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July 2018


Same Store Sales Trends

Stronger FSR results drive modest 2Q comp growth in-line with estimates

  • 72% of public companies with systemwide sales of $1B+ under RR coverage have reported with a 2Q:18 comp average of +1.9%.
  • Sales results are generally in-line with Street estimates with FSR strength (+5.7% Applebee's, +5.5% Texas Roadhouse & +4.0% Outback) helping to off-set slightly worse QSR performance.
  • Government retail sales data also shows FSR rebounded sharply in May and advance Total Food Service & Drinking Place sales surged +9.0% y/y in June (versus +7.1% in May and represents the best performance since +11.5% Feb. 2016).


Source: RR Quarterly Same Store Sales & Hedgeye


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Menu Innovation

Extreme value focus is hurting innovation, maybe traffic

  • Menu innovation fell sharply in July with the majority of new product news coming from a relatively few chains.
  • 66% of the 55 $1B+ chains under RR coverage are offering some form of price value deal. 
  • Our concern is that the industry's extreme value focus is hurting innovation, which, in turn, could hurt traffic.
  • The industry badly needs brand leaders who are willing to take a leap of faith to premium based on all the economic growth indicators.  


Click this link for July New Product News



Economic Outlook

GDP outlook gains steam

  • Strong +4.1% 2Q GDP growth is expected to accelerate to +5.0% in 3Q and reflects healthy economic fundamentals.
  • Pros: increasing disposable income; low unemployment rate; strong consumer confidence; and lower tax rates for 2018.
  • Cons: Higher gas, interest rates & commodity costs (moderating).


Source: Government Data


RR Resources


                       Research Notes                                   Presentations

                    Unit Level Trends                    Report Announcements

                            Insights                                    New Product News

                           Menu Pics                                    Industry Events


Key Cost Trends & Forecasts

Commodity costs continue to moderate, labor is highest in a decade

  • Commodity costs continue to moderate with the BLS Foodstuffs Index posting its second consecutive month of mid-single digit declines and is now down -0.2% YTD July.
  • Coffee and beef are at LTM lows. However, wheat, chicken & labor costs are at new LTM highs.
  • According to a recent BLS report, the Employee Cost Index was the highest in a decade. This implies that consumers have more money to spend at restaurants.


Source: RR Commodity & Labor Database


Source: NOAA


Franchisee EBITDA Valuations

Limited inventory helps 1H:18 multiples, but outlook under pressure

  • While the 1H:18 unit level franchisee valuation multiple increased because of a scarcity of sellers and an abundance of capital, the July valuation outlook is pressured by prospects of higher labor & borrowing costs.



Source: RR 1H18 Valuation & Finance Report


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Stock Valuations from Hedgeye Risk Management

Restaurant stocks are not cheap given recent sales growth

  • RR's $1B+ Index gave back some of June's gains compared to an increase in the S&P 500, but is still out-performing on a YTD basis.
  • This likely reflects that the industry's 1H18 top-line comp performance could be stronger (especially compared to GDP growth) given an EV/EBITDA multiple that exceeds the S&P 500 average by +22%.  


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Marcus & Millichap Cap Rates

Strong demand keeps cap rates in check for now

  • Cap rates pulled-back modestly in July on strong demand (+19% y/y transaction volume), but remain near recent highs as rising interest rates and store level margin pressure dictate lower bids. 


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Recently Completed Reports


Taco Bell     TGI Fridays


1H18 Valuation & Finance Report



Please pass on to your colleagues


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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