RESTAURANT INSIGHTS | CMG (+), TXRH (-) BJRI (-) & Black Box Value Scores

CMG Surpasses Expectations in 3Q23, Eyes Aggressive Expansion: A Glimpse into the Numbers and Forward Plans

Chipotle 3Q23 Non-GAAP EPS of $11.36 beats by $0.73 and Revenue of $2.5B (+11.3% Y/Y) beats by $30M; Comparable restaurant sales increased 5.0%; Operating margin was 16.0%, an increase from 15.1%

Chipotle posted a robust 3Q23 performance, posting numbers that surpassed market expectations and painting a promising picture as it moves into 4Q23. The reported 3Q23 EPS stands at $11.36, easily beating FactSet's $10.55, but revenue is in line. The comparable sales increased by +5%, edging out the FactSet estimate of +4.6%. A notable beat was also seen in the restaurant margin, which improved by +60 basis points, propelled by food, beverage, and packaging costs 20bps lower than anticipated. AUV's growth increased +6.3% year-over-year to $2,972 million.

CMG guides that same-store sales will grow by +MSD% to +HSD% in 4Q23 and 2023, higher than the +5.3% and +7.1% that FactSet has for 4Q23 and 2023. This bullishness includes incremental pricing and underscores the company's confidence in sustaining its growth momentum. CMG looks to open 255-285 new restaurants (including 10 to 15 relocations to accommodate a Chipotlane) in 2023. The pace is expected to escalate in 2024, with plans to unveil 285–315 new restaurants. This aggressive expansion narrative accentuates CMG's aim to broaden its footprint and tap into new markets and consumer bases.

Chipotle is experiencing construction permit hurdles but remains undeterred. Despite the hiccups, the company is set on 8%–10% unit growth by 2025, backed by a sturdy pipeline and potential strategies to truncate timelines. In Europe, the story revolves around bolstering operational efficiency and training to pave the way for accelerated growth, given the already robust sales volumes. The emphasis is on harnessing the potential in a market that has shown promise. Back home, the narrative of transaction strength gaining momentum month-over-month throughout 3Q23 comes to light courtesy of incremental staffing and training endeavors.

Inflationary pressures loom large, yet the significant traffic growth shows that Chipotle's value proposition stands undeterred. The question is, how long? The affordability factor continues to draw lower-income customers. The margin tale for Q3 2023 narrates a figure of 26.3%, close to the coveted target of 27%. With some leniency in commodity costs or labor inflation, hitting the margin target next year appears within grasp. The pricing narrative takes a twist with the recent hike not factoring in the looming wage increases in California next year. The decision on pricing adjustments is slated for a closer review as the scenario unfolds. On the menu innovation front, the focus is twofold: shining a spotlight on core menu items while also whipping up new additions to entice the palate. A pipeline for news over the forthcoming 18–24 months is brewing, hinting at a well-thought-out strategy to keep the menu fresh and appealing.

Projected Outlook

• Growth Prospects:
• Anticipation of mid-to-high single-digit comps for 4Q23
• On track to meet the restaurant opening guidance, marking a company record.
• Strategic market entries, like the recent one in Calgary, and plans for accelerated growth in Europe and the Middle East.
• Executive Statements:
• "Trends remain strong in October, and we anticipate comps in the mid-to-high single-digit range for the fourth quarter, which includes our recent pricing action." - Brian R. Niccol
• "I am more confident than ever that we have created the foundation to achieve our aggressive growth goals and further our purpose of cultivating a better world." - Brian R. Niccol.

Implications: Bullish

• The company's strong financial performance, underpinned by solid sales growth, margin improvement, and strategic operational initiatives, paints a bullish picture.
• Continuous innovation in operations, as seen in introducing technology to improve throughput and customer experience, signifies a forward-thinking management approach to sustain growth.
• The aggressive expansion plan, both domestically and internationally, paired with a record number of restaurant openings, demonstrates a strong growth trajectory and a positive outlook on meeting long-term growth goals.

TXRH: Blossoming Sales Amid Economic Thorns: A Mixed Bag of 3Q23 Performance

TXRH 3Q23 GAAP EPS of $0.95 misses by $0.12, and revenue of $1.12B (+12.8% Y/Y) is in line.

Texas Roadhouse's (TXRH) 3Q23 performance narrative unfolds with a bittersweet tone. The company continues with its strong comparable sales growth, a testament to its strong operational strategies and appealing brand. The company-owned restaurant comps increased by +8.2%, beating FactSet's forecast of +7.7%, while franchise comps at +7.1% also exceeded the FactSet forecast of +5.6%. A 2.7% menu price increase that went into effect early in the quarter helped the first four weeks of 4Q23 maintain momentum with a +9.2% y/y increase in comps at company restaurants. However, amidst this sales growth narrative, the margin tale took a slight detour. The restaurant and operating margins missed their marks by 50 bps and 90 bps, respectively. This margin blip amid sales growth exemplifies the difficulty between generating revenue and controlling costs, especially when economic pressures are present. Looking ahead, TXRH holds onto its optimistic lens for 2023, reiterating its forecast of positive comparable restaurant sales growth, with menu pricing actions supporting it. The projection of store week growth hovers around ~6%, factoring in the recent franchise acquisitions. However, anticipating commodity cost inflation of 5%–6% and wage and other labor inflation of 6%–7% casts a shadow of cost pressures that could continue to pressure margins. In its updated outlook for 2023, TXRH unveils plans to open as many as 27 new Texas Roadhouse and Bubba's 33 company restaurants. This also includes an effective income tax rate of approximately 13% and total capital expenditures circling around $340 million. These forecasts underline TXRH's expansionist ethos despite the economic hurdles on the horizon. 

Looking toward 4Q23, a 2.7% menu price hike will lead to a 5.5% increase throughout the quarter, aimed at cushioning the blow from structural wage pressures. With beef taking center stage, wages and commodity prices play a significant role in dictating the cost narrative. The stabilization in the pace of wage hikes and a forecast of more normalized rates in 2024 brings some relief, but is it enough to offset the inflationary tremors? However, as has been the case, the discourse around margins amidst the prevailing economic challenges leaves room for speculation and concern. The TXRH story, as told through the 3Q23 performance, is a tale of growth striving amid economic headwinds. The script of sales growth and expansion is well-received, but concerns about margins amidst a storm of economic challenges are taking center stage.

Executive Statements:

• "Despite this noise, we continued growing margin dollars per store week while maintaining year-to-date double-digit EPS growth."
• "...this pricing action is primarily meant to offset structural wage pressure, including the impact of upcoming state-mandated wage increases."
• "All of our capital allocation decisions are made through the lens of creating strong shareholder returns for our investors."

Implications & Interpretations

• Pricing Strategy: The price changes are meant to counterbalance wage pressures, which shows that management is taking action to protect margins in the face of external costs.
• Sustainable Growth: The balanced and disciplined approach to capital allocation suggests a sustainable growth strategy, blending organic growth with shareholder value creation.
• Operational Efficiency: Effective cost management, despite wage and commodity pressures, reflects operational efficiency, a bullish indicator for maintaining or growing margins in subsequent quarters.
• Expansion Strategy: The shift to a more evenly distributed store opening schedule in 2024 hints at a potentially more stable and predictable growth trajectory, which investors may see favorably.

BJRI: BJ's 3Q23 Performance: A Closer Look Beyond the Growth Narrative

BJRI 3Q23 GAAP EPS of -$0.16 misses by $0.14 and revenue of $318.64 million (+2.4% Y/Y) misses by $7.24 million; comparable restaurant sales increased by 0.4% and total restaurant operating weeks increased by 0.8%.

Despite the upbeat narrative surrounding BJ's strategic management and operational decisions, the 3Q23 performance figures may tell a different story. The steady sales growth, enhanced margins, and strategic cost management often paraded by the firm seem to hit a reality check this quarter. Although BJ's has been proactive in adapting to seasonal trends, optimizing labor, and channeling investments into technology and remodeling, the effectiveness of these initiatives remains questionable and unproven. The reactivation of the share repurchase program and the ongoing expansion and remodeling align with the long-term growth narrative. Yet, the tangible benefits to the company's financial health are yet to be seen. The management's purportedly clear path toward sales and margin growth appears to be more of a slog than a sprint, with the consumer appeal for BJ's concept yet to translate into substantial financial gains. The 3Q23 figures paint a less rosy picture: a GAAP EPS of -$0.16, missing the mark by $0.14, and a revenue of $318.64 million (+2.4% Y/Y) falling short by $7.24 million. The 0.4% increase in same-store sales (SSS) significantly lagged behind the FactSet projection of +2.7%. Despite a 40bps miss on the restaurant margin, the firm managed a +30-bps beat on the adjusted EBITDA margin, though the revenue miss overshadowed this silver lining. The total number of restaurant operational weeks only saw a marginal increase of 0.8%.

Furthermore, the restaurant-level operating margin showed a modest improvement to 11.9% from 10.3%, with the adjusted EBITDA at $19.6 million, up from $15.2 million. However, the sales pattern in 3Q23 reverting to a "normal" seasonal rhythm with lower volumes in August and September always raises concerns. The initial three weeks of October showed a slight uptick in comparable restaurant sales, yet this was a modest recovery, which only underscored the struggle to meet the projected growth targets. The 3Q23 performance prompts a more cautious outlook. Despite BJ's efforts on strategic initiatives and operational adjustments, the journey towards significant financial and operational growth appears challenging. The story is getting more interesting, and we need to look more closely at it to see if the strategic moves can help BJ's grow in the planned way or if the company's operational strategy is based on too much optimism.

Sales and operational highlights:

• Menu Optimization:
  • Rolled out a new menu with 15% fewer items, focusing on familiar items made "brewhouse fabulous," leading to improved pay scores year over year.
  • Continuous innovation with new menu items like the giant twist pretzel, Hickory Brisket nachos, and new innovative cocktails is boosting sales in appetizer and cocktail categories.
• Service Enhancement:
  • Implemented new server scripts and an updated Mystery Shopper program to elevate service and hospitality standards.
  • A notable improvement in staffing levels and hourly team member retention rate matched pre-COVID levels in September.
• Restaurant Remodeling and Expansion:
  • Targeting between 35 and 40 remodels in 2023, to remodel at least 20% of restaurants by year-end
  • We opened five new restaurants in 2023, with the 2022 and 2023 classes exhibiting strong weekly sales averages and overall margins.
• New Restaurant Prototype:
  • Plans for a new prototype for 2024 openings, estimated to save approximately $1 million per build and provide labor optimization opportunities.

BLACK BOX: Recap of September 2023 Restaurant Sales and Traffic Trends

The restaurant industry is dynamic and constantly evolving with consumer preferences and market trends. The Black Box same-store sales data has been in the public domain for a few weeks. However, the accompanying analytical commentary released recently offers some noteworthy observations that warrant a closer look.

One highlighted finding is the dip in the Value Net Sentiment since 2019. Interestingly, the impact has been asymmetric across different types of establishments. Full-service restaurants have weathered the storm relatively better, registering a moderate decline of 7%. Conversely, limited-service venues have borne a more substantial negative swing of 24%. This trend prompts an analysis of its ripple effects on prominent market players like McDonald's (MCD), known for its aggressive pricing strategies over the past two years. The significant sentiment drop among limited-service eateries could reflect consumer resistance to price hikes, potentially affecting MCD's revenue streams. As the competition stiffens and the cost of operations escalates, the balancing act between price, value, and consumer satisfaction becomes even more critical. September 2023 marked a dip in restaurant sales with a mere 0.6% growth in same-store sales, a noticeable decline from the previous months. The industry hasn't seen such sluggish growth since February 2021. Though slower, traffic growth also hit, with a 3.3% growth rate reported.

Interestingly, while traffic erosion was lesser, sales witnessed a steeper fall due to the deceleration in average check growth. Among the various industry segments, only delicate and family dining saw an uptick in traffic growth. The cautious consumer spending and looming economic slowdown hint at a rough path ahead, particularly for full-service restaurants, with lower-priced segments like fast casual and quick service likely to fare better.

Key Takeaways:

• Sales Slump: Same-store sales growth dwindled to 0.6%, marking the lowest in over two years since the pandemic times of early 2021.
• Traffic Downtrend: A -3.3% decline, with a 0.5% decrease from August, indicating a continuing downward trend in customer visits.
• Check Growth Deceleration: The rate of average check growth slowed down, albeit consumers are still spending more per visit, with a YoY growth just above 4.0% in September.
• Fast casual and quick service segments followed fine dining regarding traffic growth, indicating consumers prefer lower prices in light of the current economic uncertainty.
• Economic Clouds: With an economic slowdown in sight, consumer caution is driving better performance in lower-priced restaurant segments, hinting at a challenging outlook for full-service venues.

With a 20.4% rise in inflation since 2019, restaurants are witnessing a parallel surge in check growth. However, the perception of "value" has taken a hit, leading to a decline in value-net sentiment, more so in limited-service restaurants. Despite the inflationary backdrop, certain brands have managed to bolster their value sentiment scores, subsequently enjoying better sales and traffic growth. This decoupling of check growth and perceived value underscores that price isn't the sole determinant of value; hospitality is a significant contributor, too.

Key Highlights:

• Inflation and Check Growth: The industry mirrors inflation trends with a median four-year check growth of 22.2%, impacting customer perception of value.
• Value Perception: Value net sentiment has declined since 2019, with full-service restaurants less impacted (-7%) than limited-service (-24%).
• Sales and Traffic Growth Correlation: Brands improving in value sentiment witnessed 1.5 times better sales and eight times better traffic growth.
• Hospitality's Role: Good hospitality can offset the adverse effect of check growth on value perception, making guests feel their money's worth.
• Defining Hospitality: It transcends service and ambiance, focusing on touchpoints and micro-experiences that make guests feel valued and comfortable.
• Hospitality Score and Performance: In Q2 2023, full-service brands with high hospitality scores outperformed others in same-store sales (2.4%) and traffic growth (1.8%), retaining employees better.
• Digitalization Impact: With the rise of remote work and e-commerce, dining out is a key social avenue, heightening the importance of hospitality in providing a competitive edge.