RESTAURANT INSIGHTS | RBI Mixed Results, DNUT Slows Down, Adapting to Change

Restaurant Brands International Posts Mixed Q4 Results

Restaurant Brands Non-GAAP EPS of $0.75 beats by $0.01, revenue of $1.82B beats by $20M

Restaurant Brands International (RBI), the parent company of Burger King, Tim Hortons, Popeyes, and Firehouse Subs, reported fourth-quarter results mixed against expectations. On the positive side, same-store sales growth was strong at Tim Hortons and Popeyes, outperforming forecasts. Tim Hortons saw comps jump 8.4% globally while Popeyes comps grew 5.5%, indicating these brands have momentum entering 2023. Additionally, RBI's advertising revenue and international adjusted EBITDA exceeded estimates. However, total revenue and adjusted EBITDA margin fell short of projections. Consolidated revenue was $767 million versus expectations of $771 million. And RBI's adjusted EBITDA margin declined 110 basis points to 33.1%. On a brand level, Burger King and Firehouse Subs saw weaker than anticipated adjusted EBITDA, signaling some near-term profit headwinds. And while systemwide sales grew for all four brands, Burger King posted a more modest growth of just 4.9% globally. Overall, it was a mixed bag this quarter for Restaurant Brands International. However, strong sales momentum at Tim Hortons and Popeyes points to continued growth opportunities across RBI's portfolio of quick-service brands. 

The earnings release highlights several important themes that are indicative of the company's strategic direction, operational successes, and future outlook:

Positive

1. Robust Digital Transformation and Sales Growth (Digital Growth 20% YoY)
2. Strategic Brand Investment and Franchisee Profitability (a positive and a negative)
3. Financial Strength and Shareholder Returns ($1.5B returned to shareholders)

Negative:

1. Macro-Economic Pressures and Cost Inflation (RBI acknowledges the impact of macroeconomic pressures, including inflation in commodity, labor, and energy costs, as well as foreign exchange volatility and rising interest rates.) 
2. Segment Performance Variability (noting decrease in Burger King (BK) segment income within the U.S. and Canada)
3. Investment Requirements for Growth (TAST acquisition underscores the necessity for substantial capital outlay to remain competitive and relevant in a rapidly changing market.  

Krispy Kreme Delivers Strong Revenue Growth in Q4 But Profits Fall Short

Krispy Kreme reported impressive net revenue growth in the fourth quarter, with sales rising 13.2% organically. Total Q4 revenue hit $450.9 million, handily beating estimates of $439 million. The sales strength reflects the continued popularity of Krispy's fresh doughnuts, coffees, and branded sweet treats. However, bottom line performance missed expectations in Q4. Adjusted EPS came in at $0.09, below the $0.13 analysts had forecast. Adjusted EBITDA of $64.1 million aligned with estimates despite stronger than projected revenue. The profit shortfall indicates some margin compression hit Krispy Kreme's operations in the latest quarter. The company experienced lower volume in the U.K., which led to deleveraging in the quarter.  For the full year ahead, Krispy provided initial 2024 guidance pointing to a notable growth slowdown. The company sees revenue rising 5-7% annually, including 6-8% organic growth. Adjusted EBITDA is expected to increase 8-11%. This outlook fell short of Wall Street's growth assumptions as ongoing macro uncertainty appears to have prompted a more cautious forecast from management. Despite fantastic top line momentum, Krispy Kreme has some work to do getting margins and profits back on plan. Execution unlocking profit growth will remain key for the business in 2024. Is guidance conservative enough? 

Adapting to Change: Navigating the Future of the Restaurant Industry in 2024

The National Restaurant Association's annual State of the Industry Report (SOI) presents an interesting take on the current state of the restaurant industry. The findings from the SOI report reveal an industry still grappling with the aftermath of the pandemic, facing significant operational and financial challenges. The evolution of the labor market, supply chain issues, and adoption of alternative revenue streams through merchandising are key trends shaping the restaurant industry's future. This analysis underscores the importance of adaptability, strategic planning, and innovation as restaurants navigate the complexities of the current landscape.

Here's a breakdown of the essential findings and their implications for the industry:

1. Financial Health of Restaurants in 2023:
• Nearly 40% (38%) of U.S. dining establishments reported financial losses in 2023, highlighting the lingering impact of the pandemic on the industry.
• Approximately 43% of restaurateurs are still addressing debt accumulated during the pandemic, indicating long-term financial challenges.
• Two-thirds (67%) of operators expect their 2024 sales to be the same or lower than in 2023, signaling cautious or pessimistic outlooks for the coming year.
2. Supply Chain Challenges:
• The pandemic-induced disruptions in supply chains have persisted, with 77% of operators experiencing delays or shortages in food and beverage supplies and 54% facing equipment issues.
• This has led 60% of restaurant operators to seek new suppliers in an attempt to mitigate these challenges.
3. Operational Adjustments:
• Due to staffing issues, 65% of restaurants reduced their operational hours in 2023.
• A significant portion of establishments (43%) increased their closure days, and over half of full-service restaurants (51%) shortened their sales week.
• These adjustments reflect the ongoing difficulty in finding and retaining staff, making employee acquisition as critical as customer acquisition.
4. Labor Market Dynamics:
• The labor crisis has evolved from a demographic issue, with a shrinking pool of young workers, to a matter of decreasing interest among teens in working at all.
• The workforce participation rate for teens aged 16 to 19 slightly increased to 36.9% in 2023, up from previous years, but it is still significantly lower than the 57.9% participation rate in 1979.
• The U.S. Bureau of Labor Statistics anticipates a continued decline in participation, suggesting ongoing labor challenges for the industry.
5. Diversification Through Merchandising:
• There is an expected increase in restaurants diversifying their revenue streams by selling branded merchandise such as hats or T-shirts.
• This trend is anticipated to grow in 2024, with 60% of full-service and 47% of limited-service restaurants expecting more establishments to engage in merchandising.