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March 2018


Same Store Sales Trends

Discounting provides industry sales backstop 

  • 1Q:18 same store sales outlook for the $1B+ chains suggests a continuation of the recent rebound which is buoyed by strong 4Q17 results from top QSR names to go with an FSR improvement.
  • Broader government retail sales data shows total QSR sales declined -0.4% in January (the first y/y decline since 11/09) after the strongest 4Q17 holiday spending since 2005 as consumers took a breather.
  • Strong discounting in both QSR and FSR should help maintain traffic while industry sales hopefully catch-up with growth in employment and disposable income.



Source: RR Quarterly Same Store Sales & Hedgeye


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Menu Innovation

QSR starting to innovate while FSR is still focused on value 

  • QSR menu innovation has finally started to ramp-up while FSR is still focused on value.
  • Value promotions are migrating to loyalty program incentives (Chili's and T.G.I. Friday's now offer free apps/soft drinks with every visit while Starbucks made its rewards program more exclusive with "invite only" happy hour specials).


Click this link for March New Product News


Economic Outlook

Favorable data, but escalated uncertainties

  • GDPNow model forecast for 1Q:18 was revised down for the 2nd consecutive month to +2.8% which is still strong when compared to +2.2% annual average from 2014 - 2017
  • Still strong consumer confidence declined from recent highs while the personal savings rate increased for the 2nd consecutive month (perhaps post holiday financial restocking). 
  • While concern about the possibility of trade wars and Fed rate hikes have increased capital market volatility, underlying economic data remains positive on a historical basis
  • Pros: increasing disposable income; low unemployment rate (holding steady at 4.1% - lowest level since 2001); strong consumer confidence (although down slightly in March); and lower tax rates for 2018.
  • Cons: Higher gas, home heating prices, commodity costs and interest rates.


Source: Government Data


Key Cost Trends & Forecasts

Price volatility is expected to level out this year

  • While commodity costs are currently a mixed bag, the USDA projects that costs will pull-back/level-out in 2018.
  • Egg prices remain volatile and spiked sharply higher in March.
  • February was much colder and wetter than the same period last year. 


Source: RR Commodity & Labor Database


Source: NOAA



RR Resources


        Research Call Notes                           RR Presentations

        Franchisee Surveys                            Concept Conclusions 

        RR Thermometer Insights             New Product News


Franchisee EBITDA Valuations

Higher labor, food & borrowing costs pressuring multiples

  • Unit level valuation outlook pressured by higher labor, food & borrowing costs.



Source: RR 2H17 Valuation Report


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Stock Valuations from Hedgeye Risk Management

RR Index most stable game in town

  • RR's $1B+ Index handily out-performed the broader market despite DineEquity's stock giving back some of its February gains. 
  • From a valuation perspective, the RR Index looks pricey with flat EBITDA growth prospects and a +21% multiple premium to the S&P 500.
  • Investors may take solace in strong 4Q17 sales from MCD, QSR and a number of casual chains for the first time in a long while. Also, investors may appreciate a strong appetite for private buyouts in this space.
  • In any case, domestic restaurant stocks are unlikely to suffer in a trade war and may simply look appetizing compared to FANG stocks. 


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Marcus & Millichap Cap Rates

Cap rates hit 2-year high

  • Cap rates jumped +8% to their highest level in 2 years as rising interest rates and overall stock market volatility may be starting to trickle down to the commercial real estate market.
  • Transaction volume declined slightly on a y/y basis.


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Recently Completed Reports


Chilis     IHOP


4Q17 Same Store Sales



RR Partners: Talking Points about 4Q17 Results
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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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