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December 2018


Same Store Sales Trends

Muted 4Q Comp Outlook Improves Slightly

  • Muted 4Q comp outlook improves sightly from November, helped by better than expected results for Olive Garden & LongHorn (+3.5%/+2.9%, respectively vs. initial +1.9% blended outlook).
  • While Total Foodservice sales are trending up slightly in 4Q through November, growth remains well below the summer peak.



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



Promotional Composition

QSR Steps-up Value & New News, the Opposite of FSR

  • QSR value mix increased in December following a 2 month decline after its September peak. The $5 price point remains sharply in focus and represents 21% of value offers. New product news increased after a weak November with recent intros including: Jack in the Box's Pannidos; McDonald's Signature Crafted Mushroom & Swiss Sandwiches; and Sonic's Fritos Chili Cheese Lineup. 
  • FSR value mix continues to trend down with most of the decrease attributed to fewer $14 - $15 promotions. The number of new product intros also declined to an LTM low (4.8% mix).



Source: RR Menu & Promotions Report (Outline)


Economic Outlook

GDP Growth Decelerates but Remains Respectable

  • 4Q GDP growth outlook was trimmed again slightly to 2.7% as economic activity continues to decelerate from 4.2% in 2Q to 3.4% in 3Q.
  • Pros: increasing disposable income; record low unemployment rate; strong consumer confidence (although a sharp decline in December trimmed the index to its July level); and lower tax rates for 2018. Gas prices also fell sharply in December and are now down 18% from the May peak.
  • Cons: rising interest rates (which moderated in December & declined to under 2.6% during the first few days of January) and stock market volatility.


Source: Government Data



Key Cost Trends & Forecasts

Favorable Food Costs Outlook Helps to Offset Labor Cost Pressure

  • The BLS Foodstuffs Index declined for the 3rd consecutive month and ended 2018 down -1.3% y/y with cheese reaching a new LTM low.
  • 2019 USDA outlook is favorable with the chicken price outlook revised lower for the 2nd consecutive month. 


Source: RR Commodity & Labor Database (Outline)



Franchisee EBITDA Valuations

Multiple Pressure Points for Unit-Level Valuation Multiples

  • RR survey results indicate 2H:18 franchisee EBITDA valuation multiples declined slightly from 1H:18 and are expected to remain under pressure in 1H:19 due to unit level margin challenges driven by modest sales prospects & rising labor costs. Also, valuations are pressured by higher  interest rates and greater supply. Finally, we hear that some lenders are turning more cautious although overall access to capital remains strong.


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


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Stock Valuations from Hedgeye Risk Management

Market Down-turn Wipes Out More than Half of 2018 Gains

  • RR's $1B+ Stock Index followed the broader market's sharp down-turn in December, wiping out more than half of its 2018 gains.
  • However, the RR index still managed to strongly outperform the broader market during 2018, up +7.1% vs. a -6.2% decline for the S&P 500.



Marcus & Millichap Cap Rates

Stock Market Volatility Good for Real Estate

  • Cap rates fell sharply in December to just above the 7-year low set in January 2018 (5.71%) as stock market volatility and lower supply (29% fewer transactions y/y) increased investor appetite in this space.






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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 2019.


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