Yesterday was Day 2 of the annual ICR conference, a three-day conference held in Orlando, FL, and from the beginning of yesterday's presentations, it was clear that a few core topics would dominate the exhibitions: labor cost inflation, technology (namely DELIVERY), struggling same-store sales, and marginally, the oversupply of restaurants/competitors flooding the space. No one in the space is immune to the labor cost contagion, as a few names have even chosen to proactively raise wages in a sign of goodwill. From our perspective, delivery/technology is the next frontier, and operators have continued to push delivery and technology initiatives as a way to expand reach, value proposition, and improve convenience.
Below is a list of the names who presented yesterday, accompanied by some key metrics and other pertinent key takeaways:
Del Taco (TACO): Del Taco is the second largest Mexican-American QSR chain by units in the United States, with 551 units. Overall, the concept, which has system-wide sales of $737M and $1.41M company AUV, is a regional icon on the West Coast of the US, with a differentiated menu showcasing a mix of Mexican-inspired cuisine and American classics.
Del Taco’s preliminary 4Q results were very positive, as company-operated same-store sales came in at +5.3% vs Consensus +4.7%, marking the 15th consecutive quarter of gains. The company reported same-store sales for franchised units of +5.8% vs Consensus +4.3%, and system-wide same store sales of +5.5% vs. Consensus +4.5%, marking the 13th consecutive quarter of gains. Total revenue was approximately $150.2M, representing 12.6% growth from the same period a year ago. The company also discussed their mobile initiative, as they have launched a mobile order app, which they believe will improve the guest experience and differentiate the brand. For 2017, the company expects 50bps of food and paper inflation and with the California minimum wage now at $10.50, TACO expects labor inflation of 5% in 2017. In the long-term, TACO will look toward high single digit system-wide growth; annual same-store sales growth in the 2.5%-4.5% range; and approximately 10% in total revenue growth.
(Source: Company Filings)
Jack in the Box, Inc. (JACK): JACK disclosed that the company has partnered with DoorDash in their California to test delivery. According to management, it is still too soon to share results of the test run, but they did express that consumers were not averse to ordering burgers and fries as a late night meal, despite the tendency for fries to not travel well. According to them, “Consumers are much more forgiving when it comes to delivery, compared to in-store experiences.” JACK’s decision to test delivery falls in line with what we are seeing across the space, as brands are fighting to expand reach and offer greater convenience to customers. In addition to delivery, JACK plans to drive same-store sales through their catering offering and also their mobile app/affinity program.
Shake Shack (SHAK): According to management’s presentation, labor and innovation were top of mind, as they addressed labor pressures their system would be facing as a result of management underestimating the impact that new store openings would have. Labor cost is expected to be higher than initially expected in 4Q16, but management is willing to continue investing in growth and labor for the time being as new units come on line. Full year guidance was as follows: total revenue of $264M to $265M; same-store sales growth of +4% to +5%; 20 domestic company-owned unit openings and 10 franchise unit openings. Following suit, SHAK touched on technology as they disclosed that the last unit recently rolled out mobile ordering. The company expects demand for the app to be highest at peak traffic times.
Wingstop Restaurants Inc. (WING): Wingstop is a differentiated brand with a simple concept and an efficient operating model boasting ~1,000 units, 98% of which are franchised. The big news on the day for WING was the announcement that the brand will now be offering voice-activated ordering, with menu item customization, through Amazon Alexa, making them the first restaurant brand to do so. This partnership appears to make perfect sense, as takeout is 75% of WING’s business, with 50% of orders coming in over the phone. Additionally, management highlighted their brand’s strong unit growth pipeline, with 104 new openings YTD, representing 18% in growth YoY, pushing total domestic units to 882, with potential to reach 2,500 worldwide, according to the company. WING touts an industry leading 58% in domestic unit growth since 2013. WING also has posted a same-store sales figure of +3.9% YTD, with 2016 poised to be the 13th consecutive year of same-store sales growth.
(Source: Company Filings)
Papa Murphy’s Inc. (FRSH): Ahead of its presentation, the company announced preliminary sales results for 4Q16. The company estimates total revenue of ~$35.5M for 4Q16 and ~$126.9M for fiscal 2016. Domestic system-wide same-store sales are estimated to have decreased by -7.8% for the quarter and -5.2% for FY16. The company opened 27 new units system-wide during the course of the quarter, and this brought domestic new unit development to 104 for FY16, a 5% increase YoY.
This year has been challenging for FRSH, and management did not hide from this fact as they stated, “2016 was challenging for us, but we believe those same-store sales figures to be an anomaly, and we expect to get them back on track.” This statement was buttressed by their 2017 same-store sales outlook, which is calling for it to come in at flat to +2%. FRSH hopes to drive same-stores sales through a four-pronged approach, of which includes digital innovation (e-commerce) and delivery. At the crux of their digital innovation is their move to one POS across the system, online/mobile ordering across the system, and precision marketing. Precision marketing is in its infancy as the company continues to build out its database, but it will continue to be a bigger part of their business going forward. According to management, internal research disclosed strong consumer demand for delivery, and as a result FRSH will test delivery in 2017 through a third party.
Del Frisco’s Restaurant Group, Inc. (DFRG): Del Frisco’s Restaurant Group operates three different high-end concepts with 50 restaurants across 23 states and Washington, D.C. and LTM revenues of $343.8M. Del Frisco’s Double Eagle Steak House is the premier fine dining steakhouse in the country and features prime beef and an award-winning wine list. Del Frisco’s Grille is a casual American grille in a casual atmosphere and leverages Del Frisco’s brand positioning at a broader range of price points. Sullivan’s Steakhouse is a vibrant, energetic, white tablecloth steakhouse that features fine hand-selected, aged steaks and a broad seafood offering.
Ahead of its presentation, the company released preliminary fourth quarter and fiscal year 2016 sales results. Consolidated revenues are expected to be between $119M and $119.2M, representing an increase of 4.2%-4.4% from $114.1M. Total comparable restaurant sales increased +0.8%, with comparable restaurant sales at Del Frisco’s Double Eagle increasing by +0.1%, comparable restaurant sales at Sullivan’s Steakhouse increasing +0.9%, and comparable restaurant sales at Del Frisco’s Grille increasing by +2.1%. For the fiscal year, consolidated revenues are expected to be between $351.5M and $351.7M, an increase of 6%- 6.1% from $331.6M. Total comparable restaurant sales is expected to decrease by -0.8%, with comparable restaurant sales at Del Frisco’s Double Eagle decreasing by -1.2%, decreasing by -0.2% at Sullivan’s Steakhouse, and decreasing by -0.7% at Del Frisco’s Grille.
The biggest issue management has seen during the course of the quarter has been the continued drag that the struggling oil market has had on the Houston portion of the business. According to the company, they initially saw the negative impact in the Houston market in 4Q15, and expected the drag to reduce, but not necessary turn positive. Instead, it still had a double digit drag on the business. Management expressed uncertainty regarding when this drag would end.
Chipotle Mexican Grill, Inc. (CMG): Perhaps the most awaited name at the ICR Conference, Chipotle’s presentation was highly anticipated and management picked up where they left off last month. The company announced preliminary sales results for 4Q16 and according to management, comparable restaurant sales for 4Q16 decreased -4.8% vs Consensus -3.5%. Comparable restaurant sales decreased -20.2% in October, decreased -1.4% in November, and increased +14.7% in December. Management expects restaurant operating margin to be in the 13% to 14% range.
The company used the time to reiterate their revised value proposition and operational improvements they believe will address the issues facing the brand. According to CMG, employees were not able to appropriately focus on the operational processes and this caused the business to falter. Going forward, they have revamped their restauranteur program to reflect this culture shift and management expects to see an improved guest experience in FY17 and beyond.
Additionally, CMG will be continuing its push to regain patrons by launching its largest ad campaign in company history this coming April, with an emphasis on taste and ingredients. According to management, the brand had seen an uptick in new patrons, starting in April 2016 and finally outpacing the number of lapsed patrons in July 2016 (please see chart below).
(Source: Company Filings)
On the digital front (Chipotle Digital), the company believes there is a large opportunity to drive growth and brand adoption by modernizing its digital capabilities. To this end, CMG has partnered with third-party delivery services in an effort to expand reach. However, this may work to their disadvantage as it could hamper margins, as it can be inferred that CMG will be paying 10%-15% in delivery fees.
Dave & Buster’s Entertainment, Inc. (PLAY): Dave & Buster’s is an owner and operator of entertainment and dining venues, marketing itself as the only place to “Eat, Drink, Play & Watch” in North America. This unique concept boats 92 locations in 33 states and Canada, all company owned, with total revenues of $969.2M and an industry-leading store AUV of $11.8M.
The Dave & Buster’s management team reiterated their concept’s unique value proposition and differentiated guest experience throughout their presentation, both of which drove the company to revenue growth of 18.6% and same-store sales of +5.9% in 3Q16. Other 3Q16 highlights included the company outpacing Knapp-Track same-store sales figures for the 18th consecutive quarter; the opening of 1 large and 1 small store in 2 new markets (Las Vegas, NV & Fresno, CA); and adjusted EBITDA growth of $14.4M (an increase of 41.6% YoY). Management emphasized its brand’s broad appeal, as it is on-trend with millennials, but also attracts families who crave weekend, summer, and holiday activities. Management also restated plans for global expansion, with seven units slated to open in the Middle East over the next seven years. PLAY is a prime example of a brand capitalizing on and leveraging its differentiation, something that Hedgeye Demographer, Neil Howe, touched on in his recent note titled “Why Restaurants Are Starving.”
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
