MOST RECENT CONFERENCE CALL TRANSCRIPT
UPDATED CORPORATE DESCRIPTIONS: McDONALD’S, YUM CHINA, TEXAS ROADHOUSE, WINGSTOP, BJ’S RESTAURANTS
YUM CHINA (YUMC)
TEXAS ROADHOUSE (TXRH)
BJ’S RESTAURANTS (BJRI)
UPDATED CORPORATE DESCRIPTIONS: TEXAS ROADHOUSE (TXRH), SHAKE SHACK (SHAK), SWEETGREEN (SG), PORTILLO’S (PTLO), PAPA JOHN’S (PZZA) with transcripts
UPDATED CORPORATE DESCRIPTIONS FOR: BLOOMIN’ BRANDS, KRISPY KREME, TEXAS ROADHOUSE, CRACKER BARREL, ARK RESTAURANTS AND NOODLES – with conference call transcripts
BLOOMIN’ BRANDS (BLMN)
KRISPY KREME (DNUT)
TEXAS ROADHOUSE (TXRH)
CRACKER BARREL (CBRL)
ARK RESTAURANTS (ARKR)
THE WEEK THAT WAS – KRISPY KREME AND FIRST WATCH PICK UP SPONSORSHIP AT ICR CONFERENCE
Brett Levy Upgrades Texas Roadhouse to Buy, Brian Bittner Uprades Chipotle to Outperform. Christopher Carril joins Bittner in downgrading Starbucks. Sara Senatore Initiated Krispy Kreme with a Buy. Brian Vaccaro Initiated First Watch with an Outperform.
None of the companies above had earnings reports lately but we have provided below a link for First Watch’s update this week and Krispy Kreme’s slide presentation
EARNINGS REPORTS TO COME
A quiet time. No reports scheduled until the last week of January. We will keep you posted.
THE WEEK THAT WAS – QUIET SEASON, ANALYSTS RETHINK A FEW RATINGS AHEAD OF ICR (USUALLY IN ORLANDO, NOW VIRTUAL) CONFERENCE NEXT WEEK
Todd Brooks Initiates WING at Hold. Nicole Regan Upgrades MCD to OverWeight and Downgrades CAKE and QSR to Neutral. James Rutherford Upgrades CAKE to OverWeight and Downgrades DPZ and TAST to UnderWeight and EqualWeight respectively. Nick Setyan Initiates STKS at Outperform. Dennis Geiger Upgrades TXRH to Buy.
MOST RECENT COMPANY TRANSCRIPTS WHERE RATINGS WERE CHANGED
THE ONE GROUP HOSPITALITY
NEXT WEEK: No restaurant companies scheduled to report. Major event is ICR Conference, which we will attend, and report on.
UPDATED CORPORATE DESCRIPTIONS – PAPA JOHN’S, RESTAURANT BRANDS, RUTH’S CHRIS, TEXAS ROADHOUSE, WENDY’S, YUM BRANDS
UPDATED CORPORATE DESCRIPTIONS – SHORTLY WILL INCLUDE VIRTUALLY EVERY PUBLICLY HELD RESTAURANT COMPANY – to be updated each quarter
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 Q4’19 – SALES, TRAFFIC, MARGINS @ TXRH, CAKE, RUTH, BJRI, BLMN – A LOT TO LEARN !!
In the last few days, five prominent restaurant companies, with company operated locations, have reported fourth quarter results. These data points give us a reasonably accurate view into current trends, and allows us a best guess as to what 2020 might look like. While franchising companies such as Wingstop and Domino’s have also reported, with excellent results it so happens, precise store level margins are not reported and we are not commenting here on those results. We have also not included Chipotle, which has become very much of a “special situation”, still recovering from the problems of several years ago, at the same time establishing themselves as a leader with off-premise sales, and it’s the four wall economics that primarily concerns us here.
The table just below shows the five companies listed above, with their Q4 results at the store level. We will fill in the other blanks later, with full updated writeups on these companies, but a quick look at four wall economics can tell us a lot quickly.
We’ve been saying for some time that a couple of points of comp sales is not enough to overcome higher store level expenses, wage inflation most notably but also higher occupancy and other store expenses. That conclusion is pretty clearly demonstrated by these results.
Only Texas Roadhouse (TXRH) improved same store sales materially (+4.4%), and that was accompanied by the best traffic trend among the five companies (+1.5%). That allowed TXRH to leverage the sales trend into a 117 bps increase in their store level margin. The other four companies , even with slightly better comp sales, suffered material deterioration of store level EBITDA margin. Labor Expense was higher by varying degrees, most notably at BJ’s, with Texas Roadhouse, again, being the only company to hold the line in this regard. Cost of Goods was not much changed across the board, except at RUTH with their heavy dependence on beef costs.
We have indicated also, at the bottom of the table, the indication as far as Q1’20 sales to date, or guidance for 2020. Once again, Texas Roadhouse leads the pack with a 6.4% comp sales increase in Q1 to date. BJ’s gave us a 1.7% number for Q1 to date. The others provided guidance for 2020 as a whole, very much in line with the modest recent increases. It is worth noting that the weather this winter so far has been fairly good on a comparative basis, and each of us can make our own judgements as to what effect this is having on Q1 results to date and management’s guidance for 2020.
In summary, there is no tangible reason to expect a material change in operating trends at company operated restaurant chains. Outliers can exist at special situations, but the overriding factors that have challenged the industry are still in place.
TEXAS ROADHOUSE (TXRH) – “BEST OF BREED” – REPORTS JUNE QUARTER – WHAT CAN WE LEARN ?
SUMMARY OF TEXAS ROADHOUSE REPORT
Texas Roadhouse generally met and even exceeded expectations in the quarter ending 6/25, especially in terms of sales results. Comp sales were up 4.7% at company locations, including 1.7% traffic growth, and up 4.3% at franchised stores, both very similar to Q1. Restaurant EBITDA margin dollar generation was up 6.5%, from new store contribution. Average Unit Volumes also looked good, up 4.2% at company, and 4.3% at franchised stores. EPS was $0.63 vs $0.62 a year earlier, up 1.6%.
The sobering part of the situation is that 4.7% same store sales was not enough to allow for improvement, or even maintenance of, the restaurant EBITDA % margin, which decreased 53 basis points YTY to 17.6%. To be sure, that was an improvement over the 128 bp decline of Q1. The pressure came almost entirely from the labor line, which increased 90 bp in Q2 to 32.9%, more than offsetting the improvement in Cost of Sales (from unexpectedly low beef prices) by 40 bp. Operating Income and Income Before Taxes was down slightly for the quarter, and lower taxes allowed for the slight increase in EPS. The quarter was largely a repeat of Q1, except that labor pressure was a little less (118 bp worse YTY in Q1) and Cost of Sales helped in Q2 (worse YTY by 7 bp in Q1).
Without going through all the details of the quarter, it is largely “business as usual”. Of note is their lack of interest in delivery, but to-go is growing 15-20% annually, up to about 7% of sales.
Looking ahead in the formal guidance, there is expected to be commodity cost inflation of 1-2%, and 7-8% in labor dollars per store week, so there is no indication of relief in the labor component, and the Q2 improvement in beef prices is expected to be “transitory”, as Janet Yellin or Jerome Powell would put it.
THE BOTTOM LINE
The bottom line for us is that even for this best of breed operator, generating store level volumes among the highest in the industry, with unit growth at a manageable 5% annually, generating admirable same store sales growth which includes traffic improvement, operating margins have deteriorated. Calendar 2017 showed an 8.3% improvement in Income from Operations, aided by an improvement of 131 bp in the volatile Cost of Goods expense line which offset labor pressure. Calendar 2018 showed EPS growth of 10%, but operating income was virtually flat, and a lower tax rate was the saving grace. Operating margin pressure continues to be the case in 2019, and we see no predictable reason that there should be material improvement in 2020. We heard one CNBC commentator just last night talk about the attractiveness of restaurant stocks because they are immune from Amazon. True enough, but what is a flat earnings trend, with no change in sight, worth?
Readers can refer to our full writeup of TXRH, dated 1/31/19, by clicking through on our Home Page at “Publicly and Privately Held Companies”. Not much has changed since January. Our Conclusion at that point, after Q3’18 results were in, went like this:
CONCLUSION – as of 1/30/2019 with TXRH at $61.14
Texas Roadhouse is one of the premier operators in the space. Management is outstanding, their long term record is superb, and we don’t doubt that they will continue to be very profitable, will maintain a strong balance sheet, and show steady unit growth. At the same time, it is clear that even 4% traffic growth and 5.5% comps are not sufficient to overcome costs increases, and the menu increases to come could discourage at least a few customers. At 27-28x trailing 2018 EPS, and 24x the 2019 estimate of $2.55 (which might be a reach), the most recent quarter provided a vivid picture of how difficult it is to increase operating earnings. We therefore suspect that Q3 is a harbinger of mediocre results to come, and there could be a better buying opportunity at some time in the next 6-12 months.