RR-in-5: Key Research Highlights

SALES LOOK GOOD, BUT LOOKS CAN BE DECEIVING

• FSR 1Q:22 comp performance for $1B+ chains outperformed the annual average for the 3-year stack comp as the sit-down concepts continue their recovery.
• Conversely, QSR comps are slowing, mirroring recent industry commentary about how the higher income demo (FSR) has been more resilient to current economic conditions relative to the lower income demo (QSR).
• Record highs for many commodities and wages have prompted most of the public restaurant companies to raise their cost outlooks for 2022.

VOLATILE CAPITAL MARKETS LOOKING FOR A FAIR VALUE

• Restaurant stocks on average are down -40% from their 52-week high, trading at ~15x EV/EBITDA, as investors continue to struggle to assess the impact of out-of-control inflation on consumers’ ability to maintain their dine-out habits.
• Given current inflation rates, interest rates should be much higher.
• The spread between cap rates and the 10-yr. approached the record low set in April as real estate has become the most attractive asset class to NNN investors.

1Q:22 SUMMARY

• 1Q:22 investor conference calls indicate staffing and commodity cost challenges somewhat off-set by higher menu prices and increased dine-in business.

NoBullEconomics: A Restaurant Research, LLC Company

BUBBLE MONITOR WEEK IN SUMMARY

The question that should be on everyone’s mind is how will the Fed’s humongous interest rate hikes help tame inflation? In our post, how do higher interest rates lower oil prices, we highlight the fact that the sky-high price of gas is not from an overheated economy (with 1Q22 GDP down -1.4%), but from a supply shock. It’s crazy for the Fed to bludgeon lower already tepid demand with these rate hikes. Taking a further look at energy, we explore how the rising cost of oil extraction is making gas too expensive for consumers and perhaps the real reason for the push towards green energy. Lastly, we put the Great Resignation in perspective by suggesting that perhaps it is a healthy sign. Of course, the same cannot be said about the declining US fertility rate (see Elon’s thoughts on this) which could be worse than hiking interest rates during an economic contraction.

UNIT & SYSTEMWIDE SALES GROWTH

• 2021 gross unit development rate of +2.6% for the $1B+ Chains was in-line with 2019 and is expected to grow +3.1% in 2022 despite headwinds.
• 2021 closure rates for the $1B+ chains improved from 2020’s elevated levels, but net unit growth was below the overall industry.
• Systemwide sales for the $1B+ Chains increased +15.7% during 2021 (+9.9% 2-year stacked basis) compared to +32.8% (+14.9% 2-year stacked basis) for the total restaurant industry and total restaurant industry market share for the $1B+ Chains has steadily declined to the lowest level in 19 years.

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