Over the next two weeks, several "pure play" restaurant franchisors will be reporting earnings: Dunkin Brands (DNKN), Burger King (BKW), and DineEquity (DIN). Sonic Drive In (SONC) and Domino's (DPZ), both approximately 90% franchised, reported last week.
Each of these has moved towards or has always has been at a 100% franchised model for years (DINE, BKW). Wall Street likes the "capital light" and "franchisees are exposed to commodity risk, not the company" logic lines. Lofty stock valuations follow, at least for many of them.
But that raises some questions for investors: (1) who is then paying for expansion, or for commodities (2) if the company essentially franchised, how is the underlying health of the company being reported or analyzed?
Franchisors rarely talk about this, and on some earnings calls, there is not one question from the sell-side community on this (perhaps anticipating resistance from the company). McDonald's (MCD) has made franchisee owner/operator cash flow (EBITDA) narrative in several recent calls, and DPZ did once.
In the past, what few questions asked by the sell-side revolved around (A) same store sales levels, (B) stores opening or closing or (C) franchisor bad debt expense from uncollected royalties. While these factors are interesting, they only collaterally get at the true health of the system.
Here are several factors that could be asked by the sell-side community and reported by companies to improve investor disclosure:
(1) What is the store development pipeline (stores under franchise agreement that haven't been opened yet)?
(2) What is the 5 year historical miss of stores in the pipeline that don't get opened?
(3) How many franchisees are in default of their franchise agreements but still open?
(4) Is the franchisee operator expanding number of stores or not?
(5) What percentage of total franchisee operators are franchisee cash flow positive (store level EBITDA isn't the best number, but its something).
(6) How many franchisees are remodeling or current on their remodels?
These are all metrics that the franchisor has or should have, that could be reported either annually, or on a trailing twelve months basis.