The Problem with Chain Restaurants, Best Positioned Retail Companies, Darden, Walmart & More
Featured Analyses from Newsletter
When managers become convinced that their business has become a zero-sum game, they naturally seek to become the low-cost provider in pursuit of share. While it is good to drive efficiencies, cost cutters can take their eye off driving top-line growth. This framework provides a clue about why the?$1B+ restaurant chains?have been losing share for the last 10+ years.
We recently discussed how the $1B+ national restaurant chains have been steadily losing share to local independent restaurants by focusing on cost-cutting. The best way to identify growth-minded retail companies is by analyzing how much they are investing in their business (capex/revenue) and how much they are generating on these investments (return on capital). We like the companies that are outperforming on both counts.
April retail sales increased +3.3% y/y, which represented an increase from March’s +1.7% y/y growth. Additionally, the CPI inflation growth rate declined from +3.48% in March to +3.36% in April. Taken together, this looks like an improvement except for the fact that inflation remains elevated from January’s +3.09% reading. Also, we recognize that April’s real (inflation-adjusted) retail spending growth rate was slightly negative. Further, May’s advanced retail sales growth rate is reading a lower +2.3% rate, down from April’s +3.3% reading.
Premium Analyses
Darden reported that >$75k households are concerned about inflation and, now increasingly the job market, driving lower transactions. There is price sensitivity in every aspect of consumer spending as non-discretionary inflation has been increasing faster than wages for a few years, pressuring discretionary spending. Management would like to see lower inflation in things that people have to buy & rent, including utilities & childcare.
Dave & Buster’s reported a complex and challenging macro environment, especially for consumers making <$75k. The company’s half-off food promotions during the second half of the quarter helped improve results and management reported benefits from its significant investment in remodels & upgraded tech while its new menu continues to drive a high attach rate and elevated consumer guest satisfaction scores.
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Domino’s has been driving profits by maintaining prices while its commodity costs have declined. A recent upgrade to its loyalty program and new AI tools are expected to drive market share gains & operational improvements. Notably, the year after initially launching its first loyalty program during 2014, its comp growth accelerated from +7.5% to +12%.
Walmart’s sales success in the face of a difficult macro environment reflects enhanced e-commerce capabilities, including: delivery in less than 3 hours; and a larger product assortment (helped by third-party sellers) enabled by its increased fulfillment center capacity.
Mondelez reported significant U.S. price sensitivity driven by post-covid price hikes and the company plans to lower pricing to regain share from private-label brands that have taken business from its Chips Ahoy! & other cookie/cracker lines. Mondelez’s current focus: chocolate, cakes, pastries and snack bars.
Management’s decision to spin out W.K. Kellogg Co (the North American cereal business) as an independent company from the much larger Kellogg Company reflected its opinion that it had been a “deprioritized” operation hidden in a conglomerate. The company’s 9% EBITDA margin reflects management’s initial success in implementing marketing and sales strategy improvements.
Best Buy revealed third-party research indicating that the purchase of non-discretionary goods is pressured by the 50% of consumers who believe they are in a recession. In any case, the company’s long-term prospect benefits from a return to electronic product innovation and the preparation for an AI future which is expected to proliferate in TVs & the smart home.
Domino’s is well positioned, ranked #1 in both delivery & carryout pizza with a focus on feeding families/groups at a reasonable price per person. While Domino's is well positioned in the solid pizza segment, the chain must continue to find ways to offer its price sensitive customers with convenient, cost-effective delivery options that will keep them from choosing to cook for themselves at home.
Restaurant Research’s Unit & Systemwide Sales Growth Report provides a 10-year history for 58 $1B+ chains including: (1) total units; (2) new units; (3) closures; (4) systemwide sales; and (5) system sales market share.
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