DC Advisory
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I used to think that analysts’ obsessive attention to same store sales was overdone. After all, there is nothing wrong with maintaining sales/store, building new stores if the unit level economics generate an attractive return, controlling store level costs, leveraging corporate administrative expenses. The result would be higher sales and profits and earnings per share as the “cookie cutter” strategy spread  geographically.

However: This is not the restaurant industry many of us grew up with. I remember when Chi-Chi’s was doing $2.5M per copy in 1980 and the gross investment in land building and equipment was $1.25M. Ryan’s Family Steakhouse came public in the 1980s, and it was gold, with $1.3M in sales per store and a total gross investment of $650k per location. Those were the days. Today: Competition is brutal. Consumers are cash strapped and shopping for the best deal on the commercial strip, if they are even leaving their homes. Building costs only go up.  Almost all operating costs are moving inexorably higher with labor leading the way. The return on investment from new stores is obviously nowhere near where it used to be and material same store sales improvement has become an absolute necessity if store level margins are to be maintained and corporate earnings have any chance of improving. Furthermore, as I have previously pointed out, 2-3% SSS is not materially enough to overcome rising store level expenses, labor in particular. The majority of publicly held chains are reporting flat to down pretax earnings, sometimes in spite of 1-3% SSS trends.

Which brings us to the current, through March, sales trends.  With few exceptions, such as Chipotle (finally), Domino’s, Wingstop and part of Darden’s portfolio, the tepid trends of the last several years remain in place. While the headlines may trumpet a rebound in March, it was a bounce off the horrible weather in February.  According to Miller Pulse: Same store sales for the restaurant industry as a whole, were up 2.1% YTY, driven by a 4.2% jump in check (price and menu mix), so traffic was still down 2.1%, for the thirty sixth month in a row.  Over two years, the stacked comp was up 3.9% in March (140 bp better than February), so the trend, over two years, in sales and traffic has been remarkably consistent (i.e.”tough”). In March:  QSR chains, with comps up 2.8% (4.6% check increase, 1.8% negative traffic) did a bit better than casual diners with SSS of negative 0.9% and traffic down 3.6%. Let’s not forget: Backing out delivery and takeout, traffic trends are dramatically worse than same store sales. Too many chains are sitting with oversized real estate, using their seating capacity only part of two or three evenings per week.

Rounding out our commentary: Our observation is that delivery is considered a necessity by most but is very much a mixed bag in terms of enthusiastic adoption. Over time we believe that margins will come down for the delivery companies as they compete for customers, and the margin hit for the restaurant company will not be as significant, but it will still be a challenge to control the “last mile” and not run the risk of damaging the brand. From a marketing standpoint, many chains are trying to move away from ultra low priced deals and get back to core products at full price, but it is a challenge to wean customers from chasing the “deal of the day”. Loyalty or Reward Programs, whatever they are called, are a proven productive approach, and Starbucks sets the best example, recently improving their personalized deal. Burger King has their own Loyalty program, consisting of a $5 per month Coffee Club which offers a cup of coffee every day. We’ve heard about senior citizens making a morning of it, bringing along their checker boards, so it will be interesting to see how this traffic building approach works out.

Roger Lipton