The third and final day of the annual ICR conference, picked up exactly where day 2 left off as labor cost inflation, technology & delivery, struggling same-store sales, and marginally, the oversupply of restaurants/competitors flooding the space controlled the conversation for the day. However, commodity deflation/inflation was also a hot topic, as a few operators reported commodity deflation working to offset some of the labor inflation they experienced throughout the year.
Below is a list of the companies that presented yesterday, accompanied by some key metrics and other pertinent key takeaways:
The Habit Restaurants (HABT): The Habit Restaurants, Inc. is a fast casual concept specializing in burgers, sandwiches, salads, sides, shakes, and more. Founded in Santa Barbara in 1969, the operator now has 172 units in the United States (132 in California), with two international locations. The company touts 51 consecutive quarters of same-restaurant growth and an AUV of $1.9 million, a 42% increase since 2010. Going forward, the company projects same-restaurants of 2%-4%, unit growth of ~20%, and adjusted EBITDA to be ~20%.
During the course of the fireside chat, management touched on various topics concerning their business, but perhaps the most important tidbit came when asked about margin outlook going forward. Management emphasized that labor inflation was the biggest headwind they faced during FY16. Specifically, they cited wage inflation of approximately 8% for CY16, with 90bps of additional pressure coming from other labor related expenses. For what it’s worth, management sees labor inflation moderating in 2017, but is still projecting that it will be in the 6%-8% range. In order to stay ahead of this, HABT has integrated a KDS in their kitchens, with the hopes of generating more sales per labor hour. By increasing efficiency in the back of the house, HABT will look to utilize managers more predominantly in the front of the house, in an effort to streamline operations. When asked about the company’s plans to combat the volatile restaurant environment, management expressed that the environment was challenging, especially given the aggressive promotional activity (“People are giving away a bag of food for $4”), but cited their everyday value and LTOs as key differentiators for the brand.
Fogo de Chão (FOGO): Fogo de Chao is a leading Brazilian steakhouse, which has specialized for over 37 years in fire-roasting high-quality meats utilizing the centuries-old Southern Brazilian cooking technique of churrasco. Fogo delivers a distinctive and authentic Brazilian dining experience through the combination of high-quality Brazilian cuisine and a differentiated service model known as continuous service delivered by gaucho chefs. With 33 units in the United States (10 in Brazil, 2 in Mexico City), FOGO is focusing its growth prospects on the most dense of the US, in order to drive traffic and frequency to restaurants (AUV’s currently sit at $8.5 million). This strategy has benefited the company thus far, as it continues to outpace Knapp-Track traffic figures.
(Source: Company Filings)
FOGO’s long tern financial goals include: at least 10% company-owned restaurant unit growth; low-single-digit annual consolidated comparable restaurant sales growth; at least 13-15% annual EBITDA growth; and 18-20% annual EPS growth. In addition, FOGO benefited from beef deflation in 2016.
Red Robin Gourmet Burgers, Inc. (RRGB): Red Robin is a casual dining restaurant chain focused on serving an innovative selection of high-quality gourmet burgers in a family-friendly environment, boasting ~553 units, 84% of which are company owned. Ahead of its presentation, RRGB announced preliminary sales results for 4Q16. The company estimates that total revenues will be ~$290.8 million versus consensus estimates of $299.6 million; comparable restaurant sales are expected to fall by -4.5% versus consensus expectations of -2.7%; and comparable guest count is expected to decrease by -2.9% versus consensus expectations of -1.8%.
During the course of their presentation, management reiterated their key initiatives, all of which we discussed in our note titled “Shedding More Light.” Management’s focus on their 4-wall performance is starkly different from their peers, who are focused on unit growth and continued expansion. Additionally, management disclosed that their initiatives were paying dividends, as they continue to see improved traffic. According to RRGB CEO Denny Marie Post, “The initiatives we put in place last fall – our new $6.99 every day value items, improved speed to table…We outperformed casual dining industry traffic trends by 243bps in 4Q16 and saw further improvement in guest service ratings.”
(Source: Company Filings)
We view these positive trends continuing for the brand as they layer on off-premise initiatives such as carry-out, delivery, and catering later this year. According to new CFO, Guy Constant, RRGB’s on-demand mix is only 4-5% of their business, whereas their competitors stand at 10-11%. By focusing on differentiating their service and giving their customers what they want, RRGB can gain significant ground. Mr. Constant put it perfectly when he stated, “our goal at RRGB is to give guests WHAT they want, WHEN they want it, WHERE they want it and HOW they want it.”
RRGB remains a Hedgeye Best Idea LONG.
El Pollo Loco, Inc. (LOCO): El Pollo Loco is a differentiated QSR+ concept specializing in fire-grilled, citrus-marinated chicken and focusing on high quality food at a great value. LOCO has 460 units (373 in California), 44% of which are company-operated; system wide sales of $785 million, and 21 consecutive quarters of positive same-restaurant sales. Going forward, LOCO expects to see 2-3% annual same-restaurant sales growth; 10-15% annual EBITDA growth; and 10-15% annual EPS growth.
Management’s presentation focused on their growth strategy, leveraging mobile technology to drive the business forward, and labor costs headwinds. With regard to their growth strategy, LOCO is planning to increase comp sales through menu innovation, marketing initiatives, enhanced operations, and improved asset design (75% of units are either new or remodeled). Management sees the potential for an additional 1,900 restaurants nationwide, with a focus on the southwest and Texas. Long term, LOCO is targeting unit growth of 8-10% annually. The company also has various digital initiatives in the pipeline, including an online/mobile order app launched in 4Q16, third-party delivery launching in 1Q17, a loyalty program starting in 2Q17, and self-service kiosks planned for year-end 2017. Lastly, LOCO saw significant labor cost inflation in 2016, as expected for a brand with a heavy presence in California, whose minimum wage has increased to $10.50. According to management, sales at California are still very strong.
Popeyes Louisiana Kitchen, Inc. (PLKI): Popeyes’ preliminary fiscal 2016 operating results were positive, as global same-store sales came in at +1.7% vs. Consensus +1.7%, and compared to a previous guidance of 1-2%. Global new restaurant openings are expected to be 216, compared to the company’s previous guidance of 200-235 units. Adjusted EPS is expected to be $2.10-$2.12 vs. Consensus $2.11, and compared to their previous guidance of $2.10-$2.15. In the fourth quarter, global same-store sales increased +2.8%, with domestic same-store sales of +3.0%. Additionally, Popeyes opened 52 domestic and 37 international restaurants during the fourth quarter.
According to management, the Popeyes brand had a raucous year as result of deep discounting by competitors, the increase in the restaurant base, the widening of the FAH vs FAFH price gap, and increased competition from the low-quality QSR segment, which they classified as gas stations and convenience stores. For the most part, this further reiterated what we have been hearing and seeing. However, the convenience store aspect seems to be a marginal competitor, as those places do not tend to offer the breadth of product at the quality that Popeyes offers.
Domino’s (DPZ): Domino’s used their time at ICR to reiterate their core value proposition as a global, innovative technology leader with a strong franchise model. With 51% of retail sales coming from international units and 22 consecutive quarters of international SSS growth, it is clear that DPZ has the wind to its back for the time being, as strategic advertising and unit remodels continue to push the brand ahead of its competitors.
The company outlined plans for global unit growth of +5-7%, domestic same-store sales of +2-5%, international same-store sales of +3-6%, and global retail sales growth of +7-11%. DPZ’s use of technology will continue to push them ahead of the competition for the time being, but as we’ve seen throughout the ICR conference, technology and delivery is top of mind for many companies. With that being said, DPZ’s position within the space will eventually face some challenges.
Texas Roadhouse (TXRH): TXRH is a 515 unit casual dining chain that operates restaurants across the United States and in five foreign counties.
Texas Roadhouse’s fireside chat was quite substantive, as management shed meaningful light on how they are positioning the business and initiatives they have undertaken to drive sales and customer engagement. To start, Scott Colosi addressed how TXRH is able to serve 15-20% more guests now than they did five years ago, despite their competitors serving 10-15% fewer guests today than they did five years ago. According to him, TXRH is very conscious of the guest experience and has worked hard to make sure that this part of their value proposition is maintained. For TXRH, this commitment starts with how they pay their general managers (Managing Partners). Each Managing Partner receives a base salary, and also 10% of the net income of their respective restaurant; this essentially creates an ownership mentality across the entire business. Additionally, TXRH has strived to reduce guest wait times by focusing on speed of service and utilizing a Guest Management System that helps employees efficiently seat guests.
TXRH experienced labor inflation throughout 2016, but also saw beef deflation. Company margins benefited from beef deflation, as it helped to offset some of the labor inflation experienced by the company. Going forward, management is projecting mid-single digit wage inflation in 2017. States like New York saw tip wages increase to $7.50, from $5; and the company went ahead and gave their managers wage increases as a sign of goodwill, and this alone will account for ~100bps. Beef prices are expected to be down once again in 2017, and TXRH expects low single digit commodity deflation in 2017 (The company has already locked in prices for ~55% of its commodity basket for 2017).
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
