Restaurant Finance Monitor
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The following is the lion’s share of Roger’s monthly “Follow the Money” column for the Restaurant Finance Monitor.


Progress takes time in the real world and Jose’ Cil’s appointment as CEO at QSR in early 2019 is starting to bear fruit. Cil is an ex- bankruptcy lawyer who originally joined Burger King (BK) in ‘00 as an in-house counsel. With the exception of 10 months at Wal-Mart in ’10, he worked his way through worldwide and US operations at BK. Some historical context is necessary here. QSR, controlled by Brazilian 3G Capital, put BK and Tim Horton’s (TH) together in late 2014, creating a publicly held multi-branded “free cash flow”, “asset light”, franchisor. Popeye’s was added to the mix in 2017 and Firehouse Subs is about to become the fourth brand. While Popeye’s struck gold with their chicken sandwich, and there has been consistent systemwide unit growth at Burger King, Tim Horton’s has had well publicized friction (to be charitable) with their franchisees, and both chains’ same store sales have lagged their competition.

At the operational level over the last seven years, QSR demonstrated its platform’s administrative efficiency by closely controlling corporate G&A at both BK and TH, designed of course to maximize the cash flow for the franchisor. Setting aside (1) the widely known price increases (of food supplies, etc.) imposed on the TH franchise system, the wider profit margin providing a very large portion of the increase in TH operating income and (2) anecdotal reports that have circulated for years about less than ideal field support for BK franchisees.

The reported financials were muddied a bit between ’17 and ’18 as a change in accounting treatment took place and advertising fund contributions from franchisees were added to revenues as well as G&A expenses (mostly netting out). However, at Burger King, absolute dollars of G&A were down from ’15 to ’17 and virtually flat (up 0.2%) from ’18 through ’20. At Tim Horton’s, absolute G&A was down from ’15 through ’17, and down again from ’18 through ’20. During those same five years the systemwide units at Burger King grew steadily from 15,003 to 18,625. Even with the problems at TH, the number of systemwide units grew from 4,413 to 4,949. Therefore the systemwide units grew by 24% at Burger King and 12% at Tim Horton’s but dollars spent for G&A went down from 2015 through 2020. If you are not good to your franchise system, your franchise system will not be so good for you.

While QSR, the stock, has done “OK” since 2014, going from about $40 to $60, the free cash flow generated since 2015 has allowed for about $6.2 Billion of dividends and corporate purchase of (controlling parent) 3G’s partnership units. The long term debt, by the way, has gone from $8.5B at the end of ‘15 to over $12B today, so “free cash flow” largely benefited 3G Capital rather than the public.

Back at operations, in spite of Tim Horton’s selling an addictive product line and Burger King’s large number of drive-thru locations, results have lagged competitors throughout the pandemic. Average Unit Volumes the past eight quarters (according to Technomic) have been down 0.49% at BK, versus a positive 7.0% at McDonald’s, 5.5% at Wendy’s, and 7.5% at Jack in the Box. Tim Horton’s results have been worse, down 15.7% in ’20, only partially recovering in ’21. Current management, led by Jose’ Cil, obviously can’t change the past, but are acknowledging the shortfalls and taking steps. Cil acknowledged recently that “our drive-thru speed-of-service declined significantly” and he told analysts recently that “the company is increasing overhead spending for field operations and training specialists. We’re giving them better tools, investing in that from a technology standpoint.” Cil just hired Tom Curtis away from Domino’s to oversee BK operations, and other changes are no doubt in the works. Restaurant Brands may yet deliver on its potential.

STOCK MARKET INEFFICIENCY is more frequent than you think, with valuation disconnects taking place for no good fundamental reason. For example, we have periodically watched venture capital, private equity or even corporate strategic investors pay much higher valuations for a privately held company than could be obtained in the public marketplace.  This process, implemented by smart professionals, is due largely to the fact that the institution raised the capital for the express purpose of investing in the private marketplace, whether or not that is where the greatest value lies. It just so happens that private equity funds, while performing very well two or three decades ago, have not done nearly so well in recent years when they’ve had so much capital to put to use and so few bargains to pursue.

We have also watched IPOs (the latest “shiny objects”) get priced by their underwriters and then trade at much higher valuations than those accorded companies previously public. The pricing of IPOs is at last partly due to the fact that a previously privately owned situation has not yet shown themselves to be fallible.  The power point slide show always show charts sloping upward to the right, and management is predictably optimistic that this will always be the case.

As a result, though down from their highs, Sweetgreen (SG) is trading with an Enterprise Value over $3B, about ten times trailing SALES (growing units by about 20% per year) and the first nine months of ’21 showed NEGATIVE EBITDA of $107M, a GAAP loss of $49M, with no promise as to the timing of breakeven corporate performance.

Dutch Bros (BROS) is currently selling at 65-70x ’22 EBITDA. Portillo’s (PTLO), First Watch (FWRG), and Krispy Kreme (DNUT) are selling at an average of about 22x ’22 EBITDA. On the other hand, the average Enterprise Value for (reasonably well situated companies) Bloomin’ Brands (BLMN), Brinker (EAT), Chuy’s (CHUY), El Pollo Loco (LOCO), and Ruth’s Chris (RUTH) is about EIGHT TIMES TRAILING TWELVE MONTHS’ EBITDA. Take your pick.

Roger Lipton