CLICK HERE for audio replay & materials link.
After a very challenging 3Q, we took a step back to better understand what will drive restaurant stocks over the next 12-months. For our Best Ideas, we currently only have one LONG (EAT) and two SHORTS (BYND & SHAK). As we enter 4Q and look toward 2021, we want to get more aggressive on both the long and short sides of our names.
These are five key themes that will be playing out as we head into 4Q20 and 2021:
DON’T IGNORE THE INFLATION SIGNAL
The timing of the industry seeing significant protein inflation could not be worse. Most industry participants enter long-term contracts for essential proteins when they can – late 3Q/early 4Q is when many industry participants look to renew contracts. We see significant inflation in many vital commodities, mostly ground beef, meat, poultry, fish, and eggs
ACCELERATING/DECELERATING SAME-STORE SALES
Is it that simple? Do fast money and retail investors just care about acceleration and/or deceleration in same-store sales? What we have learned coming out of the pandemic, is that the absolute level of same-store sales is less important than the rate of change (i.e., are sales recovering). The role of day traders trading on just headlines can have a substantial impact on security prices, and it is not for just a few hours. For the balance of the next six months, most companies will see a rate of change in a positive direction, while a few will see slowing trends. Others have expectations that appear to be too aggressive, given structural changes to consumer spending behavior.
THE BULL MARKET FOR CASUAL DINING
Can casual dining compete with the drive-thru or fast casual counter service? I don’t think we can fully appreciate the magnitude of how the pandemic has impacted independent restaurant operators just yet. The government has helped with the PPP, but even that has fallen short of real, long-term sustainable benefits. Notably, there was no follow-up to the PPP, leaving many restaurant operators looking at a long cold winter. It will take to the spring to know the extent of the damage to independent operators. Still, for the next 6-12 months there will be a supply shortage of dining out options that will benefit sizable, financially strong sit-down dining brands.
ELEVATED FOOD-AT-HOME SPENDING
The supply shortage of restaurants has two notable benefits. As we noted above, casual dining will be a beneficiary, but this will also contribute to elevated food-at-home spending. As General Mills (GIS) reported last week, food-at-home spending slowed in its 4Q20 numbers, but remain elevated relative to pre-COVID levels. We believe that this trend will continue well into 1Q21.
DIGITAL, DELIVERY, & GHOST BRANDS
The COVID pandemic has taken the focus off the Takeaway acquisition of GRUB, while at the same time increasing the importance of delivery to the overall industry. We have a positive bias toward Takeaway, given the historical operating performance and management focus on running a profitable operation. Can Takeaway stem the tide of market share losses for GRUB? Is it still a race to the bottom from a spending perspective? Or did Takeaway purchase GRUB at precisely the right time as an industry disruptor (DoorDash) needs to focus on profitability, given that it signaled to the market its intention to go public? How has the management of Takeaway done with its acquisition of Just Eat, and what are the current trends for the core UK business? The accelerated digitization of the restaurant industry also will play a role in casual dining becoming more successful and more profitable in the future. Is the ghost kitchen the answer to better utilization of the kitchen? Will ghost kitchens usher in an era of new brand launches by the larger chains?
