Black Box June
"U.S. economic conditions continue to strain restaurant performance in every segment except for Quick Service."
Black Box Commentary from June data:
Same-Store Sales Growth Lowest Since February 2021
Year-over-year guest counts have been in a three-month decline (since March 2022), impacting sales and traffic. Same-store sales growth was +1.6% in June – a sharp decline from the +4.9% reported for May and its lowest since February 2021. Same-store traffic growth also fell, but by a smaller margin than sales. Traffic growth was -4.8% in June – down from -2.9% in May.
Segment Performance Reveals Consumer Preferences
For the first time in over a year, segment frontrunner Fine Dining experienced its most significant drop in sales growth for June. Upscale Casual also saw a steep decline compared to May 2022. Quick Service was the only segment to experience year-over-year sales growth last month. While Fast Casual also saw a slight decline in year-over-year sales growth, the segment took the lead as the best performing segment in same-store sales growth.
Last month's segment performance paints a clear picture: price-conscious consumers favor the value-obsessed QSR and Fast Casual (Limited Service) segments.
Higher Average Checks Linked to Lower Intent to Return and Decrease in Traffic.
Restaurants have been bearing the brunt in significant ways – watching the cost of food, raw materials, gas, labor, and everything in between spike. At the same time, already thin profit margins become even more pinched. The most immediate response has been essentially unanimous among restaurants: raise prices. The result? Industry-wide price increases have driven up check performance. Year-over-year, average guest checks grew by almost 7% in June – a rate double long-term norms.
Does that mean restaurants should continue raising prices to offset growing costs? Black Box Intelligence data suggest a more moderate approach to price increases will benefit restaurant companies looking to hold or strengthen their position in the market. Black Box Intelligence Analysts investigated average guest check growth in Q2 2022 compared to Q2 2019. Restaurant companies reporting the lowest increase in guest checks (i.e., restaurant companies that represented the 25% with the lowest check growth) saw an increase in guest counts. All other restaurant companies reported negative traffic growth for the same period. Furthermore, the companies with the lowest check growth reported much higher traffic growth – a significant 16 percentage points over the 25% of companies with the most significant increase in average check.
Black Box confirms what we said yesterday, CMG is taking a big risk raising prices aggressively!
unlike the others
WING IS A LONG
WING reported 2Q22 revenue growth of 8.8% royalty and 3.2% company revenue growth. Non-GAAP EPS reaching $0.45 for the second quarter came 25% above the street, and system-wide sales increased 7.5% to $633.6M. COGS improved by 450bps; labor hurt by 250, and other expenses by 280bps. Restaurant-level margin down by 80bps to 21.5%, one of the best in the industry. As we laid out in our LONG deck (click here), the company is in a unique position for the back half of 2022, benefiting from significant deflation in bone-in wings that will help drive sales in a challenging consumer environment. The company also has several sales-driving initiatives to deliver on its stated guidance in 2022 of low-single-digit domestic same-store sales growth and diluted earnings per share of between $1.55 to $1.57. Importantly restaurant development is better than planned.
2H22 sales drivers:
- Expanded delivery service provider base by adding Uber Eats nationwide - this was incremental news from the earnings call.
- A meaningful increase in the number of dollars deployed to the national ad fund with an increase of over 35% in the number of ad dollars to be invested provides significant firepower to drive top-of-mind awareness.
- The Wingstop chicken sandwich is looking to get targeted sales mix levels of approximately 4% while maintaining the simplicity of the operations. The company announced a national launch of the Wingstop chicken sandwich in early September.
- Enabling value with wing deflation and little need to raise prices, WING can return some of this inflation in the form of value to the consumer.
CAKE COVERING THE SHORT
We have been SHORT CAKE for a few years and have been a poorly run company for the better part of 10 years - the stock is trading at the same price it was in 2004!
Yesterday CAKE was up +5.0% despite reporting 2Q22 EPS, revenue, comps, and restaurant margins below consensus; guided Q3 revenue below with plans for +4.25% menu price increases; maintains FY22 sales assumptions with commodity inflation +200-300bps from last quarter outlook.
With the stock not going down on this bad news, trading at 0.46x NTM sales (bottomed at 0.26x in 03/202). We will look to re-short it if it rallies more!
YUMC Better than expected; uneven recovery
YUMC is a LONG
Strong cost controls in a challenging environment.
YUMC 2Q22 Non-GAAP EPS of $0.20 (street $0.00); Revenue of $2.13B (-13.1% Y/Y) misses by $30M; Same-store sales decreased 16% YoY (Street 19.8%), with decreases of 16% at KFC (street 17.4%) and 15% at Pizza Hut (street 12.4%), excluding F/X. Restaurant margin 12.1% vs FS 3.8% and year-ago 15.8% and Operating margin 4.0% vs FS (0.7%) and year-ago 9.7%; Opened 53 net new stores during the quarter; total store count reached 12,170 as of June 30, 2022.
The cadence of sales during the quarter - "April was tough. May improved a little bit. June came back quite a bit. The comparisons get significantly easier in 3Q/4Q22, with KFC down 8% and 12%, respectively.
TXRH Earnings
Outperforming the industry; sales slowing.
Revenue $1.02B vs. FactSet $1.02B; comparable restaurant sales increased 7.6% at company restaurants and increased 6.2% at domestic franchise restaurants; Comparable restaurant sales at company restaurants for the first four weeks of 3Q22 increased 3.9% YoY. Restaurant margin decreased 116 bps to 16.6%; Commodity inflation of 11.8%, with higher costs across the basket.
If the stock rallies on the news, we will get more aggressive on the SHORT side
