Strong concept; the stock is not so much
PTLO reported 4Q22 EPS of $0.08, beating FactSet's $0.02, and Revenue of $150.9M (+8.6% Y/Y) misses by $4.44M.
SSS increase of 6% (consensus +6.8%) driven by an increase in the average check of 6% (pricing 7.9%) and a 2.3% impact from the change in recording third-party delivery pricing, offset by a (-2.3%) decrease in transactions. AUV grew 3.3%. Like others, subsequent to the fourth quarter of 2022, PTLO has seen improvements in SSS, up "12.3% in our first fiscal period of 2023, and we estimate same-restaurant sales to grow 7.9% in our second fiscal period of 2023." The company guided SSS growth to be in the range of 8%-10% and total revenue growth to be in the range of 16%-18% for 1Q23. Sales growth will slow meaningfully in 2/3Q23.
Restaurant margin declined by (396bps) with COGS up 240bps, labor 37bps, and operating expenses up 114bps. In FY23, the company guided overall commodity inflation to be ease +MSD%; also anticipates additional wage investments. "We anticipate making continued wage investments in 2023 and remain committed to providing a competitive total rewards package for our team members." The company is cautious about raising prices but will "strategically offset this expense increases through menu price increases" and operational efficiencies; during mid-January of 2023; it increased certain menu prices by 2.0%.
The company is accelerating unit growth in 2023 to 12% from 4% in 2022 (10% L-T target), and that will come at a cost to margins and revenues are they are back-end loaded. "We expect to open nine new restaurants in the Class of 2023 in the back half of this year, with three to four targeted openings in the third quarter and the remainder in the fourth quarter. The increase in unit opening in 2023 across three newer states (TX, CA & FL) and the required investments to execute strong openings will leave RLM margins significantly below 2020/2021 levels and likely put further pressure in 2023. Restaurant-level margins declined 400bps in 2022. The 400bps decrease in restaurant-level margins was primarily driven by the continued impact of increased commodity costs and, to a lesser extent, labor investments. As shown below, BEEF will continue to pressure COGS margins in 2023.
Current consensus estimates shave PTLO revenue growth, accelerating from 9.7% in 2022 to 16% in 2023 and EBITDA growth of 11% versus a 13.7% decline in 2022. The margin pressure and growth investments will make EBITDA growth in 2023 difficult to achieve.
CATTLE INVENTORY
There was 89.3 million head of cattle and calves on U.S. farms as of Jan. 1, 2023, according to the Cattle report published today by the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS).
The USDA’s biannual cattle report showed that, as of Jan. 1, 2023, there is an 89.3 million head inventory — which is three percent lower than the total from a year ago and the lowest since 2015. Of that number, 38.3 million cows and heifers have calved. Additionally, there are 28.9 million beef cows, which are those explicitly bred for slaughter and meat sales, as of the start of this year — which is down nearly four percent from last year and the lowest the agency has recorded since 1962.
According to Beef Magazine, some challenges and reasons for the decline in beef cows appear to be the input prices and the drought last year. The magazine’s Ryan McGeeney wrote:
For many producers throughout the country, 2022 had offered a perfect storm of economic and weather-related challenges: input costs such as diesel and fertilizer doubling or even tripling and a hot, dry summer that only increased reliance on groundwater in the absence of rainfall. For cattle producers in particular, drought conditions offered no replenishment of dwindling forage supplies, leaving many producers to cull deeper into their herds than they might have otherwise preferred. Elevated beef cull prices contributed to an 11% increase in beef cow slaughter, according to USDA.
"It takes about two years for a new calf to become the steak on your dinner plate.”
DIN IS NOT A GROWTH COMPANY
The longer they pretend it is, the more expensive it will be for shareholders.
DIN management guided the street so that it opened more restaurants than it closed, returning the brand to a path of growth for "years to come." Yet they are now saying inflation and low margins have changed those plans; DIN now expects to end the year with 10 to 20 fewer domestic Applebees, a bigger reduction than last year. In 2022, Applebee’s operators finished with 1,678 domestic restaurants flat YoY. And despite achieving record average unit volumes of $2.8 million last year, the ROI on new Applebee’s has not met the franchisor’s expectations, as higher costs of buying land and building units alongside commodity and labor inflation. The rate or pace of development comes down to franchisees believing that there’s an attractive value proposition and that is not a factor for DIN's Applebee's division. These challenges are not unique to DIN, but after years of mismanagement and closures and management has to convince franchisees that opening new restaurants again is worth the investment. For the fourth quarter, Applebee’s same-store sales rose 1.7% YoY, with pricing up 7.5%, indicating that traffic fell 5.8%. IHOP comps increased 2% on 10% average pricing.
The other part of the DIN growth plans is Ghost kitchens, and there continues to be more evidence that it will not materialize either. WEN, on its earnings call, said Reef ghost kitchens are no longer part of its growth plan. “We do not envision delivery kitchens as part of our growth trajectory moving forward,” CEO Todd Penegor said on the earnings call. “We believe our efforts are better spent driving more access to Wendy’s brand through” its most recently updated “Global Next Gen” restaurant prototype." The comment represents a further scaling back of the Wendy’s-Reef deal. WEN announced in 2021 plans to open locations in 700 Reef facilities, by far the largest deal of any kind in the growing ghost kitchen business and one that would have made Reef one of Wendy’s largest operators. But sales at Reef locations underperformed expectations, and Wendy’s late last year said it would only open 100 to 150 Reef locations and that it could close some of its restaurants.
