MCD Preparing for the worst
"Our base case scenario going forward is that we expect to experience a mild to moderate recession in the US and one that will be potentially a little deeper and longer in Europe." Christopher J. Kempczinski, President, Chief Executive Officer & Director, McDonald's Corp.
Restaurant stocks continue their month-long rally into Thursday afternoon trading after MCD/WING led off the earnings season for the sector with a strong earnings report? What about CMG? As the economy slows, more people will enter the MCD system looking for value. MCD did not see a traffic drop after using pricing to help offset labor and commodity inflation headwinds. As the MCD CEO noted above on the earnings conference call, the impact of inflation and interest rate hikes on consumer spending will likely lead to a global recession. While MCD/DPZ/WING and others might see more higher-income customers trading down to fast food from full-service dining, a recession will not be suitable for the broader restaurant space. The is no "read-through" from the MCD earnings report that some casual dining chains might have pricing power or appeal as a trade-down option.
The mic drop moment on the call "Well, the McRib is the GOAT of sandwiches on our menu. And so, like the GOAT Michael Jordan, Tom Brady, and others, you’re never sure if they’re fully retired or not."
SOLID TXRH Earnings
Having said that above, some operators are better than others, and TXRH is one of them. We are removing TXRH from the SHORT list and will revisit the name when signs of a broader downturn occur.
TXRH reports a 3Q22 EPS of $0.93, beating FS's $0.89, with revenue upside in all segments. Key operating metrics: For 3Q22, comparable restaurant sales increased by 8.2%, driven by 7.7% average check growth. Guest traffic was up by 50bps overall, with dining room traffic up 3.3%. "We continue to see a favorable mix driven by year-over-year improvement in the percentage of guests choosing to dine in as well as dining guests continuing to order higher priced entrées." The restaurant margin was in line as the operating margin beat by +20bps, but the cost of sales was 20bps higher than expected. Plans to acquire eight domestic franchise restaurants with a targeted close date as of the beginning of the 2023 fiscal year. By month, comparable sales grew 3.9%, 9.9%, and 10.4% for our July, August, and September periods. And our sales momentum has continued into the fourth quarter. For the first four weeks of the quarter, weekly sales averaged 130,000, with comparable sales up 8.3% compared to the same period in 2021; a Menu price increase of ~2.9% in late October.
Reiterates FY22 guidance: positive comp growth including the benefit of menu pricing actions; store week growth ~6%; wage and other labor inflation ~8%; an effective income tax rate ~14% and total CAPEX of $230M. Updates the following expectations for FY22; expects as many as 23 Texas Roadhouse (prior guidance ~25) and 33 Bubba's company restaurant openings; expects commodity cost inflation of approximately 10.5% vs. prior ~12%. Guides FY23: positive comp growth; 30 Texas Roadhouse and Bubba's 33 company restaurant openings; store week growth ~5%; commodity cost inflation of 5%-6%; wage and other labor inflation of 5%-6%; an effective income tax rate of ~15% and total CAPEX of approximately $265M.
BLMN Earnings
There is no reason to be LONG a collection of underperforming brands in casual dining. Trading at 0.62x 2023E revenues valuation looks reasonable, but we can see the stock trading back down to $17 or 25% downside.
Bloomin' Brands (BLMN): 3Q22 Non-GAAP EPS of $0.35 beats by $0.01 and Revenue of $1.06B (+5.0% Y/Y) beats by $10M. Comps of US +1.4%. Assuming pricing of 6%, suggest that traffic is down 4-5%; Outback +2.3% vs FS +1.4%; Carrabba's +0.7% vs FS (1.2%); Bonefish (0.9%) vs FS (1.6%); Fleming's +1.3% vs FS +2.9% and Brazil 30.1%. GAAP diluted earnings per share guidance coming down from $1.11 to $1.22 and now $1.05 to $1.15. Reaffirms Adjusted diluted EPS in the range of $2.45 to $2.55 vs. consensus of $2.45. This is a classic Dave Deno "U.S. comparable sales improved throughout the quarter while our margins remain well above pre-pandemic levels.” Don't fall for the CEO's bullish commentary: The BLMN reality is traffic is down MSD across nearly every concept, and a recession is looming!
