Restaurants
Restaurant Brands (QSR) is a SHORT
We are SHORT QSR and contend that the company is one of the worst managed large-cap restaurant companies we follow, and yesterday proves that point. Financial engagement has been a hallmark of the company, but that is the biggest problem, as the company has put limited amounts of capital into the brands to remain competitive. Yesterday, QSR reported Q2 EPS $0.76 topping F.S. $0.74 with EBITDA of $607M ahead of FactSet $603M, but revenue missed. Same-store sales missed in all segments with Tim Horton's +8.9% vs FS +10.3%, Burger King +7.9% vs FS +8.6%, and Popeyes (2.4%) vs FS +2.4%. ...Worldwide comps g looked better for all three concepts, but the softer performance from Burger King and Popeyes in the U.S. is an issue. The bulls can be encouraged by a strong international development pipeline. Still, the company is now eliminating paper coupons and has plans to equip drive-thrus with outdoor digital menu boards? How far behind the competition are these moves?
The commentary on BK USA's issues is troubling tot say the least and points to further trouble for the balance of the year. "During the quarter, we saw a 1.6% decline in comparable sales at Burger King U.S. has driven primarily by One, the underperformance of value offerings and two, our intentional shift away from paper coupons. On value offerings, this quarter's core offers of BOGO plus $1 and 2 for $6 yielded a considerable year-over-year gap against last year's 2 for $5, while also facing headwinds from competitor core discount offerings. And on paper coupons, we made a conscious decision to reduce our investment in this declining promotional channel that we've historically over-indexed relative to our peers. We know this decision will impact our results in the near term, but believe it's the right one as we focus on building more sustainable long-term sales through our digital platforms and by maximizing media firepower behind growing channels with increasingly tailored offerings for our guests."
Paper coupons are a declining promotional channel? Who knew!
Sweetgreen's IPO
Sweetgreen, which operates a chain of fast-casual salad restaurants, filed on Monday to go public. As of the time of the filing, the company owned and operated 140 restaurants in 13 states and Washington, DC, and it grew its restaurant presence at a 27% CAGR from 2014 to 2020. It looks to be pitching its "plant-forward" menu, and an end-to-end supply chain with more than 200 domestic food partners. The Los Angeles, CA-based company was founded in 2006 and had $303 million in sales for the LTM that ended September 30, 2021. It plans to list on the NYSE under the symbol SG and had confidentially on June 17, 2021. The book runners are a who's who with Goldman Sachs, J.P. Morgan, Allen & Company, Morgan Stanley, Citi, Cowen, Oppenheimer & Co., RBC Capital Markets, and William Blair on the deal.
According to the S1, "Over the last 15 years, we have been leading a movement to re-imagine fast food for a new era. There is a powerful shift happening in consumer behavior. Every day, more people want to eat healthier food and care about their choices in the environment. This is becoming the new normal, and we believe Sweetgreen is well-positioned to be a category-defining food brand for the future. Today, Sweetgreen is one of the fastest-growing restaurant companies in the United States by revenue. As of September 26, 2021, we owned and operated 140 restaurants in 13 states and Washington, D.C., and employed over 5,000 team members. We have thoughtfully designed all of our restaurants to reflect the culture and feel of our local communities and support our multiple digital channels. For our fiscal year to date through September 26, 2021, 68% of our revenue came through our Total Digital Channels, with 47% of our revenue coming from our Owned Digital Channels (and the remaining 32% of our revenue attributable to Non-Digital transactions made through our In-Store Channel).
This is an interesting element that we have not encountered in previous IPO's. "In September 2021, we completed the acquisition of Spyce Food Co. (“Spyce”), a Boston-based restaurant company powered by automation technology. The purpose of the acquisition is to serve our food with even better quality, consistency, and efficiency in our restaurants via automation. This investment has the potential to allow us to elevate our team member experience, provide a more consistent customer experience, and, over time, improve our capacity and throughput, which we believe will have a positive impact on Restaurant-Level Profit Margin."
This risk factor is a problem relative to other recent IPO's - "We have incurred significant losses since inception. We expect our operating expenses to increase significantly in the foreseeable future, as we grow our business, increase our new restaurant openings, and invest into new technology, and we may not achieve profitability."
More to come
Consumer Staples
Diaper inflation (HNST)
Management lowered their outlook for organic sales to decline 1-2% from their prior outlook of flat to up 2%. The outlook for EPS was lowered from $6.65-6.90 to $6.05-6.25. Management cited higher polymer-based materials, distribution costs, and energy rates. In July, management expected commodity prices to ease in the second half of the year; instead, resin and pulp prices increased. A tight labor market and freight disruption make it difficult for shipments to get on retailers' shelves. In addition, energy costs have experienced sharp upward increases, especially in Europe. "In a normal time if we have 30 people, given the inefficiencies with the labor and turnover, we might need to have 40 people just to get the same amount of product out the door…. I've never seen a supply chain environment like this, and it's affecting us across the P&L."
Kimberly Clark's diaper share improved 340bps in North America sequentially after being negatively impacted by a tight supply situation. However, share in the quarter was just about flat. The Honest Company benefited from Kimberly Clark's inventory availability and outgrew the diaper category's 20% growth with 33% growth in the previous quarter.
Sonoma County wines (VWE)
In the twelve months ended September, DTC shipments wine shipments from Sonoma grew 16%, outpacing growth for overall wine and Napa County. Sonoma now accounts for a third of the entire DTC channel volume. Since 2016 Sonoma's volume growth has been about double that of Napa County, as seen in the chart below. Napa accounted for 47% of DTC in sales dollars compared to 21% for Sonoma in 2019. Napa's shipments were up 12% to $1.75B in the past twelve months compared to $.9B for Sonoma and $432M for the Central Coast of California. Sonoma County has benefited from more winery events and less stringent limits on visitors during the pandemic. The wineries have done an excellent job maintaining customer relationships after in-person visits.
Cometeer challenge for home coffee (KDP)
Cometeer raised $35M in a Series B financing round. Cometeer uses a flash-freezing process at -321 degrees for coffee brewed at 10x the strength to create a frozen capsule. The capsule is then thawed in hot water for hot coffee consumption or in iced water or milk for cold coffee consumption. Cometeer's aluminum capsules are fully recyclable, solving one of the environmental issues of the Keurig pod. The additional flexibility of the capsules to make hot and cold coffee and hot and cold lattes without any kitchen equipment is also appealing. We haven't tried the coffee yet, but the company does partner with several leading roasters. So Cometeer seems to have advantages, while Bruvi, a maker of a single-serve pod system that recently raised $7M in a pre-Series A round, is very similar to the Keurig platform it is looking to challenge.
