Restaurants
NotBYND
BYND is a SHORT
Yesterday, we recently removed (SBUX) from the long list, but today is giving me pause to think about BYND. SBUX is partnering with food tech firm NotCo for plant-based options in Chile after seeing strong consumer interest in meat alternatives. So why not partner with BYND? The agreement covers lactose-free milk, NotMilk, and two sandwiches made with NotMeat Molida. NotCo said last month that it raised $235M in its latest funding round. The new funding round saw athletes Lewis Hamilton and Roger Federer join previous investors like Jeff Bezos' Bezos Expeditions, Twitter co-founder Biz Stone and 3G's The Craftory. Chile-based Notco was valued at $1.5B after attracting new investors.
Restaurant Themes
We presented our Restaurant Themes call yesterday. Our three investment themes are:
Inflation pressures persist
Inflationary pressures are well known, but the pervasive impact on the restaurant industry can't be ignored. Labor is a critical issue for the industry, and it requires extraordinary moves by companies to attract a quality labor supply. As Hedgeye's Macro Team said last week, "the fastest growth in money printing globally has predictably produced not just the fastest pace of asset price inflation on record, but also the highest rates of global price inflation in decades."
Macro setup favors secular growers.
The current setup favors vigorous secular growers in the restaurant space, and OLO, DASH, and TOST now account for over $100 million in equity value. Unfortunately, the Delta variant caused sales trends in August to cool, and it has continued to impact sales trends into September. However, with case counts rolling over, we could see a sequential improvement as we roll through 4Q21. Unfortunately, that is where the good news ends, with tough comparisons beginning in March 2022. As a result, we are maintaining our cautious stance on casual dining until year-end.
Valuations stretched, fundamentals slowing.
Fast Casual remains the one subsector where valuations look stretched, while Casual Dining is the least expensive subsector. They are two of the three best performing subsectors, with the other being Pizza - the best performing subsector YTD. Over the past three months, Distribution and Casual Dining have seen the sharpest negative revisions in Revenues and Earnings, while Family, Delivery, and Pizza have seen the highest revisions.
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Flip'd reduce the labor (DIN)
Dine Brands opened its first Flip'd by IHOP restaurant in Lawrence, Kansas. The new concept differs from IHOP by being a fast-casual version. The second location will open in New York City. With labor shortages despite higher wages, the Flip'd concept may have better returns for franchisees who can convert their existing locations. We presented a pre-IPO Black Book on First Watch this week. Instead of reducing the labor in the store First Watch has been successfully operating one menu in just the breakfast and lunch dayparts.
Consumer Staples
On-Premise recovery (SAM)
According to CGA, a market research firm, on-premise sales velocity appears to be following pre-pandemic seasonal trends. On-premise outlets were up 39% for the week of September 12 through 18 compared to the prior year and up 12% compared to the same week in 2019. On average national sales velocity in the on-premise channel has been higher than 2019 levels since early June. New York was the best-performing state in the week despite heavy flooding, with velocity up 64%. However, New York at -1% was still below 2019 levels. Texas performed the strongest compared to 2019, with the last week up 27% compared to the corresponding pre-pandemic week. Compared to the prior week, Florida was down 3% but was 33% above 2020 and 18% above 2019 levels. California was up 52% YOY and up 17% compared to 2019.
Can shortage (TAP)
Crown Holdings said it would build a new aluminum can manufacturing facility in Mesquite, Nevada. The 355,000 square foot plant is planned to begin operations in Q2 of 2023. In January, the company said it would open a 355,000 square foot facility in Henry County, Virginia. The Virginia facility is expected to begin operations in 2022. The Virginia facility is expected to cost $145M. Crown has 20 manufacturing facilities in North America. Crown's announcement came on the heels of Ball Corp.'s news that it would open an aluminum beverage packaging plant in North Las Vegas for $290M. Ball's new facility is expected to be operational in late 2022. In addition, Vobev announced two weeks ago that it would begin operations at its 1.2 million square foot slim can facility in Salt Lake City by the end of the year. The industry estimates the U.S. is currently short 10-14 billion cans. New capacity expansions, lower beer shipments, and draft beer recovering lost share should alleviate the can shortage. In August, U.S. brewers shipped 14.5 million barrels of beer, 3.3% less than the prior year after July's 6.4% decline. In the meantime, imports have been needed to keep up with the demand.
Return to the office (KR)
According to Kastle Systems, its ten-city average occupancy rate for office buildings increased 80bps to 34.4% in the week ended September 22 from the prior week. The occupancy level has nearly approached the highs seen during the summer. Kastle's occupancy barometer reflects access swipes to the office; it provides control systems to 2,600 buildings in 138 cities. The Houston metro market had a significant rebound of 8.2% in the occupancy, driving most of the overall increase. Houston had declined 5.2% in the previous week. The recent focus on variants and indoor mask requirements in some areas has delayed the return to the office, benefiting grocery sales and at-home consumption.
The National Association of Realtors (NAR) said half of the top-performing commercial office markets (office demand) are in Florida and Texas. The NAR said the office sector remains one of the weakest sectors of commercial real estate, with absorption rates and rents declining and many occupied spaces largely devoid of workers. However, NAR reported that positive indicators had been seen in small and medium-sized metropolitan areas, seeing increases in office occupancy rates that outperform most large cities and the national average.
