Chain Restaurant Disclosure and Analysis Can Improve

by: John Gordon

In April, we had several chain restaurants report: McDonald’s (NYSE:MCD), Chipotle (NYSE:CMG), Starbucks (NASDAQ:SBUX) Brinker (NYSE:EAT), Burger King (BKC), Panera (NASDAQ:PNRA), Buffalo Wild Wings (NASDAQ:BWLD) and others. And despite the “open efficient market knowledge and sophistication”, we are still talking about bad weather as a driving influence for some (BKC, for one).

While all businesses are sensitive to incremental revenue and operating leverage, restaurants are more so, as somewhere between 35 to 50% of incremental sales should drop through to the bottom line. When you hear some restaurant analysts talk (see Brad Ludington, KeyBanc CNBC interviews in April), every other word is same store sales.

Based on how quickly these stocks can move (think BWLD down $10 in a week) and hinge on a single number, some reforms are needed in the disclosure.

52 versus 53 weeks can distort: when 53 week years mean 13 week quarters, some chains don’t adjust for this and report in uneven quarters (comparing 13 week quarters to 12 week quarters, and vice versa, thereby getting a lift or a decrement). This could all be solved by reporting comps on an average weekly basis for the quarter. I asked Brinker if there was some concern on this point, recently.

Compound sales growth versus year ago: the investment community focuses on near term trends of one quarter or two quarter same store sales (sss) trends versus a year ago. But, the results are different if you flex off a compound growth calculation. Hint: McDonald’s still looks strong either way.

Stock Repos distort: last week, Panera estimated that analysts had $.09 of share repo effect in their projections. EPS, the second most visible item, could be calculated on a before and after stock repurchase effect as a memorandum line. Check out Darden’s numbers either way.

Franchisee Results Disclosure: as the QSR chains work to refranchise even more stores (YUM hopes to get its KFC brand in the US down to 5% company owned), the health of the franchisees becomes even more important. You’d be surprised how many earnings calls are almost totally silent on franchisee matters, usually only prompted when royalty and bad debt expense goes up and affects G&A.

At a minimum, franchisee same store sales trends could be revealed (even when disclosure isn’t consistent) and the number of openings and closings can be reported.

Variance to Budget: while there’s plenty of discussion on what happened last year that mucks up the comparison, what about how the company did versus a more important metric: the budget? That’s where the debt, CAPEX and incentive plan decisions come.

Disclosure: No stock positions

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