Analysis of key metrics for industry decision makers.
Restaurant Research, LLC
Building Bridges Between Franchisees, Franchisors & Financiers
Economy
Starting with the "flation" part of the word stagflation, we see energy prices continuing to move out of reach with the average national price for regular gas hitting $5.00 in June (+60.9% y/y for the month). At the same time, rents are up +5% during the month which may hurt consumers more than gas prices because of the actual dollar amount increase.?
Now for the "stag" part of stagflation, we see the current 2Q22 Atlanta Fed GDP forecast down -1.9% on top of -1.6% 1Q22 results (revised down from -1.4%). Further, the Fed's recent rate hike is having its intended consequences as the job market starts to cool.?
Notably, the 10-year treasury reached 3.49% on 6/14 which was the highest level since 2011, although it has settled to around 3% as the recession fears of bond investors outweigh concerns about the possibility of more Fed rate hikes. Some think that the recent rise in equities suggests that the market is already looking for the Fed to start cutting rates to fight the recession.?
Stock Performance
Given the economic backdrop, how do investors find the bottom for restaurant stocks? While these stocks have largely given-up 2021 gains, the sector remains elevated from 3-year lows which suggests there could be more downside. On the other hand, valuation levels are starting to make sense especially if you assume a soft-to-moderate landing (or a quick Fed reversal from hawkish to dovish).??
Unit Level Valuation Metrics
Unit-level restaurant investors are not immune to concerns about sales, labor, inflation and interest rates, driving down both QSR & FSR valuation indexes firmly in bear territory for the third consecutive month.
Cap Rates
While unit-level restaurant investors are exhibiting caution, unit-level real estate investors can't get enough of a good thing as they drive the cap rate gap (vs. the 10-year treasury) to a record low. NNN leases maybe the safest game in town as restaurant operators must pay their rents no matter the cost of food and labor.
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