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)
THE WEEK THAT WAS, ENDING MAY 20, JUST A FEW RATINGS CHANGES – with relevant transcripts, and WEEK TO COME
From earnings reports in prior weeks: Jack in the Box and Wingstop maintained at Neutral and Outperform, respectively
From a week ago: JIM SANDERSON and BRIAN VACCARO upgrade Shake Shack to Buy and MARKET PERFORM, respectively.
THE WEEK TO COME: only two companies scheduled to report
Thursday 5-26 Before Market Open Jack In The Box (JACK) Q2
Thursday 5-26 After Market Close Red Robin (RRGB) Q1
THE WEEK THAT WAS, ENDING 5/6, LOT’S OF EARNINGS REPORTS, SEVERAL RATINGS CHANGES, MANY MORE DATA POINTS IN THE WEEK TO COME – links to transcripts provided
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.
THE WEEK TO COME: MORE DATA POINTS
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
STARBUCKS REORGANIZES AS SCHULTZ RETURNS, BRINKER AND WINGSTOP DISAPPOINT THIS MORNING, THE FOLLOWING ANECDOTAL REPORT ILLUSTRATES THE CHALLENGE!
We wrote our “Hope” anecdote a couple of days ago, to be published as part of our monthly column the 5/15 issue of the Restaurant Finance Monitor. However, in the wake of (1) Howard Schultz’ temporary return to Starbucks, his decision to withdraw guidance for ’22 and invest one billion dollars “to uplift Starbucks’ employees and The Store Experience and (2) the disappointing results reported this morning at Brinker and Wingstop, the following field trip observations are worth thinking about today. There will be conference calls today at 10am for EAT and WING. From an investment standpoint, we have always valued the “transparency” of this industry.
Hope is not a strategy – “Culture”, or “hospitality quotient” as Danny Meyer has put it, seems difficult to define but is recognizable when you experience it.
As a positive example: I visited a First Watch restaurant last week for the first time, around 9:00 am on a Monday morning. As I noticed that the entrance door and adjacent window glass were sparkling clean (the first tell), a young woman with a big smile opened the door and ushered us in. We sadly didn’t see any more of her but the entire service team was equally friendly, made easy eye contact, tried to be helpful (without being intrusive), obviously happy to be there. The menu was appealing and well priced, the coffee included flavored creamers and we both enjoyed the blueberry pancakes. More important than the food, because you can get coffee and pancakes in lots of places, was the dining experience. I came back to NYC and bought the stock (FWRG, trading at about 12x trailing EBITDA).
On the other hand: That same night, we had dinner at a publicly held full-service restaurant chain. There were tables available but we waited for twelve minutes to be seated, so our assumption was that they were short of staff. We were handed menus, a bit worn, as we were seated but it was six or seven minutes before a server showed up to take our drink orders. The appetizer arrived in an acceptable amount of time but the entrees took way too long. As we waited, there seemed to be quite a few service people in the area but it felt like they were a bit confused. The activity was not frenzied but it seemed less than organized or purposeful. After waiting too long for our entrees, and finally making eye contact with our waitress, I said: “So I guess our entrees will be here soon?” Her response: “I hope so”, as she disappeared from view, is as much as we need to know. My basic reaction was one of sympathy, since this girl’s orientation had obviously been far from adequate in today’s labor environment. It must be a daunting challenge to hire, train and motivate the rapidly turning over service staff in a high volume full service restaurant. On top of that, the kitchen staff may not do their part, and the service person who just happens to be on the firing line will get discouraged pretty quickly.
If restaurant management is throwing service personnel out on the floor, to interface with customers (who are increasingly hard to come by these days), “hoping” for a good outcome, there’s some serious work to be done.
P.S. Four and one half years ago, we wrote about Starbucks as follows:
IT’S A ‘BUM RAP”, STARBUCKS DOES NOT SELL “$5.00 CUPS OF COFFEE”
It’s a “bum rap”. The media, and the skeptics like to point to the folly of customers paying $5.00 for a cup of coffee. However, we priced (before tax) Starbucks, Dunkin’, and Horton’s in Detroit (to avoid NYC prices) this morning. Starbucks’ 12 oz.“tall” coffee is $2.20, Dunkin Donuts 10 oz. “small” is $1.75, and Horton’s 10 oz. “small” is $1.58. Per oz., Starbucks costs $.183, Dunkin’ is $.175 and Horton’s is $.158. If you want a latte’, the gap is wider ($.312 per oz. at Starbucks, $.253 at Dunkin’, and a materially cheaper $.222 at Horton’s). A latte’ costs more at Starbucks, but Dunkin’ and Horton’s don’t even offer the Soy Latte’ that I order. I can’t vouch for the “quality” of latte’ at Dunkin’ or Horton’s. You can judge for yourself whether the service component, or the type of coffee, is worth the price premium at SBUX but, in any event, it is not a “$5.00 cup of coffee”, and Starbucks’ prices are not grossly higher than the competition.
THE STARBUCKS DIFFERENCE
In my opinion, what has distinguished Starbucks over the years has been the corporate “culture”, which they have incredibly duplicated in 27,000 stores worldwide. Their employees, selected, trained, and motivated to an unmatched degree in food service, look you in the eye, remember your name and drink if you are anything close to a regular customer, and become part of your daily social life. A couple of years ago, about the time that Chipotle ran into trouble, I asked a SBUX employee if he knew anything about Chipotle. This young man, perhaps 18 or 19 years old, told me he used to work at Chipotle, then gestured kind of frenetically with his hands saying: “at Chipotle it was all about speed. Starbucks makes me a better person”. That’s what Starbucks has been all about, creating a uniquely welcoming retail environment that produces “better persons” of their employees.
THE TIMES THEY ARE A’CHANGIN’
BARRON’S MAGAZINE this morning has a front cover entitled THE FUTURE OF COFFEE (AND RETAIL). The subtitle reads “Starbucks has succeeded where Silicon Valley hasn’t: changing the way consumers pay. The behavioral shift holds big promise for the coffee giant and its stock”.
Not exactly, in my opinion. It is not just about “the law of large numbers”, and the difficulty of satisfying investors by building on profit margins that are well above peers. The business model has changed, and the question becomes whether the new model will match the original. It’s well known that a new loyalty program bothered some customers and also that an increasing number of customers are ordering and paying online, often in advance of entering the store. In the most recent quarter, 30% of US transactions were paid using the smartphone app, up from 25% a year earlier and 20% two years ago. More important, to my view, is that 9% of US orders were ordered and paid for in advance. The company has been discussing the store level congestion for several quarters now, as mobile orders slow down service for customers going through the line. Perhaps it’s just me, but I am put off somewhat when the line at the register (where I like the human contact) is short, but I have to wait while eight or ten orders are pumped out ahead of my own.
MILLENIALS, WHO ARE THE SPENDERS, DON’T VALUE HUMAN CONTACT (AS MUCH)
It’s not so long ago that pundits dismissed the internet as a retail venue. The public was not expected to give out their credit card information, and certainly was not going to buy “touchy, feely” products like apparel or shoes through online channels. The public is not only ordering “everything” through Amazon and others, but relationships are maintained through Facebook and other social channels. As a corollary, customers are increasingly seeking “experiential” retail situations, rather than visit the malls, with their undifferentiated stores and restaurants, most often staffed with poorly trained employees.
WHAT’S IT ALL MEAN TO EMPLOYEES, AND CUSTOMERS?
Relative to Starbucks, their leadership with mobile order and pay, increasingly in advance of the store visit, may well be appropriate and necessary, but the business model has changed. It’s become a production challenge, not a relationship driven enterprise. The employed “people person” who was the star of the previous model, is not going to be as easily satisfied, because most of the employees, for most of their time, are busy pumping out product. It’s going to be harder to find someone as described above who says that Starbucks “is making me a better person”. From the customer side, there are 27,000 stores already existing that are already tightly configured and can’t be reconfigured too much to handle a lot more production. From a customer standpoint, some, like myself (perhaps in the minority these days), who value the human contact, may decide that the local independent shop, or even the home or office kitchen, can provide an adequate cup of coffee at a competitive price without the “tumult”.
I remember when Howard Schultz said that food will never be a material part of Starbucks’ sales. Today, it represents 30% of revenues. Schultz originally envisioned his coffee shops as a “third place”, to hang out other than home or office. That’s a little hard today, in a small busy shop, but we can call this an “unintended consequence” of building one of the still growing premier worldwide brands. Comps and traffic have slowed in recent years, due to the “law of large numbers”, the natural limitations of small stores that were not originally built to handle today’s volumes, and the evolving environment that every successful retailer must adjust to. Starbucks is one of the most successful retailers ever created, and we don’t doubt that they will continue to succeed in a major way. We caution however, that the rate of progress demonstrated in the past, already slowing, will be increasingly difficult to replicate. The business model has evolved. Starbucks was a retail “disrupter” but their previous approach may not be quite as successful. Accordingly, valuation parameters that have applied to SBUX equity in the past may not apply in the future. The stock chart that has languished over the last couple of years may well be reflecting the most likely future business model; still good, just not quite as great.
UPDATED CORPORATE DESCRIPTIONS: WINGSTOP, DARDEN RESTAURANTS, FIRST WATCH, ARCOS DORADOS AND WENDY’S WITH CONFERENCE CALL TRANSCRIPTS.
DARDEN RESTAURANTS (DRI)
FIRST WATCH (FWRG)
ARCOS DORADOS (ARCO)
THE WEEK THAT WAS, ENDING 3-25 – ANALYSTS ALREADY LIKED WINGSTOP, WENDY’S, FIRST WATCH, DARDEN, ONE COMPANY UPGRADED, WHICH WE WROTE UP A MONTH AGO
FIRST WATCH (FWRG) AND DARDEN (DRI) PROVIDE GOOD REPORTS, HARD NOT TO LIKE THEM. ARCO DORADOS (ARCO) GETS UPGRADED
RE: First Watch (FWRG), ANDY BARISH, JEFFREY BERNSTEIN, GOLDMAN SACHS, continue to like it. ANDREW CHARLES wants to see more (I guess).
RE: Darden (DRI), BRIAN VACCARO, LAUREN SILBERMAN, JAMES RUTHERFORD, JEFFREY BERNSTEIN, analysts at Morgan Stanley all continue to like it. NICK SETYAN wants to see more (I guess).
RE: Wingstop (WING), NICK SETYAN likes it, in spite of Charlie Morrison leaving.
RE: Wendy’s (WEN), IVAN FEINSETH likes it.
RE: Arcos Dorados (ARCO), ROBERT FORD upgrades to BUY.
RELEVANT TRANSCRIPTS FROM MOST RECENT CONFERENCE CALLS.
UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S (DENN), WINGSTOP (WING), CHEESECAKE FACTORY (CAKE), SHAKE SHACK (SHAK), BJ’S (BJRI) and CHUY’S (CHUY)
UPDATED CORPORATE DESCRIPTIONS – YUM CHINA (YUMC), KURA SUSHI (KRUS), WINGSTOP (WING), SWEETGREEN (SG), FIRST WATCH (FWRG), POTBELLY (PBPB)
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.