Chain Restaurant Sales and Earnings Trends, Variable Momentum

Being almost all the way through Q4 chain restaurant earnings, it may be appropriate to note what’s underway at cycle’s end.

Its interesting that this quarter almost every single company beat the consensus Reuters EPS estimate, no matter how dire the sales trends were. That’s either a lot of commodity or G&A savings, buybacks, or widely divergent set of estimates that drove the average estimate down.

And there were many 14 week vs. 13-week quarter comparisons issues that made for muddied results (WEN for example), so much so that we recommend companies report average weekly unit sales and use for the SSS calculations, to remove this effect.

With companies like Ruth Chris (RUTH) and Morton’s (MRT) reporting either positive December or January sales trends, that is a real signal sales are moving at least in some sectors. Business travel is improving, as is catering, driving some of the gain. Those companies earlier tracked minus 20% SSS store sales for 6 quarters plus. Also, YOY retail sales have been up 5 weeks in a row, per Retailsails. But it is off low base.

It’s the fast feeders, particularly, the California weighted chains (CKR, JACK), and some of the older fast feeders (not MCD) that struggled with US segment results: YUM (KFC and Pizza Hut especially), Burger King (BKC) and Wendy’s/Arby’s (WEN) that are struggling the most sales-wise. But all of these companies had improved full year restaurant level margins and lower G&A.

The CEOs noted lower breakfast, lower weeknight, lower frequency, lower side items (drinks, french fries, etc), lower combo meals and lower average check/mix effects, lower overnight sales, a loss of teenage, lower income customers, peer discounting and bad weather. We personally believe this effect is correlated to older franchisors/franchisees who haven’t the CAPEX or unit economics to keep up, or scrape/rebuild/relocate units to better traffic areas.

Here is our notional monitor of chain restaurant sales momentum. We look at a several quarter trend, and discount partial quarter, early peek results for this list. Some calls were very tight.

Fast casual and chains with existing growth runways (but reflected in the PEs) starred.

Positive Comps/Gaining: Panera, Chipotle, Buffalo Wild Wings, McDonalds, Starbucks, and Dominos

Negative Comps but Improving: Cheesecake Factory, BJ’s, Darden, Ruth Chris, Ruby Tuesdays, Brinker, Texas Roadhouse, McCormick’s, Morton’s, Papa Johns

Mixed: DineEquity (IHOP negative, Applebee’s flat)

Stable or Declining: CKE Restaurants, Jack in the Box, Denny’s, Red Robin, YUM, Sonic, Wendy’s

Unclear: Burger King