MENU Prices
According to data released Wednesday, restaurant menu prices hit a fresh 40-year high in June as soaring inflation led to continued increases in menu prices.
Food away from home prices rose 0.9% in June, according to new data from the U.S. Bureau of Labor Statistics, and 7.7% over the past year, the highest rate since 1981. That was lower than overall inflation, which hit a 40-year high of 9.1% in June. For restaurant operators, increases in wage rates (up about 13% over the past year) and food costs, driven by a host of factors, are eroding margins driving the need to raise menu prices. Full-service menu prices have risen 8.9% over the past year. Limited service prices have been up 7.4% over the past 12 months. Those price increases pale when compared to the rising prices consumers are paying at the grocery store. Food-at-home prices rose 12.2% over the past 12 months, the most significant 12-month increase since April 1979. The higher inflation rate at FAH can provide something of a backstop for restaurant sales, giving consumers more of a reason to dine out despite higher menu prices. But rising prices could also limit consumers' overall spending. Given the recent Knapp data showing June sales slowed MoM by 560bps, plenty of evidence suggests consumer distress over soaring inflation. This can also be seen in the University of Michigan, the Consumer Confidence Index hit an all-time low in June. Consumers are being hit with higher prices on a host of items, including gasoline, up 61% YoY, fuel oil (up 98.5%), and electricity (up 19%).
The group most exposed to the consumer slowdown and margin pressure are the Casual Dining names.
WING Black Book
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WINGSTOP (WING) LONG THESIS:
Wingstop, Inc., with an enterprise value of $2.9 Billion, is a franchisor and operator of restaurants, which engages in cooked-to-order, hand-sauced, and tossed chicken wings. It operates primarily through 1,754 Franchise stores, or 97% of the total store base. The Franchise segment consists of both domestic and international franchise restaurants. The company was founded in 1994 and is headquartered in Addison, TX. We like the setup for WING as a strong Quad 4 name for these reasons:
- MINING THE DIGITAL CONSUMER: WING is a company with a robust platform for monetizing data, focused on engaging with the consumer and managing the brand, but digitally tech-enabled in a way that gives the company a 360 view of the consumer. In 1Q22, 62.3% of sales were digital, up 10% YoY.
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WING DEFLATION: The pandemic drove a significant increase in the number of restaurants selling chicken wings driving down supply and driving up the price of wings. Those dynamics are reversing in 2022, and WING should be able to recapture lost margin thru lower food costs in 2H22 and into 2023. In addition, the company is in a unique spot and can lean into value to drive incremental traffic, while others in the industry are taking more price.
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SAME-STORE SALES AND TRAFFIC: WING posted the slowest SSS for 1Q22 at 1.2% in some time and has a challenging comparison in 2Q22 at 31.9%. But the traffic remains strong. While this is a concern for the upcoming quarter, we believe the company has seen accelerated traffic since the end of 1Q22 and that the improvement in profitability will overshadow the difficult comparison.
