We will have a lot more to say about reported results at the end of next week, after over forty publicly held restaurant companies have released quarterly results.

GENERAL OBSERVATIONS SO FAR

As the chart below shows: Just this week McDonald’s, Denny’s, Brinker, Yum Brands, First Watch, Wingstop, Dine Brands, Cheesecake Factory, Potbelly, Red Robin, Portillo’s, Shake Shack, Wendy’s, Papa John’s & Starbucks have reported September quarterly results.

After broadly summarizing the stock price reactions, and why, we raise below a “caution flag”.

The chart below shows the stock price action this week in response to the sixteen reports that have been issued. It seems to us to be a picture of the “haves” and “have nots”.

At the top of the list, in terms of stock performance,  are Potbelly Corp. and Red Robin Gourmet Burgers (up 16% and 15% for the week), both low priced stocks, statistically inexpensive and previously trading near their fifty two week lows as investors awaited a progress report on their turnaround efforts. Potbelly is further along in this process, but the new burgers are apparently working at Red Robin and progress at both was sufficient to generate a price bounce (off the lows).

Among the more widely traded names, McDonald’s, Starbucks, and Wingstop (up from 4% to 12% in that order) were especially encouraging, justifying their long term inclusion among “best of breed” operators, beating street expectations and providing comfort relative to Q4. Portillo’s joined them, up about 8%, with a constructive report and the stock previously at an all time low ($15, down from a post-IPO high of $49. I add First Watch to the list of companies that performed well operationally, though their stock is down 1.7% for the week (probably because it wasn’t as depressed as some others), and, based on the small price decline, we show it within the next group on the chart.

I put the “steady as she goes” group together next: including Yum Brands, Denny’s, Wendy’s, Brinker and Shake Shack, generally meeting expectations but leaving analysts without an urgency to upgrade ratings. Managements were a bit less confident about the next quarter or two, and the stocks have been about even for the week so far.

Of more concern were the “almost acceptable” reports at Wendy’s, Cheesecake Factory, Papa John’s, Dine Brands and Yum China,  whose stock prices declined as much as 13% (@Yum China).

You can see that the immediate “headlines” on Seeking Alpha gave a pretty good indication of what the stocks might do. A caveat: before you decide to make a career of following Seeking Alpha’s headlines, most of the opportunity in the stock has usually taken place before the headline hits your computer.

OUR CONCERN GOING FORWARD

You should not need us to remind you that consumers are carrying a record trillion dollars of credit card debt, paying over 20% interest on that debt, and have reduced their saving rate to under 4% (from a peak of over 30% in March ’20) to service that debt. This has been reflected in lower traffic counts at most chains, especially for on-premise dining, changed the way diners use the menu, and shifted traffic from mid-week to the weekends, when families are increasingly interested in a dining “experience”. Management teams, in their quarterly discussion, have provided confirmation that adjustments in behavior is indeed taking place, in particular on the low priced end of the spectrum. The following discussion relates to that.

A DEAL A DAY IN THE QSR BUSINESS

October, November and December is historically a relatively active time of year in the restaurant industry. Back to school spending needs have been met in August and September, backyard autumn barbecues are history, the winter weather uncertainties are not yet  upon us, and the public is starting to anticipate the holiday season. It’s usually a time for good traffic and operating margins in the restaurant industry.

So why am I seeing these types of TV ads every day?

Burger King is offering Two Whopper Juniors for $5, and Mix n’ Match for $8.

McDonald’s is offering, until12/3, BOGOs for Quarter Pounders with Cheese, Big Mac or 10 pc. McNuggets.

Wendy’s is offering 2 for $3 (Breakfast Bundles, which is a biscuit with sausage, egg & cheese, with small potatoes and a medium coffee), or a 2 for $6 meal (which includes a Single Burger or Chicken Sandwich or 10pc Chicken Nuggets).

Sonic is offering a “2 for $7 Menu” (mix and match between a Chicken Sandwich, 6 piece Mozzarella Sticks, Cheeseburger),  or Under $3 ( a Chili Cheese Coney or Chicken Slinger or ¼ pound Double Cheeseburger).

Arby’s is offering  “2 can dine for $9.99”, including two sandwiches, two fries and two drinks

Dairy Queen is offering a 2 for $5 menu any two of: Cheeseburger, regular fries, a small soft drink, pretzel sticks with queso, Chili Dog, or small sundae.

Chili’s, whose burger we happen to like, is competing for the business by offering “3 for Me” at 10.99, including a beverage, appetizer and full size entrée (including Cheeseburger, 3 -piece Chicken tenders, paired with Mac & Cheese,

There are others, but you get the picture. All these companies are not getting this aggressive for no reason. (I hate double negatives. That means they have a reason .) We suggest that, for the reasons noted above that are stressing the public’s dining budget, this is what it takes to attract attention, at least from Monday through Thursday.

CONCLUSION (at this still early stage of the reporting cycle)

Operating margins are starting to stabilize, if not improve, as menu prices have largely caught up with the rapid escalation of labor and cost of goods. The best operators can therefore provide reasonably good guidance and some even have reason to be cautiously optimistic. However, especially relating to the QSR segment, based on what we view as heavy promotions for this time of year, we suspect it is not getting any easier out there.

Roger Lipton