Restaurant Research LLC
All You Need to Know About 2Q12 Investor Conference Calls
- Chipotle (NYSE:CMG) - This organic restaurant chain has an intact business model stressing locally sourced food and home-grown staff capable of creating a compelling fast casual atmosphere. Investors panicked about 2Q comps coming-in at +8% instead of +10%, thus sending the stock down over 20% and dragging down the rest of the restaurant stocks along with it. Management explanation about underperforming Street sales expectations created all sorts of fear that the depression started already. We think it just shows that QSR is beginning to hit back at fast casual at the margin with menu and facility improvements. Anyway, what's so bad about 8% comps??
- McDonald's (NYSE:MCD) - If Chipotle's sales didn't prove the start of the depression, then McDonald's US comps coming-in 3.6% for the quarter did. The difference is that McDonald's also proved the start of a global depression that extends beyond the US. McDonald's will vent its frustration by beating everyone up with a tweak to its marketing machine powerhouse that will stress value (both low price points and premium products at relatively attractive prices) in order to capture market share and prepare it for an up-sell opportunity in 6 months. We think McDonald's suffers from the same ailment as Chipotle - increased competition from feisty players following McDonald's and Chipotle's success. That combined with a huge but unsustainable ad expenditure by Burger King during 2Q. The big news? McDonald's indicated that ObamaCare will cost an extra $10k - $30k per store per year - expensive, but not impossible to overcome when considering that some years McDonald's commodity cost increases can exceed this amount.
- Domino's (NYSE:DPZ) - The good? 1) -9.5% lower cheese prices: $1.52/lbs during the quarter vs. $1.68 last year. 2) Store level profitability increased +$5k/store during the quarter - representing a +18% increase. Currently, unit level profitability is in the $75k range which represents a huge improvement from the $50k range in 2008. 3) Continued growth in online (including mobile) sales which exceeded $1B domestically in aggregate this year. The bad? Negative order counts/traffic during the quarter. In any case, US comps grew +1.7% during the quarter or +6.5% over the last 2 years as management was quick to point out. Also, domestic closures declined from 28 during 2Q11 to 5 during 2Q12. The point is that franchisee profitability is beginning to stabilize which suggests hope for domestic development in the future. Unfortunately, Pizza Hut is beginning to target smaller markets with its new carryout light model (comparable to Domino's format) which could drag on Domino's expansion hopes.
- YUM! (NYSE:YUM) - Doritos Locos Tacos drove 13% same-store-sales at Taco Bell during 2Q12. While the new Cantina Bell menu is designed to compete with fast casual at 2/3 the price starting in 3Q (maybe even Chipotle), double-digit domestic comp growth is unlikely to continue at Taco Bell. KFC's US business is stabilizing. During the quarter, Pizza Hut was about $10 large pizzas; $10 and $20 boxes; the introduction of the P'Zolo sandwich. YUM! expects uneven US performance going forward with high sales volatility. Most of the call had to do with international growth - an area of intense investor focus.
- Buffalo Wild Wings (BWLD) - Company sales increased +30% y/y during the quarter while net income increased only 9%. This reflects a huge increase in the cost of chicken wings which grew an astounding +86% y/y to $1.90/lb. during 2Q11. This taken together with the new practice of producers growing larger birds (with heavier wings) means that the company's actual cost for wings doubled by the end of the quarter. This is a big deal as traditional wings represent 20% of the concept's sales mix while boneless wings represent another 19%. Cost of sales went from 30% during 2Q11 to 31.3% during 2Q12 which reflects the offset of menu price increases. However, investors are concerned that even more menu pricing will be necessary (especially when considering prospects that drought induced feed price hikes suggest even higher chicken prices) - what does even higher menu prices portend for future sales in a difficult economic environment? At least, the company can address the problem of heavier wings by changing its marketing from categorizing wings by quantities (6,12,18 & 24) to single/double/triple "jumbo" wings.
- Panera (NASDAQ:PNRA) - Very strong quarter with company comps +7.1% or +11.5% on a 2 year basis driven by the success of its summer celebration (one of 5 seasonal celebrations per year). Signature salads and sandwiches were both up +22% y/y. Comps are up +5.9% Q3 to date which supports its 5%-6% 3Q comp target (75-125 bp in transaction growth). The company plans 2.5% price increase during 4Q which is slightly below expected all-in food and paper cost inflation of +3% for the year which is possible because of favorable sales mix. Management mentioned that their operating environment is very competitive with everyone "copying each other". Fast casual's attributes: chef-driven, high quality food; and positive energy producing a high quality customer experience. Panera is enjoying success in urban locations and drive-thrus are gaining traction within the system with 40% of 2012 new builds incorporating this format. Direct media spend is increasing to 1.5% of sales this year vs. 1.3% last year and the brand is testing national cable. The average check is just under $10 without catering which can drive $125 average checks (catering sales grew 20% this quarter).
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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