2Q:19 Same Store Sales

1H:19 Valuations & Finance Update

Report Highlights

(1) EBITDA multiple estimates (post G&A) for 44 chains based on survey data from 8 leading appraisal firms; (2) a comparison of public restaurant company and private franchisee valuation multiples; (3) a summary of real estate cap rate trends based on data provided by Marcus & Millichap; and (4) an update on borrower financial condition, changes to underwriting standards, restaurant loan origination volume, and interest rate outlook derived from a survey of leading lenders.

Conclusions

(1)1H:19 franchisee EBITDA valuation multiples declined slightly from 2H:18 and were at the lowest level since 2H:14, but are expected to stabilize in 2H:19; (2) the public $1B+ chain restaurant company valuation multiple and premium reached their highest levels in at least 9 years reflecting strong interest in QSR which continues to significantly outperform FSR; (3) aggregate cap rates for single-tenant net-leased restaurant properties decreased slightly during 1H:19 as interest rates declined and the private 1031 buyer pool continued to grow; (4) although lenders are more optimistic about their borrowers’ financial condition, underwriting standards tightened; (5) 1H:19 aggregate loan origination volumes were mixed and the outlook for 2020 loan originations is slightly less bullish; and (6) the average LIBOR spread was basically unchanged from January, but lower interest rates have translated into lower borrowing rates resulting in a mostly favorable lending environment for large operators.

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TGI Friday's

TGI Friday's long-established brand equity as the original bar & grill national chain works well with Millennials (40% to 45% of guests) who maybe more likely to visit a bar than a sit-down restaurant. As Friday's bar scene cannot be replicated at home, it is more immune from to-go and delivery cannibalization and its large mix for alcohol sales helps to drive check & margin. The brand seeks to differentiate around tech & digital which also works well for Millennials and its app functionality includes: booking & check-in; pre-ordering; mobile payment with Venmo split check capability; loyalty; and social media sharing capabilities. We like the possibility of a test in Dallas which allows guests to place orders while seated in-store at the table. AI customer interfaces on app & social media (well suited for a social brand) is intended to offer customization & cost effective marketing and an emphasis on growing its loyalty program (to drive frequency) fits-in with its efforts to develop an AI driven 1-to-1 marketing platform. An expanded digital reach further drives growth of high ticket off-premise sales generated by new, younger customers and new occasions with existing patrons when a meal at home is preferred to a social night out. However, the chain's relatively small scale and decreasing share translates into a smaller share of voice and mostly negative comps since 2008 Great Recession reflects the system's fundamental challenges, particularly as it relates to value in our opinion. Comp performance over the last couple of years has been especially challenging, translating into a system low AUV and EBITDAR margin (impeding CAPEX investments that maybe necessary to fuel a rebound) and net closures over the last 10 years. In conclusion, while Friday's does well to differentiate around its original bar & grill brand equity layered with efforts to lead the casual space in Millennial friendly tech innovations, there is still more work to do around value such that Friday's can join in the progress that its competitors have made in better meeting today's consumers where their wallets are at. 

 

Taco Bell

Taco Bell is extremely well positioned as the only $1B+ national QSR Mexican player (category of 1) with core equity around abundant value, craveable innovation and a bold flavor profile. Its compelling value equation extends well beyond the notion of "cheap food" to affordable food that also offers appealing taste, flavor & gratification (food people want, not just what they can afford) and it is notable that the brand has been successful at balancing value with margins that benefit from: recent promotional focus on $5 boxes; a switch to its new $1/$5 Cravings Menu (which replaced the 20 item $1 value menu at the beginning of 2019); and a move to $1.29 price points, up from $1 in some cases. In any case, its value positioning is facilitated by a material COGs outperformance which is driven by the ability to mix & match an abundance of inexpensive ingredients. The brand is extremely dialed-into the Millennial demo with a very targeted menu & marketing strategy and this cult, Millennial lifestyle "hipness" brand entertains with playful and engaging story ads that include compelling fake trailers for fake movies with sequels that provide viewers with a reason to stay-tuned.  Healthy comp growth reflects strong brand positioning and its AUV is at an all-time high (capacity benefits from a menu that addresses multiple dayparts including breakfast, lunch, dinner, Happier Hour & late-night) and store-level dollar profits are also at an all-time high. Access benefits from the recent launch of delivery (4,000 stores with marketing support starting in February 2019) and the installation of two 22" kiosks in 4,000 stores with the rollout expected to be completed by the end of 2019. We like that its delivery menu prices are the same as in-store and that Taco Bell has negotiated a reasonable 15% commission to pay Grubhub for deliveries. In conclusion, Taco Bell's strengths continue to far outweigh whatever few weaknesses we can find as the chain continues to represent one of the most relevant QSR brands in the 21st century. 

Unit Economics

• RR’s Industry Data Report on Unit Economics provides: (1) FYE 2018 unit level AUV along with COGS, labor, royalty, advertising, other operating and EBITDAR margin estimates for 46 chains; (2) a 5-year history of unit economic performance; (3) an analysis of food and labor cost drivers; and (4) aggregate G&A margins, rent margins and leverage ratios based on RR’s annual lender survey.
• Report highlights: (1) Average 2018 EBITDAR margin for the $1B+ chains came in even with 2017 at 18.8% (the lowest level since 2008) and it is notable that lower COGS were fully off-set by higher labor costs; (2) at the EBITDA level, lower G&A expense helped to off-set higher rent based on our lender survey; (3) franchisee leverage levels remain elevated but coverage ratios are solid with lenders reporting minimal delinquencies; and (4) 2019 EBITDAR margin pressure reflects rising labor costs and slightly elevated commodity costs aggravated by increased industry discounting through 1H19, slightly off-set by modest same store sales growth prospects.