RESTAURANT INSIGHTS | MCD Earnings Next Week, DALLAS PROTOTYPE (PLAY), FROM GHOSTS TO HOSTS

McDonald's (MCD) Q4 Earnings Preview

MCD is unveiling its Q4 financials, on Monday, February 5th, pre-market hours. MCD stock has etched a modest 0.5% ascent YTD, eclipsing the S&P 500 Consumer Discretionary sector's performance yet trailing behind the broader S&P 500 index. The forecasted EPS hovers at $2.83, marking a 9% year-over-year increase, a deceleration from the 19% surge witnessed in 3Q23, against a backdrop of $6.45 billion in revenue, up 8.8% YoY, yet a downtick from 3Q23's 14% growth. This narrative hints at a tightening grip on the company's operational leverage. Peering into 1Q24, projections of a 6% revenue growth paired with a 5.5% climb in EPS.

Comparable sales are poised for a 4.7% lift in 4Q23, albeit with a forecasted deceleration to 3.6% in 1Q24, setting the tone for the fiscal year. Hedgeye's sentiment leans towards caution, underscored by a bearish outlook for 2024, as McDonald's grapples with challenging comparatives and a dip in consumer enthusiasm, further exacerbated by dwindling foot traffic. Yet, the final quarter of 2023 could see McDonald's fortifying its market stronghold, propelled by its competitive pricing, loyalty incentives, and a robust digital ecosystem, alongside its drive-thru and delivery capabilities. Despite reservations about the brand's accelerated expansion and strategic roadmap unveiled during its analyst day, a sharper focus on lucrative growth avenues, both domestically and internationally, remains a priority.

Wall Street's sentiment, however, skews optimistic, with 76% of analysts championing a 'Buy' stance on MCD, a notable uptick from the previous year's 69%. Nonetheless, the projected average price target of $324.22 suggests a modest 8.8% potential upside, painting a mixed picture of McDonald's financial journey ahead.

Key Observations:

• Will the company talk about January's trends?
• Incremental MACRO projections for 2024, alongside insights into MCD-specific consumer dynamics.
• Detailed performance within the U.S. and globally managed markets.
• Progress in technological advancements from the analyst day.
• Introducing new burger menu items and implementing a new loyalty program.

Is Dave & Buster’s New Dallas Prototype Really a Game-Changer or Just Hype?

Dave & Buster's is launching an innovative new prototype in Dallas, which is set to open on February 9. This location, situated at 9450 North Central Expressway, is gearing up for a grand opening weekend that coincides with the Super Bowl on February 11. In an NRN article, the Dallas general manager, Garrett Chimarys, expressed excitement about unveiling this new entertainment destination, especially during the Super Bowl weekend. This launch is part of Dave & Buster's ongoing brand transformation, which continues despite recent challenges in same-store sales. If there is a bull case for PLAY, it will come from a successful remodel program, but that could take a few years to impact the financials. Dave & Buster's, with almost 150 units across the U.S., continues evolving its brand to provide unique and engaging customer experiences. This new prototype in Dallas is their commitment to reinventing a tired brand and innovation in the entertainment sector.

Key features of this new prototype include:

1. The Arena: This is described as a "wall-to-wall gaming environment," offering a comprehensive and interactive gaming experience.
2. Interactive Darts and Shuffleboard Bays: These additions provide a social and interactive element, enhancing the entertainment options for guests.
3. Immersive Sports Viewing Experience: Focusing on sports fans, this feature includes a giant 40-foot WOW Wall screen for an enhanced viewing experience.
4. Self-Serve Beer Wall: This offers guests a novel and convenient way to enjoy a variety of beers.
5. New Menu: Dave & Buster's also introduces a refreshed menu alongside these entertainment features.

To mark its opening and the Super Bowl weekend, the Dallas location has several events planned:

• Ribbon Cutting Ceremony (February 9): This event will feature the Dallas Mavericks mascot, Champ, and the Mavericks' street team, giving away prizes.
• Drone Shows (Feb. 9 and 10): Adding to the celebratory atmosphere, there will be drone shows on the nights of February 9 and 10.
• Super Bowl 58 Celebration (February 11): On Super Bowl Sunday, Dave & Buster's is offering a special promotion of $58 for unlimited gameplay plus food. There will also be prize giveaways throughout the day.

From Ghosts to Hosts: The Evolution and Resurgence of the Ghost Kitchen Model

The narrative surrounding ghost kitchens in 2023 presents a complex picture of an industry undergoing significant transformation. Initially hailed as a revolutionary model for the restaurant industry, leveraging underused kitchen spaces for delivery-only brands, ghost kitchens faced considerable challenges, leading many to declare the trend dead. However, according to Lisa Jennings of RB, the reality is more nuanced, showing not a complete demise but an evolution of the concept. Instead, the industry is in a state of flux, with businesses adapting to overcome the initial model's challenges. The future of ghost kitchens lies in innovative approaches that reduce operational complexities, improve financial viability, and meet evolving consumer demands for convenience, variety, and quality. This ongoing transformation suggests that while the original ghost kitchen model may be under scrutiny, the underlying concept of leveraging technology and underutilized kitchen space to meet the demand for delivery remains robust, albeit in a transformed landscape.

Critical Challenges for Ghost Kitchens:

1. Financial Viability: The original model of commissary-style ghost kitchens, where multiple operators rent kitchen space primarily for delivery, faced criticism for its lack of financial sustainability. High costs and the logistical complexities of operating in shared spaces made it difficult for these businesses to thrive.
2. Venture Capital Misalignment: The ghost kitchen model attracted significant venture capital investment with expectations of rapid scalability and high returns. However, the operational complexities and high initial investments in infrastructure did not align well with these expectations, leading to disappointments and scale-backs.
3. Operational Complexity: Managing a ghost kitchen involves coordinating between landlords, operators, restaurant brands, franchisees, and delivery services. This multi-faceted operation proved too complex for many, adding layers of difficulty in achieving profitability.
4. Market Saturation and Competition: The rapid expansion of ghost kitchens led to market saturation, with too many delivery options competing for the same customer base. This competition, coupled with the reliance on third-party delivery services, which take a significant cut of the revenue, further eroded profit margins.

Evolution and New Models:

Despite these challenges, the sector is witnessing the emergence of "ghost kitchen 2.0" models, which aim to address the shortcomings of the original concept. These include:

1. Vertical Integration: Some operators, like ClusterTruck and Oomi Digital Kitchen, have found success by controlling the entire process, from food preparation to delivery, thus improving efficiency and customer satisfaction.
2. Hybrid Models: Concepts like Vistro are experimenting with offering delivery, pickup, and dine-in options, moving away from the delivery-only model to incorporate more traditional restaurant elements.
3. Host Kitchens: Using existing restaurant kitchens to host additional virtual brands is gaining traction, offering underutilized spaces a chance to generate additional revenue without the significant overhead of a new location.
4. Franchising and Software Solutions: Some companies are pivoting to offer franchising opportunities or selling software to help other businesses manage their virtual brands or delivery operations more efficiently.