Tag Archives: QSR



Starbucks reports, only change is David Palmer upgrading. Nobody wants to be negative. NICOLE REAGAN, JOHN GLASS, CHRIS CARRIL and JON TOWER stay neutral. LAUREN SILBERMAN, JEFFREY  BERNSTEIN, DAVID PALMER and ANDREW CHARLES continue to like it.


Denny’s reports, NICK SETYAN still likes it.



Restaurant Brands reports, only change is CHRIS O’CULL downgrading to HOLD. M.Stanley analyst maintains underweight. JON TOWER is neutral, while CHRIS CARRIL AND LAUREN SILBERMAN like it here.


Yum Brands reports. No changes. LAUREN SILBERMAN is NEUTRAL while JON TOWER says BUY.


Brinker reports (and disappoints). DAVID PALMER downgrades to IN-LINE.  BRIAN MULLAN, NICK SETYAN, and M.STANLEY analyst are NEUTRAL. BRIAN VACCARO and ERIC GONZALES continue to be positive.


Wingstop reports (and disappoints). M. Stanley  analyst, NICK SETYAN, JON TOWER and ANDREW CHARLES all stick with it.


SHAKE SHACK reports. Everybody maintains. LAUREN SILBERMAN and BRIAN MULLEN are neutral, while PETER SALEH & NICK SETYAN like it.


PAPA JOHN’s reports. LAUREN SILBERMAN and NICK SETYAN continue to like it while BRIAN MULLAN is neutral.




5-09 After Market Close RCI Hospitality Holdings RICK


5-10 Before Market Open First Watch Restaurant Gr FWRG


5-11 Before Market Open Wendy’s WEN


5-11 Before Market Open Krispy Kreme DNUT


5-11 After Market Close Dutch Bros BROS


5-12 Before Market Open Carrols Restaurant Group TAST





















The summaries we show, while not complete in detail and involve a number of approximations, provide a good starting point for our own investment banking activities and will hopefully do the same for our readers.


RESTAURANT BRANDS – https://www.liptonfinancialservices.com/2021/11/red-robin-gourmet-burgers-inc-rrgb-updated-writeup-inflection-point-could-be-at-hand/







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

RESTAURANT STOCKS – Recent Change in Analyst Ratings – SHAK, DNUT & QSR Downgraded, TACO & PZZA Initiated with BUY, LOCO and DPZ Initiated at HOLD

RESTAURANT STOCKS – Recent Change in Analyst Ratings – SHAK, DNUT & QSR Downgraded, TACO & PZZA Initiated with BUY, LOCO and DPZ Initiated at HOLD

Jim Sanderson downgrades SHAK to Neutral, Bill Chappell downgrades DNUT to Hold, Eric Gonzales downgrades QSR to Sector Weight, Todd Brooks Initiates TACO and PZZA at Buy, initiates LOCO and DPZ at Hold

This summary is planned to be a regular feature of Roger’s Review, along with a “heads up” prior to  next week’s reports. We welcome commentary from readers as to how these features can be more helpful.

Roger Lipton




We have written on Restaurant Brands many times over the last several years, and have correctly predicted that the growth in earnings and cash flow would be flattening out now that the operating “efficiencies” in the wake of the Burger  King and Tim Horton’s acquisitions were unlikely to be repeated.  The stock has, accordingly, done very little over the last two years. QSR stock is not overpriced relative to its “asset light” peers, and it’s 5% “Free Cash Flow” yield is intriguing, but we do not consider possible growth of 7 or 8 percent annually to be be sufficient to render attractive  a 22x price earnings multiple or about 19x trailing EBITDA.

RECENT RESULTS:  (Per the Q4 release and Conference Call)

Restaurant Brands (QSR) reported results yesterday, in line with expectations, from a bottom line standpoint. Results at Tim Horton’s continued to disappoint, Burger King slightly underperformed, and Popeye’s shot the lights out ! The analysts and money managers generally considered the results acceptable and QSR stock was largely unchanged.

The Company, predictably, put it’s best foot forward, while admitting that Tim Horton’s results have disappointed: “We have three iconic restaurant brands that are together growing around the world. …. I’m proud that our 2019 results have us solidly on track …Burger King delivered its strongest year of restaurant growth in the last two decades. Popeye’s launched an iconic Chicken Sandwich that has proven to be a game changer for the brand in every way. At Tim Horton’s, our performance did not reflect the incredible power of the brand and it is clear that we have a large opportunity to refocus on our founding values and what has made us famous with our guests over the years, which will be the basis for our plan in 2020”.

The “bottom line” numbers include the following:

Income From Operations was down 1.0% for three months and up 4.6% for the year.

Income Before Taxes was down 5.2% for three months and up 5.1% for the year

Net Income Attributable – common Shareholders, up 1.2% for Q4 and up 5.0% for year.

Diluted Earnings Per Common Share, down 15.7% for Q4 and down 2.1% for year

Some “Non-GAAP” numbers are presented, as usual.

EBITDA was down 0.4% for Q4 and up 4.5% for the year

Adjusted EBITDA was up 7.0% for Q4 and up 4.2% for the year

Adjusted EBITDA, division by division

Horton’s was down 0.1 for Q4 and down 0.5% for the year

Burger King was up 7.7% for Q4 and up 7.1% for the year

Popeye’s was up 62.4% for Q4 and up 20.2% for the year

Combined, up 7.2% for Q4 and up 4.2% for the year

Just as we have suggested over the last two years or so, QSR is growing at an overall rate of mid to high single digits. Horton’s (which provided much of the growth 4 or 5 years ago) is a drag, Burger King continues to grow, and Popeye’s is too small to move the needle by much.

There is one other summarized set of numbers that is worth discussing. “Unlevered Free Cash Flow” is shown as growing steadily from 2015 to 2019, from $1.5B to $2.0B. First,those numbers are after adding back about $500M of interest, so Net Cash Provided by Operating Activities is more like $1.5B. Secondly, some portion of that “Net” cash is not quite so free any more with the requirements of refurbishing the Tim Horton’s chain. Lastly, as we have pointed out before, $330M of the cash flow was spent in 2017 and $561M was spent in 2018 to buy back shares from 3G, the controlling shareholder. Along with the repurchase of Warren Buffet’s Preferrred Shares, this is why, with all the “Unlevered Free Cash Flow, the net debt is still $10.8B, virtually the same as the $10.7B at the end of 2017 and $10.9B at the end of 2018. It always amazes us how cash flow can be considered “free” when there is a great deal of debt outstanding.


The most important Tim Horton’s division, representing about half of the corporate cash flow (with $1.1B of Adjusted segment EBITDA for the year) continues to be troubled. Comp sales were down 4.3% for Q4 and 1.5% for the year. “Winning Together” apparently didn’t get the job done. The effort is being retooled, with a heavy emphasis on the loyalty program. An inflection point could be in the offing but it is far from a certainty.

Burger King (with $994M of Adjusted segment EBITDA for ’19)  continued to grow comps and units steadily. Systemwide comps were up 2.8% in Q4 and 3.4% for the year. However, US comps were only up 0.6% in Q4 and 1.7% for the year, which could be considered a disappointment in light of the Q4 emphasis on the Impossible Burger. We can’t resist taking a bow, for our prediction that the Impossible Burger would not be a game changer, even after 18% comps were touted from the St.Louis test market.  The Company is going back to “basics” now, and there is no reason to think that Burger King will not continue to be a growth segment within QSR.

Popeye’s has obviously hit a grand slam home run with their Chicken Sandwich, driving US comps up 37.9% in Q4 and 12.1% for the year, and The Sandwich wasn’t even there for a full quarter. Popeye’s unit growth was up 6.9% for the quarter and year, and can be expected to move higher. All of this is excellent, but Popeye’s, with $188M of segment Adjuted EBITDA  (up from $157M in ’18) represented only about 9% of three divisions combined.

Putting the three divisions together, going forward we believe it is reasonable to expect Horton’s results to be flat, Burger King to be up high single digits, Popeye’s perhaps up by as much as 30-40%. That would equate to overall growth on the order of 7%.

CONCLUSION: Provided at the beginning of this article










We urge our readers to use the Search function to peruse our previous writings relative to QSR.

Restaurant Brands, Inc. is a fascinating case study about the opportunities to create a fortune in an accommodating financial environment. A creative management team, backed by Brazilian based 3G, attracted prominent investors such as Warren Buffet (no longer a shareholder) and Bill Ackman’s Pershing Capital, and had little difficulty borrowing a cool $12 billlion over the last five years. While the music has been playing and QSR stock has gone from the low 30s in early 2015 to a high close to 80 a month ago, most observers have been willing to overlook the problematic aspects of the “low hanging fruit” that was picked by Restaurant Brands, as they streamlined operations at Burger King and Tim Horton’s, most lately attempting to do the same at Popeye’s. Bottom line operating results were impressive enough at Burger King, once acquired, that Horton’s could be acquired, “efficiencies” could be implemented (some of which haven’t been embraced, to say the least, by franchisees), and Popeye’s could then be acquired. The capital markets, equity and debt, have viewed Restaurant Brands favorably.

At this point, and over the last couple of years, with Horton’s “stuck”, Burger King growing, and Popeye’s too small to matter much, we have felt that total corporate EBITDA growth is most likely to be in the 6-8% range. Our view continues to be that QSR is adequately leveraged and fully valued.


Restaurant Brands, INC. (QSR) – franchisor of Tim Horton’s, Burger King and Popeye’s reported their third quarter this morning, and bottom line results largely met analyst expectations. Adjusted net income was up 13.4%, Adjusted Diluted Earnings Per Share was up 14.2%. Since QSR is considered a “free cash flow” and “asset light” story, EBITDA is a major concern and Adjusted EBITDA was up a more modest 5.4%.

By segment, and by size:

Tim Horton comps were down 1.4%, unit growth was 1.7%, Adjusted EBITDA was up 0.6%.

Burger King had 4.8% comp growth (with the Impossible Burger rollout), unit growth of 5.8%, and Adjusted EBITDA growth of 10.0%.

Popeye’s had comp growth of 9.7% (with the success of their chicken sandwich), unit growth of 5.6% and Adjusted EBITDA growth of 14.6%.


We won’t detail here the various operating initiatives, other than reflect on the most important investor (and management) concerns, in order of magnitude.

Tim Horton is the largest division, by EBITDA measure, with $301M generated by this segment in the third quarter (up from $299M). Sales continue to be lackluster, comps down 1.4%, traffic (though not disclosed) likely down more than that. Management outlined a variety of initiatives, including a new brewing platform, new cold beverages, ongoing emphasis on digital and loyalty, etc.etc. The troubled franchisee relationship is supposedly repaired. Analysts, as evidenced by questions on the conference call,  are apparently losing patience, and confidence, in the timing of the improvement at Tim’s. In the words of one analyst, Tim’s sales “have been slack for the last three years”. We have been cynical for some time about the likelihood of near term improvement, and remain so. Recall that a large part of the EBITDA improvement (corporate wide) after QSR bought this chain was from higher ingredient prices charged to franchisees and that “low hanging fruit” has been picked. Since that portion of the QSR financial magic no doubt helped to create lawsuits involving over half of the Tim’s franchisee system, it is safe to say that future price increases will be more measured, segment EBITDA improvement will have to come from sales improvement and unit growth, both of which have been tepid. We continue to feel that this division’s EBITDA growth will be modest, at best.

Burger King has been the major star in the QSR universe, continuing to generate solid comps and unit growth, especially overseas.  Segment EBITDA was $254M, up from $231M. Q3 included the systemwide introduction of the Impossible Whopper. As we suspected, this introduction didn’t come anywhere close to the 17% sales increase in the test market. While the 5% US comp (4.8% systemwide) was the best since 2015, it was only a couple of points better (as we suspected) than it had been running. We would like to know what was the trend of Impossible Whopper sales, intra-quarter, and David Tarantino of Baird asked the question on the conference call. The answer was….”we saw really good performance….essentially in line with what we expected…..lot of traffic and trial that came from new guests….the feedback was really positive…we don’t discuss specific performance and details over the quarter beyond, but we continue to see good performance….and we’re excited about it being a long term platform for the business….” We have written that the “meatless” products will fade from prominence over time. The size of the potential market for folks that will pay a premium for a product that costs more, tastes no better, has roughly the same calorie and fat content, has no cholesterol but five times as much sodium has yet to be defined. As you can tell, we think the market is likely smaller than currently thought, and negative publicity regarding the “processing” of these products is starting to develop. However, Burger King, within Restaurant Brands’ portfolio, continues to be a growth vehicle. We believe that the 10% segment EBITDA growth in Q3 is the order of magnitude of growth that is most likely in the foreseeable future.

Popeye’s Louisiana Kitchen had a solid quarter. Unit growth was 5.6% and the comp was 9.7%. Popeye’s is by far the smallest division, with segment adjusted EBITDA contribution of $47M, up 14.6%. The highly publicized (much of it free) very successful chicken sandwich was an important contributor, and is about to be relaunched. Popeye’s has great potential for growth, both in the US and abroad, and will add to the overall corporate growth rate. It is worth noting that the 14.6% segment EBITDA growth was almost exactly the growth in system sales. There is so far no “leverage” of G&A, even with substantial growth in units and comps. Restaurant Brands managed to leverage G&A very quickly after acquiring Burger King and Horton’s, not the case so far at Popeye’s.


This portfolio of brands is generating something over $2B of “free cash flow” annually. Of course, with $12.8 Billion of debt, $11.0 Billion net of cash, the lenders, still accommodating QSR as they reach for yield in a zero interest rate environment, might not always consider the bottom line as quite “free cash”. The net debt, which has not been reduced in recent years, compared to Adjusted Free Cash Flow is quoted as 4.8x, not so very high in this zero interest rate environment, but the lion’s share of cash generation after dividends has been used to buy back exchange units from Brazilian based 3G, still the controlling owner of QSR. “Returning cash to shareholders”, through dividends and stock buybacks, is the oft quoted phrase by CFOs. In this case, the “return to shareholders” mostly applies to 3G.

CONCLUSION – Provided at the beginning of this article

Roger Lipton



Two prominent restaurant companies are in the news today, both SBUX and QSR  are down materially today, and there are lessons to be learned. From a broad brush standpoint, It continually amazes me how the “wealth effect” as a result of worldwide zero interest rates has inflated stock and bond prices to unheard of multiples of cash flow and earnings per share. We have lived through similar periods of new valuation parameters, the “one decision” stocks of the early 1970s that sold (for a while) at 50-100x expected earnings, and the dotcom bubble of 1999-2000 when companies were valued based on eyeballs and multiples of sales and business plans, rather than operating results.


Restaurant Brands’ (QSR) controlling shareholder, 3G Capital Partners, a Brazilian company, has owned most recently 41% (190M shares, worth a cool $14B) of the fully diluted shares of QSR.  QSR has been a great investment for 3G, and Bill Ackman’s Pershing Square Capital (who currently owns owning 15M shares, worth about $1B). While earnings and cash flow  progress have slowed down in recent years, and you can read all about it within our website. The QSR stock has continued to levitate, currently selling very near its all  time high, at almost 30x ’19 EPS estimates and 20x TTM EBITDA. Considering that EPS is growing at about 10% annually and EBITDA growth closer to 5%, this “asset light”, “free cash flow” franchising company that happens to be carrying $11B of debt, not too many observers would call QSR a great bargain. It is therefore no wonder that 3G just announced the sale of 17M shares, worth about $1.3B, and of course the institutional market snapped it up. It’s worth noting that 3G sold $530M worth of shares in calendar ’18 and $330M worth in’17, and QSR bought those shares, rather than reducing their debt. For whatever combination of reasons, QSR stepped aside this time, and let the market absorb those shares. On a smaller scale, Pershing Square Capital Management, has lightened up as well, selling 4M shares in Q2’19 and 8M shares in total in the last twelve months.  We believe that the current valuation is mostly supported by “TINA” (there is no alternative) investing in equity markets when $16 trillion of sovereign debt around the world yields  nothing.


Starbucks (SBUX) is a different story. Just a couple of months ago the Company raised guidance for earnings over the next year or so, and combined with firming comp sales and the prospect for growth in China, the stock has hit a new high close to $100 per share, selling at 33x EPS estimates for the year ending 9/30/19 and 22x TTM EBITDA. This is a great worldwide brand, but, here too, the current valuation is far from a bargain relative to the expected growth of about 10% per year.  SBUX was down 4% today because they presented at a Goldman Sachs conference and lowered EPS growth expectations to something short of 10% in the year ending 9/20. We haven’t seen the details of the presentation yet but the headlines indicate that this adjustment of several percent is apparently the result of tax comparisons and a lower stock repurchases in ’20 vs. ’19. The fundamentals do not seem to be deteriorating, so the 3-4% stock decline seems to be a result of “uncertainty” combined with SBUX being “priced for perfection” and leaving room for disappointment. SBUX is a far stronger company, in lots of ways, than QSR, but, here again, the valuation is far from a bargain, and we believe the downside “adjustment” could be much more substantial should a further disappointment develop.


There are a couple of very recent examples of the danger of complacency relative to valuation of growth stocks. Ulta Beauty (ULTA) and Olllie’s Bargain Outlet Holdings  (OLLI) have both been outstanding investments in the retail sector for years, for good reason. In the last five years, with the EPS ramping, ULTA moved from about $100/share to $350, and OLLI went from $20 to about $100. Valuations of both companies moved up to the range of 40-50x expected earnings, “priced for perfection”, just like SBUX and QSR. Just in the last week, both ULTA and OLLI reported strong quarters, met earnings estimates, had  positive comps, but both “adjusted” guidance by a few percentage points, still projecting continued solid growth, just not so quite so solid as previously assumed. The bottom line is that ULTA sold off 25% in one day, now trading at $233, down 36% from a high of bout $365  a month ago, and 0LLI sold off about 30% in one day, now trading at $56, down 44% from over $100 several months ago.  ULTA is now selling at a much more reasonable 20x ’19 EPS, and OLLI is selling at “only” 28x ’19 EPS.  Both these companies are debt free, by the way. In our view, ULTA is a category killer in it’s space, generating a 38% ROE and 18% ROA. OLLI is not quite so impressive, but generates a 15% ROE and 11% ROA, a lot better than the 2.7% ROA generated by QSR, not as good as the 27% ROE generated by highly leveraged QSR which has bought back so much stock. In a nutshell, while ULTA and OLLI are not a close fundamental comparison to SBUX and QSR, we believe the the very recent “adjustment” in valuations illustrate the substantial risk that investors sometimes overlook.


Companies that are “priced for perfection”, as are SBUX and QSR at the current time, have serious downside price risk, even if small disappointments have been previously overlooked in a generally strong equity market.  An unexpected new chink in the armor, as demonstrated recently by ULTA and OLLI, can create an “air pocket” in the stock price that wipes out multi-year stock price appreciation. The company specific risk is in addition to that of the general market.  Be careful out there.

‘Roger Lipton



Well regarded pure franchising Restaurant Brands, QSR, Best of Breed company operator, Texas Roadhouse, TXRH, mature professionally managed multi-chain company operator/franchisor, Brinker, Int’l.,(EAT) all reported their March quarters within the last 36 hours. What can we learn?

Before we start, because the news is not great and I recently seem to be consistently pessimistic (I would say “realistic”), you should know that I am not “talking my book”. I am neither long nor short two of the three companies discussed, and have a very modest short position in only one of them (which shall go nameless). All three stocks are down since they reported, QSR and EAT more modestly than TXRH, which is down about 10% this morning.

We are not going to provide extensive details, which you can read about elsewhere and which we will discuss in our full writeups to be posted within the next couple of weeks. We will provide just the pertinent highlights as we see them, and our conclusion.

Restaurant Brands (QSR), franchisor of Tim Horton’s, Burger King and Popeye’s, reported EPS down YTY, because of a higher tax rate. Actual Income Before Taxes was up, $302M versus $281M, but it should be noted that Other “Income” this year of $17M was $30M better than Other “Loss” a year ago of $13M. Let’s call it “flat” pretax income, by our simple adjustments. Everybody looks at comps and EBITDA by division here. Tim Horton’s delivered a negative comp of 0.6% in Q1, on top of a negative 0.3% in 2018. Price changes are not discussed relative to any of QSR’s three brands, so we can’t comment on traffic. Adjusted EBITDA at Tim Horton’s was $237M, down from $245M. Burger King had systemwide comps of 2.2% on top of 3.8% in ’18. BK’s Adjusted EBITDA was $222M vs. $214M in ’18. Popeye’s had a comp of 0.6% versus 3.2% in ’18. Adjusted EBITDA was $41M vs. $39M in ’18. The three brands, therefore, had total Adjusted EBITDA of $500M vs $498M a year earlier. Let’s call the results flat, and the bottom line is that, as we have predicted for some time, it will be very difficult to grow the EBITDA and EPS comparisons by more than mid single digits. Combining the “hard” results with the conference call commentary, there is very little happening that will accelerate the cash flow and earnings progress. Readers can refer to our previous commentary regarding QSR, , but, suffice to say: Tim Horton EBITDA growth, which grew from 2015 through 2017 largely by price increases imposed on the distribution chain, is not going to recur, especially in light of the lawsuits by franchisees. Burger King is a steady grower, especially overseas, but the G&A magic has already been imposed on this system so the easy money has been made. Popeye’s is the most rapid growth division, but is too small to move the total needle by much. The dividend of almost 4% supports the stock price, but it has seemed to us for a while that this “mid-single digit” grower is fully priced at 20x trailing EBITDA and 25x forward EPS. It should also be noted that much of the “free cash flow” has been used to buy back partnership interests from their parent, 3G, so this “return to shareholders” has primarily benefited 3G. From 12/31/16 to 12/31/18 the average weighted fully diluted shares outstanding has gone from 470M to 477M to 473M. There is substantial cash flow here, but a great deal of it has been used to buy back exchangeable Partnership interests from 3G. The long term debt was constant at $11.8B in ’18 over ’17 (after $3B was borrowed to buy back Berkshire’s Preferred), and “free cash flow” is not so “free” when debt is over five times trailing EBITDA. The Board of Directors preferred in ’18 to buy back stock from 3G (at 25x expected earnings and 20x trailing EBITDA) rather than reduce the debt. We agree that it seems sensible, from 3G’s standpoint, to lighten up. To be sure, there is a substantial dividend for common shareholders.

Texas Roadhouse (TXRH) is a simpler story. They are truly one of the premier operators in the full service casual dining space, consistently delivering same store sales growth as well as traffic gains. The most recent quarter was no exception, with an admirable comp of 5.2%, including 2.6% traffic. The monthly comps, though decelerating through the quarter were fine, up 7.2%, 4.7%, and 4% in January, Feb., and March. April to date is up 2.9% on top of 8.5% a year earlier. However: Income from Operations was down 6.8%, and diluted EPS was $.70 vs $.76. Restaurant margin (EBITDA) was down 128 bp to 17.9%, and the problem was labor, which cost 118 bp. The discouraging part for investors and analysts is that the Company has predicted ongoing wage pressure, and these guys are not about to disappoint customers by cutting labor.  An additional concern, though a lot smaller, is expected commodity inflation of 1-2% for all of ’19. There’s a lot more that could be detailed here, but the results at TXRH demonstrates what we’ve been saying for a while, that it takes more than even 3-4% comps (and now 5.2%) to leverage the higher costs of operations, labor in particular. We don’t know to what extent the Street will lower expectations for ’19 but at $54.37 at the moment (24.7x ’18 EPS) doesn’t seem like a bargain when it is hard to know when EPS growth will resume. FWIW, $54.37 is 14.5x Bloomberg’s estimate of TTM EBITDA.

Brinker International (EAT) reported Q3 (ending March) with somewhat of a “mixed bag”. The headline indicated that EPS, excluding special items, was up 16.7% to $1.26 vs $1.08. Comp sales for Chili’s was up 2.9% (company) and 2.0% (franchised). Maggiano’s was up 0.4%. Operating Income was 8.4% of Revenues, down 50 bp from 8.9%. Restaurant margin (EBITDA) was 14.3%, down from 16.1% but, excluding the effect of a sale-leaseback transaction, would have been flat YTY. (However, the higher rent is a cash charge vs. depreciation which is non-cash, so the true cash EBITDA margin was truly 180 bp lower). Chili’s results are the main driver of results, and, aside from the sale-leaseback penalty, it was pointed out that: “cost of sales increased due to unfavorable  menu mix, and commodity pricing, partially offset by menu pricing, also partially offset by a decrease in restaurant labor from lower incentive compensation, which in turn was partially offset by higher wages.” So: CGS was up, wages were up, restaurant labor (hours?) was down, and there was less incentive compensation. That doesn’t sound like the industry wide wage increase is abating, and commodity costs are up, which we also heard at Texas Roadhouse. While it is admirable that comps were up again at Chili’s, with traffic up as well, it should be noted that the gain in after tax EPS was entirely due to a lower tax rate and far fewer shares outstanding. Income Before Taxes was $55.5M, down from $58.9M. Adjusted for an Other Gain of $3.5M this year versus a $2.7M loss, the comparison would be $52.0M of Adjusted Pretax Operating Income vs. $61.6M. The number of fully diluted shares was 38.1M vs. 46.0M. From a financial engineering standpoint, EAT chose to do a sale-leaseback transaction, paying higher “rent” vs. non-cash depreciation of the stores in return for retiring a large number of shares. From an operating standpoint, even with flat EBITDA at the store level, we see that same store sales (and traffic) gains of 2 or 3% are not sufficient to overcome higher labor (and other) expenses.

The Bottom Line:

The above capsulized reports show that the operating challenges have not abated, and will not likely relent in the foreseeable future. Restaurant Brands’ results show how ten years of low interest rates have allowed financially astute executives to assemble a portfolio of franchised brands, but mature (Tim Horton’s and Burger King) chains can only be financially engineered to a certain point, especially in a difficult environment. Texas Roadhouse and Brinker results show how operators ranging from a Best of Breed growth company  to relatively mature brands are similarly challenged.

Broader than the Restaurant Industry: There are something like 20M individuals employed in the hospitality industries, including restaurants, retail and lodging and this is a material portion of the entire US workforce. The wage increases that are so evident to us will inevitably start to affect the national averages, and the next step will be price increases. Operators of restaurants and retail stores and lodging will not allow their margins to deteriorate indefinitely. All those surcharges such as baggage fees at airlines, “facility” charges at hotels, and miscellaneous add-ons with car rentals (that add 25-30% to the quote), will increasingly be joined by higher menu prices. It’s not a question of “if”, rather “when”.

Roger Lipton