu & Promotions Report (Outline)


Economic Outlook

Slightly Lower 2H:18 Growth Outlook, but Fundamentals Remain Solid

  • Preliminary 3Q GDP growth came in below initial expectations at +3.5% (versus +4.1% forecast last month) and is now expected to slow further to +3.0% in 4Q, but still represents solid economic growth.
  • Pros: increasing disposable income; record low unemployment rate; strong consumer confidence (October reading was another record); and lower tax rates for 2018.
  • Cons: Higher gas prices (should start to moderate in-line with falling oil prices) and rising interest rates.


Source: Government Data



Key Cost Trends & Forecasts

Commodity Costs Remain Favorable

  • Commodity costs were mostly favorable in October with the BLS Foodstuffs Index falling -2.4% and chicken at an LTM low.
  • 2019 USDA outlook is favorable with a big improvement in October's cost outlook for eggs (down 9% to 10%).


Source: RR Commodity & Labor Database (Outline)



Franchisee EBITDA Valuations

Store Valuation Multiples Under Pressure

  • October survey shows a further deterioration in franchisee EBITDA valuations due to margin pressure driven by rising labor costs, creeping  interest rates and increased supply.
  • According to survey participants, Applebee's & Arby's multiples are trending higher while Denny's & Burger King's valuations remain strong. Popeyes is trending down due to more aggressive development requirements tied to acquisitions.


Source: RR 1H18 Valuation & Finance Report (Outline)


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Stock Valuations from Hedgeye Risk Management

$1B+ Index Weathers Market Meltdown

  • RR's $1B+ Index outperformed the broader market which sold off sharply in October. 
  • Notably, the RR Index is up +15% YTD vs. just +1.4% for the S&P 500.
  • Smaller, higher growth restaurant stocks declined double digits during the month in an apparent flight to quality.



Marcus & Millichap Cap Rates

Rising Interest Rates Starting to Impact Cap Rates

  • Cap rates ticked-up in October as rising interest rates are starting to weigh on commercial real estate valuations.






Recently Completed Reports


Buffalo Wild Wings     Dennys     Jersey Mikes


Remodel Industry Data Report



Special Order Reports


New building design to improve service


  • Strong brand equity (particularly in core northeast markets) is built on coffee strength bolstered by convenience and fast service.
  • 9,141 units (all franchised) at FYE 2017.
  • 425 new units projected FYE 2018 (all franchised).
  • 2018 new building and remodel design facilitates on-the-go ordering & digital transaction efficiencies which will help improve service speed (the brand’s core competency). 

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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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