DC Advisory
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Twenty five publicly held restaurant companies presented this past week at the heavily attended annual ICR Investor conference in Orlando. Must have been over 3,000 attendees, listening to a raft of retailers and consumer products companies, as well as those within our formal coverage. If you haven’t noticed, we are now covering over 60 companies, which you can access from our Home Page by way of the yellow box marked “Corporate Descriptions”.

We provide below our interpretation of sales and profit margin expectations for the restaurant industry, as well as a comment regarding long term expansion in a normalizing interest rate environment.

Sales trends in Q4’22 were firm, both in full service and QSR segments, but the gains were, in almost all cases, price driven, so positive traffic comps were hard to come by. Reference was made to the storm early in December and widespread brutal cold just before Christmas, as well as firm sales a year ago until the Variant hit at the very end of December. We interpret the storm/weather caveats not as a setup for disappointing sales in December or Q4, but pointing out a reality relative to December trends which might have softened a bit from earlier in the quarter. Going forward, the comps get easier in Q1’23 against Omicron in ’22, and most companies were cautiously optimistic that comps will remain positive as ‘23 unfolds. There is no reason to believe, however, that traffic gains will be easier to come by. It is worth noting that dine-in traffic, in virtually all cases, is down materially more than overall traffic, since off-premise is higher than it used to be.

Expectations for prime costs, labor & cost of goods, are: wages to be up low to mid-single digits in ’23, less of an increase than in ’22, and cost of goods will be volatile but hopefully up less than in ’22. Right now beef and egg prices are hurting. There will therefore be no material margin relief from lower prime costs, just not as much pressure as in ’22. Relative to pricing, adjustments continue to be necessary, in an effort to recoup pre-Covid profit margins. Nobody wanted to lead the way with price increases, and might have been hopeful that inflation would in fact be transitory (though we warned you), but it is clear now that wages are up and going higher, as well as utilities, the cost of repairs and maintenance, insurance, waste disposal, etc. Hardly any management teams are guiding to materially higher store level or corporate profit margins, appropriately cautious in an unpredictable economy.

It is worth commenting about the cost of new construction, up from 10-20% over the last 2-3 years, as well as ongoing difficulty to get timely delivery of materials and equipment. This, obviously, lowers the return on capital, unless the new locations do proportionately more volume, so virtually every management team is increasingly selective in terms of expansion.

We will obviously be fine tuning the above thoughts over time. Don’t hesitate to contact us with questions or thoughts. Best address is, or by way  of “Contact Roger” on our Home Page. Dialogue with our readership is always worthwhile.