RESTAURANT INSIGHTS | January's Retail Feast, TXRH (+), BJRI (-) WEN (-) RBI'S Growth Goals

Resilience and Optimism: Navigating the Economic Landscape of 2024

January's Feast: Surging Sales at Eating and Drinking Places Start 2024 Strong

The 2024 economic outlook is cautiously optimistic after avoiding the predicted 2023 recession. Growth is expected to continue, albeit at a slower pace. The job market remains strong with low unemployment rates; however, hiring is projected to slow down. Inflation is lower YoY and expected to stabilize around 2.5% by year-end. GDP growth anticipates continued economic expansion at 2.2% for 2024. While the economy shows resilience, moderation in certain areas reinforces that challenges remain. However, steady growth suggests the economy can manage potential speed bumps. What does this mean for restaurants? Though perhaps more modest, continued consumer demand provides optimism for restaurant performance. Restaurants will focus on technology efficiencies and labor cost management to manage margins in the moderating growth environment.

The Retail sales data highlights notable trends in consumer spending behaviors, mainly focusing on the resilience and growth of the restaurant sector amidst broader retail spending challenges. Overall, the January data underscores the resilience of the restaurant sector as a critical component of consumer spending, even when other retail sectors face challenges. The sustained growth in restaurant sales in nominal and inflation-adjusted terms reflects a broader consumer trend of prioritizing spending on dining experiences, supported by a strong labor market and some positive economic metrics. This trend suggests a continued positive outlook for the restaurant industry, with potential for further growth in the coming months. Here's a summary and analysis of the key points:

1. Sustained Growth in Restaurant Sales: The restaurant sector has continuously increased sales for 11 consecutive months, specifically eating and drinking places. In January, sales reached 95.1 billion, marking a 0.7% rise from December on a seasonally adjusted basis. This growth is part of a longer-term trend of positive performance in the sector.
2. Contrast with Broader Retail Sector: The broader retail sector, excluding restaurants, experienced a decline in consumer spending, with a 1.1% drop in January. This decline is part of a pattern observed over the last few months, indicating a shift in consumer priorities towards spending on dining out over other retail activities.
3. Comparative Growth Rates: Over the last 11 months, the restaurant sector has significantly outperformed the non-restaurant retail sectors. Restaurants saw a 9.0% increase in sales seasonally adjusted, compared to a modest 0.8% gain in other retail sectors.
4. Economic Factors Supporting Restaurant Sales: A healthy labor market and positive economic outlook have supported consumer spending in discretionary categories like dining out. The sustained growth in restaurant sales suggests that consumers prioritize experiences such as eating out, supported by healthy household balance sheets.
5. Inflation-Adjusted Sales Growth: Even when adjusting for menu price inflation, restaurant sales have shown robust growth, with a 4.3% increase over the last 11 months. This indicates that the sector's growth is not solely due to price increases but reflects a genuine increase in consumer demand and spending.

 

Dutch Bros Braces for 24M-31M in Costs Tied to Arizona Growth

The BROS CEO recently unveiled plans to significantly expand operations to the Phoenix, Arizona office so she did not have to move. By January 2025, the rapidly growing coffee chain expects 40% of total support staff will be located in Phoenix, up from the current level. To facilitate this large-scale transition, Dutch Bros anticipates incurring 24-31 million in aggregate charges over the next few years. Roughly 19-26 million will be employee-related costs for relocation, retention, transition assistance, and severance payouts; the remaining 5 million covers consulting and other expenses. It plans to exclude all costs as non-recurring items from its key adjusted EBITDA metric in 2024-2025. The chain also budgeted 6-10 million in capital expenditures for equipping and upgrading the Arizona office facilities.

BJ's Sales Go Flat as Traffic Trends Worsen

BJ's Restaurants Tops Q4 Earnings Views, But Sales Light

Takeaways from the quarter and we remain SHORT. While earnings were solid, lackluster sales growth in the quarter raises questions about the health of BJ's core casual dining business, which is headed into a potentially challenging consumer spending environment this year.

• Comparable restaurant sales were up 0.6% in Q4. Traffic was down about 6%, but check size grew from about 7-8% in pricing.
• Margins expanded nicely - restaurant-level margins improved by 150 bps to 14.4% in Q4. Adjusting for one-time benefits last year, margins were up 270 bps.
• They expect restaurant margins to continue expanding in 2024, exiting the year at around 16% compared to the 14.4% in Q4 2023. Margin improvement initiatives and cost savings are driving this.
• Comps are negative mid-single digits quarter-to-date in Q1 2024, heavily impacted by weather. They expect Q1 comps to be down low single digits.
• Unit growth planned for 2024 lowered to 3 new restaurants (from 5-7 previously) as they continue optimizing unit economics. The goal is to reduce build cost by 1 million+.
• Remodeling ~20 units again in 2024, focusing on higher investment remodels.
• It increased share repurchase authorization by 50 million - confident in long-term growth prospects.
• They are targeting a G&A of 82-84 million in 2024. Expect food inflation to be flat to up to low single digits and labor inflation to mid-to-upper single digits.

Texas Roadhouse Sizzles Past Q4 Estimates

TXRH is LONG BIas

Texas Roadhouse recently reported fourth-quarter results that topped analyst expectations, driven by better-than-expected comparable sales growth. Earnings per share hit 1.08, surpassing the 1.06 forecast by Wall Street—revenue aligned with consensus views. A key bright spot was same-store sales growth of 9.9% at company-owned restaurants, handily beating projections for an 8.5% increase. Franchise locations were also impressed with +7.9% comp growth versus expectations for 6.4%. Additionally, restaurant margins exceeded estimates. So far in the first quarter, strong momentum has continued, with comps up 6.8% for the initial 50 days. Texas Roadhouse also said it plans to roll out a menu price hike of around 2.2% in late March. For the full 2024 fiscal year, management reiterated guidance for positive comparable sales growth, including the benefit from 2023 price increases. Lastly, Texas Roadhouse announced a quarterly 10.9% dividend boost to 0.61 per share. This lifts the annual dividend yield to 1.82% from the prior 1.64% level.

• Revenue grew 15.3% year-over-year to 1.01 billion, driven by a 9.3% increase in average unit volumes and 6.1% store-week growth.
• Comparable restaurant sales increased 9.9%, driven by 5.1% traffic growth and 4.8% higher average check. Sales remained strong, with January comps at 4.2% and the last three weeks over 10%.
• Restaurant margins expanded 75 bps to 15.3% as price increases helped offset commodity and labor inflation. Commodity inflation for 2023 was 5.6%, as expected.
• Thirty company restaurants were opened across brands in 2023. In 2024, approximately 30 company restaurants are expected to open, more evenly distributed through the year compared to 2023.
• The company accelerated plans for digital kitchen rollouts, now expecting about 200 Texas Roadhouse conversions in 2024. This is expected to drive efficiencies and faster table turns.
• EPS grew 21.3% to 1.08 in Q4. The extra week in 2024 could benefit full-year EPS growth by about 4%.
• Tight cattle supplies are expected to pressure commodity costs more significantly in the back half 2024. However, full-year guidance was reduced slightly from 5-6% to about 5% inflation.
• In summary, robust top-line growth and margins drove another very impressive quarter. Investments in growth and technology position Texas Roadhouse well for continued success in 2024.

Wendy's Bets on Breakfast and Digital to Re-Energize Sales

Breakfast Round Two: Wendy's Takes Another Shot at the Most Important Meal - EPS of 0.21 misses by 0.02 | Revenue of 540.65M (0.77% Y/Y) misses by 6.10M

Wendy's (WEN) recently reported fourth-quarter earnings that fell short of analyst expectations. The fast food chain posted adjusted earnings per share of 0.21, missing the 0.23 forecast by analysts. Revenue also came in below Wall Street consensus estimates. Same-store sales, a key metric in the restaurant industry, increased 1.3% - lower than the 2.5% growth analysts were modeling. Breaking it down further, North American same-store sales rose just 0.9% versus expectations for 1.8% growth. Internationally, same-store sales were up 4.3%, still below the 5.4% increase analysts predicted. In addition to the sales and earnings misses, Wendy's profit margins and adjusted EBITDA margin lagged estimates. Looking ahead, Wendy's issued full-year 2024 guidance calling for adjusted EPS of 0.98-1.02 and adjusted EBITDA of 535-545 million. Both outlooks fell short of Wall Street's projections. Wendy's plans to invest in initiatives to reaccelerate growth over the long run. This includes ramping up breakfast advertising spending by 55 million over the next two years and earmarking 15 million for digital platforms and personalized marketing efforts. Additionally, Wendy's will devote 30 million to installing digital menu boards at all U.S. company-owned restaurants by late 2025. Chief Financial Officer Gunther Plosch mentioned that the U.S. company-operated restaurant margin contracted primarily due to a quarter-over-quarter acceleration in commodity inflation to mid-single digits, customer count declines, and labor inflation of almost 4% in the fourth quarter. These were partially offset by the benefit of a higher average check, driven by cumulative pricing of approximately 4.5%.

The new CEO of Wendy's, Kirk Tanner, outlined several key initiatives to drive growth for the company, as detailed during the earnings call. These initiatives focus on capitalizing on Wendy's strengths and expanding into new growth areas. The growth initiatives for Wendy's are focused on leveraging the brand's core strengths, investing in digital transformation, and expanding the brand's domestic and international footprint. These efforts are aimed at driving sustainable growth and enhancing shareholder value. Here are the main points of the growth strategy under Tanner's leadership:

1. Accelerating Breakfast Sales: One of the most significant initiatives is to boost the breakfast segment, which is a substantial growth lever. Wendy's plans to invest approximately 55 million in incremental company advertising in the U.S. and Canada over the next two years to support breakfast sales. The goal is to increase weekly U.S. breakfast sales per restaurant by 50% over the next two years, aiming to capture a fair share of the breakfast market.
2. Doubling Down on Iconic Offerings: Wendy's intends to leverage its strengths, such as its fresh, never-frozen beef and high-quality menu items, to differentiate itself in the market. The company plans to use platforms like March Madness to highlight these offerings and will introduce new premium flavors, innovative Frosty flavors, and chicken lineup enhancements. The Biggie Bag platform will also be utilized to offer compelling everyday value without compromising quality.
3. Expanding Digital Business: The digital experience for customers is another focal point, with approximately 15 million planned for investment, primarily in 2024, to enhance the mobile app and loyalty capabilities. A new customer data platform has been implemented, and loyalty platforms are evolving to increase personalization and drive higher digital engagement and sales.
4. Investing in Technology and Digital Menu Boards: Wendy's plans to invest in technology to improve the in-restaurant experience and operational efficiencies. This includes rolling out digital menu boards to all U.S. company-operated restaurants by the end of 2025, with an investment of about 20 million and another 10 million to support digital menu board enhancements for the global system. The company expects these investments to drive benefits like order accuracy, sales growth from upselling, and consistent merchandising execution.
5. Global Footprint Expansion: Tanner emphasized the commitment to expanding Wendy's global presence, with plans to add incremental funding to the Build-to-Suit program and continue expanding the company-operated footprint in the U.S. and U.K. The goal is to achieve global net unit growth of north of 2% in 2024, with further acceleration to 3%-4% in 2025.
6. Enhancing Restaurant Margin and Unit Economics: The initiatives aimed at sales growth, such as breakfast expansion and digital sales, are expected to be highly incremental and margin accretive, supporting an acceleration in U.S. company-operated restaurant margin outlook to 16%-17% in 2024.

Here are our takeaways from the WEN Quarter:

Bullish Themes

Confidence in Breakfast Segment Growth: Analysts showed interest in Wendy's breakfast segment, particularly in boosting its sales and the optimism surrounding its growth potential. The company's commitment to investing significantly in advertising and innovation within this segment underscores its potential as a critical driver for future sales growth.

Strategic Focus on Digital and Technological Enhancements: Questions around digital initiatives and investments in technology, like digital menu boards and mobile app enhancements, highlighted Wendy's proactive approach to digital transformation. This focus is seen as a positive move to cater to evolving consumer preferences, improve operational efficiency, and drive sales growth.

Global Expansion and Development Strategy: The interest in Wendy's international expansion plans, especially in mature markets like the U.K., reflects confidence in the brand's growth strategy and potential to scale globally. The company's focus on building its presence in international markets through strategic investments and franchisee partnerships is a positive indicator of its long-term growth outlook.

Bearish Themes

Challenges in Traffic and Competitive Environment: Analysts expressed concerns about traffic trends and the competitive landscape, particularly how Wendy's navigated these challenges. The need to understand the company's strategies for attracting customers and maintaining market share in a competitive QSR sector points to underlying concerns about its ability to sustain growth amid these challenges.

Concerns Over Unit Growth Acceleration: Questions regarding the factors limiting Wendy's ability to accelerate unit growth in 2024, despite a more optimistic view for 2025, highlight concerns about short-term growth prospects. This reflects anxieties about the pace at which Wendy's can expand its footprint and scale its operations effectively.

Margin Pressures and Economic Headwinds: The focus on restaurant margin pressures, particularly due to inflation and labor costs, underscores concerns about Wendy's profitability in the face of economic challenges. While the company has strategies to mitigate these pressures, there's a keen interest in understanding how these factors will impact margins and overall financial health.

Unveiling Growth: How Restaurant Brands International's Strategic Plan Sets the Stage for Global Expansion and Innovation by 2028

Yesterday's RBi Press release highlights the comprehensive strategy showcasing RBI's commitment to leveraging its strong brand foundations, operational excellence, and strategic investments to drive significant growth and shareholder returns over the next five years. Here's is our take and a breakdown of their strategic outline, including growth objectives across various segments based on yesterday's press release:

RBI's Growth Objectives by 2028

Overall Targets: Achieve 40,000 restaurants, 60B in system-wide sales, and 3.2B in Adjusted Operating Income.

Annual Targets: Aim for 3%+ comparable sales, 5%+ net restaurant growth, and 8%+ system-wide sales growth, leading to at least 8% growth in Adjusted Operating Income.

Hedgeye View:  Tim Hortons shows robust market dominance in Canada, particularly in critical segments such as hot brewed coffee, baked goods, and breakfast items. The brand's strategy to grow the PM daypart and expand its cold beverage offerings and digital engagement plans suggest the potential to hit the comp targets. Additionally, the ambition to expand aggressively in the U.S. market underscores a strong growth trajectory.

Brand-Specific Strategies

Tim Hortons (43.55% of total AOI)

Market Share and Operations: Dominant in Canada with significant market shares in hot brewed coffee, baked goods, and breakfast segments.

Growth Focus: Expand PM daypart offerings and cold beverages, leveraging product innovation and digital app engagement.

U.S. Expansion: Aspire to reach 1,000 restaurants in the U.S. by 2028.

Hedgeye View: Tim Hortons shows robust market dominance in Canada, particularly in key segments such as hot brewed coffee, baked goods, and breakfast items. The brand's strategy to grow the PM daypart and expand its cold beverage offerings and digital engagement plans suggest significant upside potential. Additionally, the ambition to expand aggressively in the US market underscores a strong but competitive growth trajectory.

International Segment (27.14% of total AOI)

Expansion Strategy: Utilize well-capitalized master franchisee partners to enter new countries, enhance penetration in established markets, and open 7,000 new restaurants internationally.

Hedgeye View:  Increased Risk and Opportunity. While the international growth strategy is ambitious, with plans to open 7,000 new restaurants, it also carries inherent risks due to global troubles and slowing growth worldwide (Japan, Germany, and the U.K. are all in a recession?) varying market dynamics. The performance could be highly variable and depends on the execution of expansion strategies and the ability to navigate diverse market challenges.

Burger King (17.55% of total AOI)

Brand Strength:  The Whopper's popularity and unique flame-grilling cooking method.

Investment and Growth: Commitment to modernize franchises, primarily through acquiring and refranchising Carrols Restaurant Group's portfolio.

Future Drivers: Modernization, marketing, operational excellence, and guest experience improvements.

Hedgeye View:  Burger King's strength lies in its iconic product, the Whopper, and its unique flame-grilling method. The substantial investment in modernizing franchises and the strategic refranchising plan indicate a long-term growth vision, and it's not without risks to margins. However, the need for a significant turnaround, especially in the U.S., presents challenges that may affect short- to mid-term performance.

Popeyes (10.05% of total AOI)

Brand Identity: Known for authentic Louisiana flavors and high-quality chicken menu items.

Menu Expansion: Continue expanding menu options and increase profitable digital sales.

Operational Focus: Enhance restaurant operations for efficiency and scale U.S. and Canada presence.

Hedgeye View:  This brand has significant potential. Popeyes is recognized for its strong brand identity rooted in authentic flavors and high-quality offerings. The focus on menu expansion, digital sales growth, and operational efficiency positions the brand for substantial growth. The plan to increase its restaurant base in North America further solidifies its potential for success.

Firehouse Subs (1.73% of total AOI)

Brand Recognition: Highly rated for food quality, taste, and community support activities.

Digital and Operational Growth: Scale digital sales channels, improve service speed, and accelerate restaurant growth in new markets.

Hedgeye View:  The emerging growth brand. Firehouse Subs is highly regarded for its food quality and community involvement. The plan to scale digital sales and expand into new markets demonstrates potential. However, as a smaller brand within the portfolio, its impact on overall company performance will be less immediate than the other, more established brands.

Capital Allocation Priorities

RBI emphasizes a balanced capital allocation, investing in high-return opportunities, maintaining a 50-60% dividend payout ratio, and ensuring balance sheet flexibility for strategic initiatives.