Divergence of trends between QSR and Casual Dining and comments on sales trends in Texas!
Yesterday, SONC reported horrific fiscal first quarter 2010 same-store sales trends, with partner drive-in comparable sales coming in down 9.1% relative to the street’s -4.6% estimate and my -5.% estimate. This 9.1% decline implies a 200 bp deceleration in 2-year average trends from the fourth quarter. And, based on management’s comments on the earnings call, the freefall in top-line trends continued into 2Q10. Specifically, management stated, “The environment continues to be a challenging one from the standpoint of the industry, so heavily focused on price and moving into the winter months that's traditionally when there is so much more sensitivity to cost anyway post holiday season, and you add to that the unpredictable weather mix that we've had December moving into January. And our perspective is that the same-store sales will continue to be a challenge moving into our second fiscal quarter, our fiscal quarter ending February.”
SONC is not the only company citing challenging weather in December. This morning CKR reported period 12 comparable sales trends for the period ended December 28 and attributed the 6.5% decline in blended same-store sales to “ongoing weakness in the overall economy coupled with poor weather conditions negatively impacted both brands' sales results during period 12.” Same-store sales at Carl’s Jr. declined -8.9%, pointing to a nearly 130 bp decline in 2-year average trends from the prior period and marks the fifth consecutive month of sequentially worse trends. Hardee’s -3.2% comparable sales decline came in sequentially worse on a 1-year basis but the concept’s 2-year average trends have remained relatively flat for the past 6 months.
So we have gotten two worse than expected data points on QSR trends in December while the only glimpse of December out of the casual dining operators (that I can recall) was the more favorable comment made by Darden. On its last earnings call, the company said, “The sequential improvement in same-restaurant sales has continued so far in fiscal December for both the industry and for our brands after adjusting for the estimated impact of the Thanksgiving shift. However, we're still early in the month and weather can always be a factor in December.” The casual dining operators are facing easier comparisons than the QSR industry, but both SONC’s and CKR’s recently reported numbers point to increasingly worse results on a 2-year average basis.
To that end, Darden did not clarify whether December trends were looking better on a 2-year average basis or whether the improvement is the result of the industry’s (as measured by Malcolm Knapp) easiest comparison from calendar 2008 when comparable sales declined 9.5%. It is important to remember that casual dining trends in November improved on a 2-year basis. We have yet to learn how December played out for the casual dining operators, but like Darden said, weather can always be a factor in December and if SONC and CKR are any indication, weather was a factor.
SONC also pointed to recent weakness in Texas to explain the company’s worse than expected trends. Management stated that the “higher unemployment that we've been experiencing for a while in the more recent past more negatively impacting our brand because of the late impact of the recession on some of our core markets such as Texas and Oklahoma, and so with a more pronounced impact on those markets in the more recent past, their shift having a more pronounced effect on our brand and on our system than some of our competitors.” In an attempt to provide some proof of the slowdown in Texas, management cited the fact that the sales tax collection statewide was -12% in October and -14% in November. And, with SONC having about 45% of its partner drive-ins located in Texas this recent YOY slowdown disproportionately impacts its numbers.
If SONC management is correct in its assessment of the current situation and the macro environment in Texas is largely to blame for its fall off in trends, then that will have an obvious impact on players with high geographic exposure to Texas. EAT, PFCB, TXRH, BJRI and JACK all come to mind. Looking back at the regional trends provided by Malcolm Knapp, Texas was the best performing region of the country in late 2008/early 2009 so on a YOY basis, Texas is currently lapping more difficult comparisons than much of the country.