2Q:18 Same Store Sales



Arby's enjoys unique positioning as a QSR chain with a credible deli format that bakes beef roasts & freshly slices all other roasts in-house in order to create Fast Crafted, made-to-order hot deli sandwiches which offer a compelling fast casual-like alternative to burger, chicken-only and cold-cut sub concepts. Sandwiches are distinguished by: generous stacks of quality meat toppings (big, meaty sandwiches); and leading-edge protein variety which extends well beyond Arby's core roast beef heritage. The brand's positioning is effectively communicated by its “We Have the Meats” campaigns and its focused core menu benefits operations while innovative LTOs (including monthly new news) drive trial and add variety. The selection of gourmet Market Fresh sandwiches & salads expands the concept's appeal to more upscale, health conscious consumers (eliminating the veto vote). Having said this, flattish 2017 comps reflects the brand's vulnerability as a premium player in a hyper competitive price environment although a steady layer of price point value LTOs in 2018 should help. A lack of a national breakfast platform could be hurting sales especially given the industry's growing emphasis of offering breakfast all day and there maybe more work to do to simplify innovation in order to improve service given deteriorating 3rd party customer satisfaction surveys. In conclusion, while Arby's is well positioned as a QSR player that can serve as a credible alternative to a NY deli, the brand could further benefit from a sharpened value focus, simplified innovation and a faster remodel & digital cadence.


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. 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 & engaging story ads that include compelling fake trailers for fake movies with sequels that provide viewers with a reason to stay-tuned. Taco Bell promotes the trial of new things with unique and compelling innovation, driving traffic & social media posts (buzz marketing). Further, the brand enjoys perhaps the strongest price/abundance value equation in QSR (price points ranging from $1 menu platform to $5 bundle meals) and Taco Bell seeks to celebrate value (Feast for a Dollar) rather than apologize for it. 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 profits are close to an all-time high. Efforts to develop frictionless guest access includes: order-ahead app functionality; plans to install 2 self-servicing kiosks in all restaurants by the end of 2019; a $200MM investment in Grubhub to help expand its delivery well beyond its existing reach with system-wide implementation expected by 1Q19; and relaunch of its brand website (Ta.co) where customers can order, rapid re-order & customize orders. 2018 is expected to be a record setting year for domestic restaurant openings and existing stores benefit from remodeling progress. 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. 


1H:18 Valuation & Finance Update

Report Highlights
  • (1) EBITDA multiple estimates (post G&A) for 45 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.
  1. While 1H:18 unit level franchisee valuation multiples increased because of a scarcity of deals and an abundance of capital, the absolute level remains slightly below 2016 levels and the 6-month outlook is pressured by prospects of higher labor, food & borrowing costs.
  2. The franchisee lending environment for large operators in national brands remains mostly favorable although operators are facing increasing headwinds as previously outlined to go with slightly tighter underwriting standards.
  3. 21% of lenders indicate a decline in borrower financial condition compared to 17% that are improving although survey trends are pointing in the right direction.
  4. Multiple premiums for large deals rebounded and are now at or close to relative highs. 
  5. While there was some recent stock investor 2nd guessing in terms of the validity of an asset-light franchisor model in an operating environment marked by rising costs, it seems like Wall Street has satisfied itself that franchisee health is OK for now, consistent with #2 above. 
  6. Aggregate cap rates for single-tenant net-leased restaurant properties increased slightly as rising interest rates are starting to dictate a more conservative underwriting and exit strategy.



T.G.I Friday's

Friday's new management has developed a sensible positioning strategy which seeks to create a new category of a bar focused brand, bringing Friday's back to its roots as an energetic, social atmosphere (In here, it's always Friday) where guests gather together with friends for fun and celebrations. The brand's social/bar heritage works well with Millennials who represent 40% to 45% of guests and its bar theme helps provide an exciting experience which prompts consumers to counter their cocooning home dining instincts. Further, a very large 25% mix for alcohol sales helps to increase check and margin with drink specials helping to drive incremental sales. Plans to pulse-in 3-5 new product intros every month should help drive traffic and 50%+ of the menu has been upgraded with a complete menu overhaul expected by FYE18 (which includes continued menu simplification to offset the added complexity from an increased LTO cadence). The new "Fire-Grilled Meats" platform upgrades include: new Big Ribs (featuring a +30% bolder, meatier, juicier rib); and an updated Burger Bar menu featuring a new patty blend of chuck & brisket. Operations should benefit from a focus on: world class hospitality; frictionless operations & service; personalized guest experience inside & outside of restaurants; and award winning facilities. Incremental off-premise sales have been ramping-up quickly helping the brand to better reach new, younger customers and new occasions. Having said all this, the new management team has its work cut out for itself given that this smaller scale player (11th largest national $1B+ casual chain) has suffered mostly negative comps since the 2008 Great Recession which reflects the system's fundamental challenges, particularly as it relates to value in our opinion. The brand's nearly $18 average check before tip and lack of an everyday value platform may impede frequency given consumer price sensitivity and a high level of competitive discounting. Sales challenges have translated into a system low AUV and EBITDAR dollar amount and gross closures have exceeded gross openings over the last 9 years. In conclusion, while Friday's has a lot going for it because of its unique bar positioning in the crowded casual chain dining space and because of its new management team which is well capable of executing its well-conceived turnaround plan, there is still more work to do around value (which we believe is forthcoming) necessary for Friday's to join in the progress that its competitors have made in better meeting today's consumers where their wallets are at.