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November 2018


Same Store Sales Trends

2-Year Stacked 4Q Comp Outlook is Up Slightly Over 3Q

  • While a modest 4Q:18 comp growth outlook for the $1B+ chains reflects expectations for an apparent FSR sequential slow-down, on a 2-year comp basis 4Q:18 FSR is expected to be up +0.4% over 3Q:18.
  • 2-year stacked 4Q comp outlook for all $1B+ chains is expected at +3.8% vs. +3.7% for 3Q. 
  • In any case, preliminary government data shows Total Foodservice sales slowing in September and October after peaking in August.




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



Promotional Composition

Value Still in Focus, but Price Points Edging Higher

  • QSR eased-up on value for the 2nd month in a row, while FSR maintained a high level of discount offers.
  • Promotional price points edged higher with an increase in $6 QSR value offers and a decline in $5 deals (which may have been prompted by McDonald's introduction of the $6 Classic Meal Deal). FSR increased offers in the $10 - $13 range while decreasing its mix of $6 & under deals.
  • Product innovation fell to an LTM low for QSR, but increased for FSR with significant menu additions at Corner Bakery, Buffalo Wild Wings, Outback, and Ruby Tuesday.



Source: RR Menu & Promotions Report (Outline)


Economic Outlook

GDP Growth Decelerates but Remains Respectable

  • 4Q GDP Now growth outlook was trimmed to 2.8% from 3.0% last month as economic activity continues to decelerate from 4.2% in 2Q to 3.5% in 3Q.
  • Pros: increasing disposable income; record low unemployment rate; strong consumer confidence; and lower tax rates for 2018.
  • Cons: Higher gas prices (starting to moderate due to falling oil prices) and rising interest rates.


Source: Government Data


Weather Trends

October was Cooler & Much Wetter than Average

  • October was cooler and much wetter (6th wettest in 125 years) than average.



Key Cost Trends & Forecasts

Negative YTD BLS Foodstuffs Index is Good for Margins

  • The BLS Foodstuffs Index fell -3.4% in November (driving the index negative for the YTD period) with potatoes & cheese reaching new LTM lows.
  • 2019 USDA outlook is favorable with both the egg & chicken price outlook revised lower during the month.


Source: RR Commodity & Labor Database (Outline)



Franchisee EBITDA Valuations

Unit-Level Valuation Multiple Sentiment Less Negative in November

  • Franchisee EBITDA valuations remain under pressure due to unit level margin challenges driven by rising labor costs, creeping  interest rates and increased supply.


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


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Stock Valuations from Hedgeye Risk Management

M&A Driven RR Stock Index Strongly Outperforms Broader Market

  • RR's $1B+ Stock Index continues to strongly outperform the broader market and is now up +20% YTD vs. just +1.8% for the S&P 500, reflecting an active M&A market for restaurant companies with Jack in the Box announcing that it is exploring strategic options.
  • Smaller, higher growth restaurant stocks continue to under-perform their larger peers possibly suggesting less M&A interest at this point in time.



Marcus & Millichap Cap Rates

Rising Interest Rates Driving Higher Cap Rates

  • Cap rates continue to trend-up as rising interest rates are starting to weigh on commercial real estate valuations.
  • While the number of transactions declined 22% y/y in November, December is expected to be a strong month as investors look to close deals before year-end.






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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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