We are always trying to understand how sustainable any given business plan is.
- Despite the maturity of the QSR category, capital spending as a percent of sales has been ticking up for three quick service restaurant companies. Given the overall macro environment for the industry, I do not believe that this is the right time to be accelerating growth. I watched this happen with the casual dining sector and we know how that played out - supply outpacing demand........
- In this post, we are looking at CKR, JBX and SONC, specifically, and through calendar 2007, the trends don't look too alarming with both EBIT margins and capital spending as a percent of sales increasing steadily since 2004. The problem lies in the fact that EBIT margins (for JBX and SONC) are somewhat stable despite softening top-line results. For CKR, they need to reevaluate the whole business plan...
- With stable margins, management can now justify the increased spending, because the returns appear to warrant such investment. However, as sales trends continue to weaken as a result of a tough environment (and increased value options) combined with our belief that higher commodity prices are not going away anytime soon, we expect to see increased pressure on EBIT margins - erasing the apparent returns of accelerating capital spending.
