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January 2018


4Q17 Comp Outlook Drives More 2018 Value Promotions

  • 4Q17 $1B+ chain comp sales are on track for a modest rebound with McDonald's +4.5% results strongly outperforming the company's competitive set (+0.2% ex. McDonald's).
  • Olive Garden's +3.0% comps outperformed its industry benchmark by +400 bps, suggesting FSR segment comps were down -1%. 
  • Broader government retail sales data shows just the opposite in November with FSR and grocery outperforming a tanking QSR segment. 
  • In any case, an even greater 2018 industry pivot towards value promotions reflect the industry's sales challenges. We will see what lower taxes brings...  



Source: RR Quarterly Same Store Sales & Hedgeye


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iSpot TV's Ad Analysis

  • Healthy TV airings growth supports value focus.



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Menu Innovation

  • QSR new product innovation remains subdued as chains continue to focus on value, including: McDonald's ($1, $2, $3 Dollar Menu); Wendy's (expanded 4 for $4 Meal); Jack in the Box (Value Jack's Way with 5 items priced from $1 to $5); and Subway ($4.99 Footlongs).
  • Spike in FSR new product news primarily reflects Red Lobster's Tasting Plate roll-out and new additions to its Lobster Fest promotion.



Source: RR Menu Report


Bullish Economic Outlook

  • +5.4% GDPNow model forecast for 1Q18 on top of +3.2% 4Q17 growth (+2.3% for full-year 2017). 
  • Pros: increasing disposable income (December's +3.1% increase was the largest since 4/16); low unemployment rate (lowest since 2001); declining savings rate; strong (near record levels) consumer confidence level; and lower tax rates for 2018.
  • Cons: Higher gas, home heating prices, commodity costs and interest rates.


Source: Government Data


Key Cost Trends & Forecasts

  • While commodity costs continue to ramp-up, the USDA projects that costs will pull-back/level-out in 2018.

Source: RR Commodity & Labor Database


Source: NOAA


Franchisee EBITDA Valuations

  • Multiples have been trending down since 2H16 which reflects higher labor costs, commodities and interest rates.
  • The highest multiples associated with the largest deals have been compressed the most as evidenced by the third chart below.




Source: RR 1H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

  • The RR Index was unable to keep-up with very strong results for the broader market as the historic benefit of refranchising has mostly played-out, highlighting the industry's need for more robust sales growth.
  • Fortunately, the new tax law should provide the sector with a helpful tailwind in the form of higher capex investments and increased consumer spending. 


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Marcus & Millichap Cap Rates

  • January cap rates declined to their lowest level since March 2017 as demand remains very strong with transaction volume up +22% y/y.
  • Cap rates are expected to remain around 6% through 1Q:18.


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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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