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Restaurant Recap: Q2 2011 Earnings

Q2 2011 Earnings: Restaurant Recap
Now that we are through half of the Q2 chain restaurant earnings results, we publish again our critical look at what’s happening throughout the restaurant earnings universe:  
Revenues and Comp Sales: no real US same store sales pops were noted, that which we define to be a movement of 1000 basis points or more. When the holiday calendar shift is the big news, you know nothing is really happening. But some solid numbers were apparent.
Certain international market operators had super pops, however: the two highest we saw were Arcos Dorados (NYSE:ARCO) in South American nations (+ 33%), SBUX in China (+30%)
Biggest revenue miss versus forecast: Papa John’s (NASDAQ:PZZA), $8M, but earnings were right on, target, ergo we think someone had bad revenue forecast that skewed the analyst sample.
We are impressed that many of the “July early peek SSS” views were positive with notable exceptions IHOP, Ruby Tuesday company stores (NYSE:RT) and PF Chang’s (NASDAQ:PFCB), despite lackluster to poor consumer confidence and polled less dining out (, July 26, 2011, less versus more: plus 37)
The casual dining Knapp track traffic count benchmark moved positive in May (.2%) and June (.5%), for the first time since 2006. Virtually all positive reporting chain restaurants saw higher positive comp sales internationally, except SBUX, that saw higher comps in the US (+8) vs. international (+5). Traffic was the SBUX driver.
Refranchising and AUV link, an optical illusion: Denny’s(NASDAQ:DENN) and Jack In the Box (NASDAQ:JACK) both noted that as it refranchises lower volume stores, its residual company store AUV would rise. That’s, true from an arithmetic, optical basis and not necessarily from an incremental sales, traffic or check driver standpoint. Have to look closely.
Stability: Several operators noted stability in daypart sales, weekday v. weekend, product mix, ability to yield price increases, etc, which implies of a pretty flat consumer base.
Steak Centric: as we noted in July (, we saw steak centric chains with better results in the first quarter, with higher end concepts improved 2500 SSS basis points from their 2009 trough, which was a very low base. 
SSS Momentum Captures: Did Denny’s (DENN) same store sales gain (+2.6%) come at the expense of IHOP (-2.9%), and did Domino’s (DPZ’s) gain (+4.8% US) come at the expense of YUM/Pizza Hut (-2%) and Papa John’s (PZZA, .4%)?
Reimaging Sales Bump Reports: McDonald’s (NYSE:MCD) +6 to +7, Jack in the Box (JACK): app. zero, DIN/APPB: +MSD. Burger King altered its expensive remodel model composed in the 2008-2009 to a less costly option.
Franchising v. Refranchising v. Company Operations:while the franchising/refranchising push over the last 20 years is unmistakable, some operators are contracting franchisees or JV partners, and pushing company store development: Starbucks (in Europe and China), Ruby Tuesday (RT), Texas Roadhouse (NASDAQ:TXRH), Panera (NASDAQ:PNRA). PNRA reports they can make money even with a 5 to 6 multiple paid. And PNRA and Darden (NYSE:DRI) say they will never franchise. We are glad that cost of CAPEX is being considered in the store economics tracking, but some companies can make money.
Earnings:of course food commodity problems were prevalent throughout the space. Many companies were app. flat on labor, with average wage rate inflation only around 1% on average (merit increases and turnover). As an outlier, Sonic (NASDAQ:SONC) has mentioned wage inflation its last several earnings calls, despite its tip credit program that should have materially lowered the average wage.  
  • Worst earnings call and miss: PFCB, with a $.15 miss, and both PF Chang’s and Pei Wei in negative SSS territory. Management indicated they would migrate the menu to feature lunch at lunch, which causes us to wonder why they are so late at reacting to that. Shortfalls coming at both Ruby Tuesday and PFCB could be seen in the last several quarters. Next worse: CMG, short $.09.
  • Buffalo Wild Wings (NASDAQ:BWLD) realized the largest most favorable cost of goods sold ratio, improved 120 basis points, but still wound up with a $.02 EPS miss.
  • Relatedly, BWLD also invented a new store level profitability metric, store EBITDA less pre-opening expense, indicating that pre opening expense is an issue.
  • While YUM/Pizza Hut doesn’t break out store margins, its largest US franchisee National Pizza Company does: average weekly sales of $15,472, restaurant margin of 8.3% and -2.8% SSS this quarter.
  • Largest number of analyst “congratulations” noted in the earnings call: Dominos (NYSE:DPZ), at four. Most “relief” noted with a call: Denny’s (DENN) with positive traffic noted for first time since 2006.
 IPO Tracking:both the Arcos Dorados (ARCO) and Bravo Brio (NASDAQ:BBRG) current share price (8/3/11) remains above their IPO opening share price. ARCO has a lot of unit growth and comp sales gains in their markets, but faces big wage inflation and Brazil, and its company adjusted EBITDA margin is still only 7.6%.
Questions that should have been asked by the analysts:
  • All five of YUMs US brands are in negative same store sales territory. What’s US franchisee economics/workout status? When will YUMHQ move to China?
  • For Chipotle (NYSE:CMG) and PF Chang’s (PFCB): why didn’t the internal company system safeguards catch the immigration documentation and related store closure problems before it grew to be a economics and PR disaster?