RESTAURANT INSIGHTS | This Weeks Earnings Preview

YUM China (YUMC) Earnings Preview

Yum China reports 2Q23 earnings today, 7/31, after the close with an 8 pm conference call. The Call will be an essential indication of the recovery in China and have implications for SBUX. The consensus EPS Estimate is $0.44 (+120.0% Y/Y), and the consensus Revenue Estimate is $2.72B (+27.7% Y/Y). SSS estimate is 15.2%, up from 8% in 1Q23.

Here is a summary of what happened in 1Q23.

• First-quarter sales rebounded significantly from the previous quarter due to innovative food offerings and value campaigns.
• Restaurant margin reached 20.3%, the highest since 2017, driven by sales leveraging, cost structure improvements, efficiency investments, and COVID-related relief.
• Total revenues grew 9% YoY in reported currency and 18% in constant currency, with system sales increasing 17% YoY in constant currency.
• KFC and Pizza Hut achieved 17% system sales growth each, driven by successful promotional activities.
• KFC same-store sales grew 8% YoY with a 6% increase in same-store traffic and 2% in ticket average.
• Pizza Hut's same-store sales grew 7% YoY, with a 13% increase in same-store traffic and a 5% decrease in ticket average.
• The cost of sales decreased by 100 basis points YoY, while the cost of labor decreased by 160 basis points YoY.
• Occupancy and others expense decreased by 390 basis points YoY, mainly due to sales leveraging and cost-saving initiatives.
• Operating profit increased by 118% in reported currency, with a net income increase of 189% YoY.
• The company generated $507 million in operating cash flow and $328 million in free cash flow during the first quarter.
• Two hundred thirty-three net new stores were opened in the first quarter, to open 1,100 to 1,300 net new stores in the year.
• The outlook remains uncertain due to the lingering pandemic, with a focus on driving sales and managing inflationary pressure.

Starbucks (SBUX) Earnings Preview

Starbucks (SBUX) is a Hedgeye Restaurants Best Idea Short. 

Starbucks reports 3Q23 earnings this Tuesday, 8/1, after the close with a 5 pm conference call. Street estimates call for the company to grow revenue by 14% YoY to $9.29B with operating margins of 16.9%. The street is modeling 11% SSS comps with an EPS of $0.95. Our US traffic data for 3Q23 indicated a deceleration in transactions from the prior quarter of 6% to around 3%. The performance of China is a wildcard in the quarter. 

Laxman's Struggles - The four key reasons why we remain short SBUX:

1. The company has taken too much price over the past two  years
2. The old CEO set up the new one for a series of disappointments, the most important of which is the long-term growth algorithm. SBUX is a low-mid single-digit comp company, not high single digits 
3. The rollout of new technology is happening slower than projected on the analyst day.
4. China is not recovering as fast as expected.  

Denny's (DENN) EARNINGS PREVIEW

Denny's reports 2Q23 earnings this Tuesday, 8/1, after the close with a 4:30 pm conference call. Street estimates call for the company to grow revenue by 4.9% YoY to $120.6M with operating margins of 14.4%. The street is modeling 4.5% SSS down from 11.4% in 1Q23, with an EPS of $0.16. The company missed EPS by $0.01 last quarter. 

Sysco (SYY) EARNINGS PREVIEW

Sysco reports 4Q23 & FY23 earnings this Tuesday, 8/1, before the open with a 10 am conference call. This quarter will be dominated by market softness impacting case growth and lower inflation. 

Bloomin Brands (BLMN) EARNINGS PREVIEW

Bloomin Brands (BLMN) is a Hedgeye Restaurants Best Idea Short. 

BLMN is a melting ice cube up 11% over the past three months, 37% YTD, but that is why its values at one of the lowest multiples in the group. Bloomin Brands reports 2Q23 earnings this Tuesday, 8/1, before the open with an 8:15 am conference call. Street estimates call for the company to grow revenue by 2.1% YoY to $1.148B with operating margins of 7.2%. The street is modeling 0.6% SSS comps with an EPS of $0.64. 1Q23 BLMN shares rose sharply after topping 1Q23 expectations on top and bottom lines beats. The company reported $0.98 in EPS on $1.24B in revenue, above the consensus expectation of $0.89 in earnings per share on $1.22B in revenue. Management also highlighted a 30 basis point expansion in operating margin despite rising wages and general inflationary pressures. For 2Q23, the company offered a somewhat cautious guide. U.S. comparable restaurant sales are expected to range from 0.5% to 1.5%. Adjusted EPS of $0.62 to $0.67 forecast for the quarter also came up short of the analyst consensus of $0.72. The street is modeling the low end of SSS guidance but the midpoint of EPS guidance.

The core Outback Steakhouse is in a secular decline!   

First Watch (FWRG) EARNINGS PREVIEW

First Watch (FWRG) is on Hedgeye Restaurants Short Bias List. 

First Watch reports 2Q23 earnings this Tuesday, 8/1, before the open with an 8 am conference call. Street estimates call for the company to grow revenue by 14.2% YoY to $210.7M with operating margins of 4.1%. The street is modeling 5.3% SSS comps with an EPS of $0.08. During 2Q23, launched a secondary offering of 3.5 million shares, with certain funds managed by Advent International Corporation are the selling stockholders in the offering. The selling stockholders received all of the proceeds from the offering. 1Q23, the company reported $0.15 in EPS, coming in $0.06 above analyst expectations.

Meanwhile, a 21.9% jump in revenue to $211.4M narrowly exceeded estimates. The restaurant operator notched same-restaurant sales growth of 12.9% and same-restaurant traffic growth of 5.1% while noting the opening of 10 new restaurants in 7 states. The company has a significant concentration of stores in FL, and the Placer Traffic has been very weak all quarter. Systemwide the company saw a significant slowdown in traffic QoQ. 

Domino's Pizza Group (DOM-GB) EARNINGS PREVIEW

Domino's Pizza Group (DOM-GB) is a Hedgeye Restaurants Best Idea Long. 

Domino's Pizza Group reports earnings this Tuesday, 8/1, with a conference call at 5:45 am. Current guidance: "Like-for-like system sales, excluding split stores and VAT in the first ten weeks, have increased by 10.8%, with orders up 2.5% and new customers up 46%. In FY 2023, we expect the impact on EBITDA from the accounting treatment and technology platform costs to be around £9 million, and there will be no further contribution from the German associates following the exercise of our put option on November 10. We expect the FY 2023 EBITDA to be broadly in line with current market expectations before the £9 million of technology platform costs. In addition, we expect underlying depreciation and amortization to be between £22 million and £25 million and underlying interest costs of between £15 million and £18 million. The underlying effective tax rate is expected to be around 22% for the year. CapEx of around £25 million, and about net debt, we expect this to be between £255 million and £275 million."

Yum (YUM) EARNINGS PREVIEW

Yum reports earnings this Wednesday, 8/2, before the open with an 8:15 am conference call. Street estimates call for the company to grow revenue by 6.6% YoY to $1.744B with operating margins of 33.6%. The street is modeling 6.9% SSS comps with an EPS of $1.24. Last quarter YUM reported 1Q23 Non-GAAP EPS of $1.06, misses by $0.07. Higher G&A spending led to the overall bottom-line miss. G&A expenses came in at 17.1% of sales vs. 16.3% consensus. YUM reported an 8% increase in SSS in 1Q23 to top the consensus expectation of 5.8%. 1Q23 Worldwide system sales grew 11%, excluding foreign currency translation, with KFC at 11%, Taco Bell at 12%, and Pizza Hut at 10%. Same-store sales gains were seen across the KFC (+9%), Taco Bell (+8%), and Pizza Hut (+7%) divisions. Unit growth was up 3% for the quarter, with all divisions seeing new restaurants added during the quarter.

Summary of 1Q23 Performance:

• KFC Division's system sales grew 15% in the first quarter, driven by 9% same-store sales growth and 7% unit growth, with a solid performance in China and international markets.
• Taco Bell Division's system sales grew 12% in the first quarter, led by 8% same-store sales growth and 6% unit growth, leveraging brand buzz, value offerings, buzz occasions, and digital initiatives.
• Pizza Hut Division's system sales grew 10% in the first quarter, driven by 7% same-store sales growth and 3% unit growth, with successful launches of Melts and strategic partnerships with food aggregators.

Chefs Warehouse (CHEF) EARNINGS PREVIEW

Chefs Warehouse reports earnings this Wednesday, 8/2, before the open with an 8:30 am conference call. CHEF 1Q23 Non-GAAP EPS of $0.12 beats by $0.01. and Revenue of $719.6M (+40.5% Y/Y) beats by $83.48M. We would not say that Knapp Track High-end steak house saw 2Q23 SSS of -3.8%, down from +5.6% in 1Q23. Full-year guidance for 2023 includes estimated net sales in the range of $3.2 billion to $3.3 billion, gross profit between $768 million and $792 million, and adjusted EBITDA between $199 million and $207 million. Second-quarter and fourth-quarter adjusted EBITDA margin performance is expected to return to a pattern more consistent with pre-pandemic years due to the uneven nature of demand built back in 2022 and non-core self-insurance-related expenses recorded in Q4 2022.

Wingstop (WING) EARNINGS PREVIEW

Wingstop (WING) is on Hedgeye Restaurants Short Bias List. 

Wingstop reports earnings this Wednesday, 8/2, with a 10 am conference call, before the open. Street estimates call for the company to grow revenue by 24.4% YoY to $104.2M with operating margins of 25.1%. The street is modeling Systemwide domestic SSS of +14.7%, Company-owned +11.5%, and EPS of $0.51. Wing prices declined 40-50% during the quarter. As seen below, the place declined significantly during the quarter.   

Cheesecake Factory (CAKE) EARNINGS PREVIEW

Cheesecake Factory reports earnings this Wednesday, 8/2, after the close with a 5 pm conference call. Street estimates call for the company to grow revenue by 5.7% YoY to $880M with operating margins of 5.4%. The street is modeling 3% SSS comps with an EPS of $0.82. In 1Q23, CAKE was the rare company to miss SSS. CAKE reported comparable sales increased 5.7% in 1Q23 vs. +7.1% consensus. The Placer.Ai traffic was down 3% in 2Q23 versus up 1% in 1Q23. For 2Q23, the company anticipates total revenues to be between $870 million and $890 million, with adequate commodity inflation of high single digits and net total labor inflation of about mid-single digits. For the full year, total revenues are expected to be approximately $3.55 billion, with mid-single-digit inflation across commodity baskets, total labor, and other operating expenses. With Cheese and milk prices down 30.4% and 29.1%, respectively, inflation guidance for the year could come down.  

DoorDash (DASH) EARNINGS PREVIEW

DoorDash (DASH) is a Hedgeye Restaurants Best Idea Short. 

DoorDash reports earnings this Wednesday, 8/2, after the close with a 5 pm conference call. In Bloomberg, article on Friday said DoorDash, is developing an AI-based chatbot called DashAI to enhance the ordering process and assist customers in finding food options. The company is currently testing this system in select markets, and it aims to offer personalized restaurant recommendations through simple text prompts. By introducing DashAI, DoorDash hopes to stay competitive with rivals like Uber Technologies and GrubHub, potentially giving it an advantage in the market. While the company has not officially commented on the feature, CEO Tony Xu mentioned that they are conducting various internal experiments during a conference call in May. Second Measure data reveals that in June 2023, sales for primary meal delivery services grew 6 percent year-over-year, collectively. The whisper number was that DASH Restaurant orders were 3% in 1Q23, Black Box transactions were up 1.1%, and Knapp Transactions were down -0.3%. In 2Q23, those numbers were -2.7% and -4.5%, respectively. Order growth for Dash is expected to be 22.2% in 2Q23, down from 26.7% in 1Q23.   

Papa John's (PZZA) EARNINGS PREVIEW

Papa John's (PZZA) is a Hedgeye Restaurants Best Idea Short. 

Papa John's reports earnings this Thursday, 8/3, before the open with an 8 am conference call. Street estimates call for the company to grow revenue by 1.7% YoY to $532M with operating margins of 6.9%. The street is modeling 0.6% SSS comps with an EPS of $0.59. During the quarter, the company got a new CEO. PZZA appoints Ravi Thanawala as CFO, effective July 24, 2023. Mr. Thanawala most recently served as CFO of Nike North America, with fiscal year 2022 revenue of approximately $18 billion. The quick-service pizza chain ex-CFO Ann Gugino announced her resignation in March 2023. Chris Collins, VP of treasury and tax, took over as the principal financial and accounting officer on an interim basis. The company said it acquired restaurants operated by the M25 division of Drake Food Service International in the U.K. to establish a portfolio of company-owned restaurants in the market. Financial terms were not disclosed. The new restaurant portfolio consists of 91 locations across London and other parts of the U.K. Minimal if any, disruption to customers is expected during the transition time. "The U.K. is important with the largest number of stores outside of North America, strong brand awareness with consumers, and potential for long-term growth," said Amanda Clark, chief international and development officer, Papa John's (PZZA). Drake Food Service will continue to hold its master franchise rights for Papa John's restaurants in Spain, Portugal, Chile, and Central America. In 1Q23, the company's growth expectations remain unchanged, with plans to grow North American comps between 2% and 4% annually. For 2023, they anticipate being at the lower end of this range. International comps are expected to remain under pressure but improve gradually as the macroeconomic environment evolves. Adjusted operating margins are expected to be comparable to slightly higher than the level achieved in 2022, with several tailwinds and offsets from investments in the UK and higher G&A expenses. The company's tax rate is anticipated at the higher end of the 21% to 24% range. The management continues to focus on menu innovation, digital enhancements, operational productivity, unit growth, and strategic capital allocation to drive value for shareholders and position Papa John's for success.

The Placer.ai data held up well during 2Q23.

Shake Shack (SHAK) EARNINGS PREVIEW

Shake Shack (SHAK) is a Hedgeye Restaurants Best Idea Short. 

Shake Shack reports earnings this Thursday, 8/3, before the open with an 8 am conference call. Street estimates call for the company to grow revenue by 19% YoY to $275M with operating margins of 1.7%. The street is modeling 5% SSS comps with an EPS of $0.10. SHAK in 1Q23 reported Non-GAAP EPS of -$0.01, beats by $0.07, and Revenue of $253.3M (+24.5% Y/Y) beats by $7.46M. During the quarter, the company confirmed that it entered a cooperation agreement with Engaged Capital. As part of this agreement, Shake Shack appointed Jeffrey Lawrence, the CFO of ShiftKey, as an independent director to its board.

Additionally, the company will collaborate with Engaged Capital to identify another independent director with restaurant operations experience to appoint to the board. To further benefit shareholders, Shake Shack has agreed to take other actions that the company and Engaged Capital believe are in their best interests. This includes retaining a consulting firm to support ongoing operational initiatives to improve restaurant execution, cost structure, and profitability as part of the cooperation agreement; Danny Meyer and confident that his affiliates will gradually step down their director designation rights over time. In return, Engaged Capital has agreed to certain customary standstill and voting commitments, supporting the board's full slate of directors at the annual meeting. Shake Shack's CEO, Randy Garutti, stated that they are focused on executing their strategic plan and share Engaged Capital's belief that the company can achieve additional profit growth. 

For the full year 2023, Shake Shack guides total revenue of $1.06 billion to $1.11 billion, representing 18% to 23% year-over-year growth. The company anticipates growing its systemwide Shack count by approximately 70 to 75 units this year and aims to achieve at least 150 to 250 basis points of restaurant margin expansion in 2023. Despite ongoing inflationary headwinds, Shake Shack plans for a solid financial performance, targeting a 50% to 70% growth in adjusted EBITDA to $110 million to $125 million for the year. The company believes it can achieve record profits in 2023 despite its challenges, including uncertainty around consumer spending patterns and inflationary pressures. To that end, both ground beef and choice cutout boxed beef prices increased significantly during 2Q23. In 1Q23, the company is optimistic about its ability to navigate these challenges and achieve its financial goals. However, it acknowledges that the degree of pressure throughout the year will determine the results. Shake Shack remains committed to its strategic priorities and is confident in its ability to drive profitability and growth in an uncertain economic environment.

The Placer.ai data suggest there could be some upside to 2Q23 traffic.

Dine Brands (DIN) EARNINGS PREVIEW

Dine Brands (DIN) is a Hedgeye Restaurants Best Idea Short. 

Dine Brands reports earnings this Thursday. 8/3, before the open with a 9 am conference call. Street estimates call for the company to grow revenue by -11.9% YoY to $209.6M with operating margins of 23.5%. The street is modeling EPS of $1.54. DIN 1Q23 Non-GAAP EPS of $1.97 beats by $0.27. Revenue of $214M (-7.1% Y/Y) beats by $6.96M. Consolidated adjusted EBITDA for the first quarter of 2023 was $66.4 million compared to $65.2 million for the first quarter of 2022. Total cash, cash equivalents, and restricted cash of approximately $235 million, of which approximately $182 million was unrestricted. The Company reiterated its fiscal 2023 guidance items:

• Gross capital expenditures are expected to range between $33 million and $38 million.
• Consolidated adjusted EBITDA is expected in the range of between approximately $243 million and $255 million.

Like Outback Steakhouse, Applebee's is a melting ice cube!

Portillos (PTLO) EARNINGS PREVIEW

Portillo's reports earnings this Thursday, 8/3, before the open with a 10 am conference call. Street estimates call for the company to grow revenue by 12.6% YoY to $169.6M with operating margins of 10.7%. The street is modeling 6% SSS comps with an EPS of $0.13.

Summary of 1Q23 results: 

• Revenues in Q1 2023 were $156.1 million, a 16% increase compared to Q1 2022, driven by higher same-restaurant sales and new restaurant openings.
• Same-restaurant sales rose by 9.1%, attributed to a 7% increase in average checks and a 2.1% increase in transactions.
• The cost of goods sold remained flat at 34.4%, despite an 8.9% increase in commodity prices due to higher revenue and lower third-party delivery commissions.
• Labor expenses decreased to 25.9% in Q1 2023, mainly due to higher revenue and operational efficiencies, despite increased team members' hourly rate investments.
• Other operating expenses increased by 23.3% in Q1 2023, primarily due to the timing of expenses, higher credit card fees, insurance, and opening new restaurants.
• Restaurant-level adjusted EBITDA increased by 24.4% to $34.8 million in Q1 2023, with 22.3% margins showing improvement compared to the previous year.
• Menu prices were increased in January and May to combat inflationary cost pressures and enhance restaurant-level adjusted EBITDA margins.
• G&A expenses increased to 12% in Q1 2023, driven by higher salaries, wages, and professional fees.
• Pre-opening expenses increased to 1.5% in Q1 2023 due to activities related to planned new restaurant openings.
• Adjusted EBITDA for Q1 2023 was $19.6 million, a rise of 11.4% compared to Q1 2022.
• Interest expense increased to $7.4 million in Q1 2023, primarily due to rising interest rates but partially offset by improved lending terms.
• Income tax benefits decreased to $0.6 million in Q1 2023, with an effective tax rate of 30.5% compared to 16.6% in Q1 2022.
• The company maintains a self-funded growth strategy using operating cash flows and available cash.

Chuy's (CHUY) EARNINGS PREVIEW

Chuy's (CHUY) is on Hedgeye Restaurants Short Bias List. 

Chuy's reports earnings this Thursday, 8/3, after the close with a 5 pm conference call. Street estimates call for the company to grow revenue by 6.6% YoY to $118.3M with operating margins of 8.9%. The street is modeling 2.9% SSS comps with an EPS of $0.53. CHUY was up 17% over the past three months after exceeding 1Q23 earnings expectations and raising full-year forecasts. 1Q23 adjusted EPS was $0.47, beating the Street consensus by $0.11, and revenue jumped 11.9% YoY to $112.5 million, surpassing analyst estimates by $2.18 million. Comparable sales increased by 8% compared to Q1 2022. Despite an increase in labor costs, the company achieved a 60 basis point decrease in the cost of sales, maintaining healthy margins by implementing price increases. Chuy's reported a robust comparable restaurant sales performance in Q1 and achieved a restaurant-level operating margin of 19.7%. The company opened its first location in Arkansas during 1Q23 and plans to open six to seven new restaurants yearly. Revised full-year earnings per share guidance is between $1.71 and $1.76, higher than the previous range of $1.60 to $1.65 and above the analyst consensus estimate of $1.62.