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Franchisors Outperform as Restaurant Sales Slow · Choppin’ It Up by Bloomberg Intelligence

0:20
Speaker 1: Welcome to Chopping it Up. I'm your host, Mike Halon,
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Speaker 1: the senior restaurant and food service analyst at Bloomberg Intelligence.
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Speaker 1: We got a go one today. We're joined by Howard Penny.
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Speaker 1: Howard's the managing director, consumables analysts and overall restaurant guru
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Speaker 1: at hedge Eye Risk Management. For those of you who
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Speaker 1: aren't familiar with Hedge Eye, the firm does a great
0:42
Speaker 1: job helping its clients, including institutional investors, retail investors, and corporations,
0:46
Speaker 1: navigate the markets and the economy. Thanks for doing this, Howard.
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Speaker 2: Hey, thank you. Michael. Glad to be here.
0:53
Speaker 1: Yeah, man, this is this is cool. I've been looking
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Speaker 1: forward to this one. Why don't you just start us
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Speaker 1: off by telling the listeners a bit about Hedge Eye
1:00
Speaker 1: and how your research differs from the traditional cell side
1:03
Speaker 1: research that's out there.
1:04
Speaker 2: Sure. So, HEDGEI has been around for about fifteen years now.
1:09
Speaker 2: We started with four of us, basically in Keith Softas
1:12
Speaker 2: Keith McCullough's my boss, founder of PEDGI as a consumer analyst. Right,
1:18
Speaker 2: so we've had four consumer analysts that got together. It's
1:21
Speaker 2: an independent research firm, so we don't manage money We
1:25
Speaker 2: don't trade stocks. We literally get paid by providing money
1:29
Speaker 2: making ideas to clients and if you know, they can
1:32
Speaker 2: fire us every four every three months if they don't
1:35
Speaker 2: like us, which is why what I really like about
1:39
Speaker 2: it is because we are literally focused on picking stocks
1:41
Speaker 2: and making money and that's you know, that's the name
1:44
Speaker 2: of the game, frankly. And so we've got as I said,
1:49
Speaker 2: we've been in business for fifteen years. We now have
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Speaker 2: what I'm a sector head that I cover as you said,
1:55
Speaker 2: I cover consumer wolves. There are twelve of us now
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Speaker 2: there's seventy employee East total. H and Keith does my
2:02
Speaker 2: boss does commodities, countries' currencies, and manages the overall business.
2:10
Speaker 1: Yeah, it's a great product. And I really like what
2:13
Speaker 1: you said about there about picking stocks and helping your
2:16
Speaker 1: clients make money. I feel like on the cell side
2:18
Speaker 1: sometimes that gets put to the back burner.
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Speaker 2: You know, Well, it makes me independent, right, Elements of
2:25
Speaker 2: it more important because there's a lot of times when
2:29
Speaker 2: you you can talk to management teams and they'll tell
2:34
Speaker 2: you one thing, and if you're trying to do a
2:37
Speaker 2: raise the Flag tour and take them on some promotional
2:39
Speaker 2: tour to visit clients you're going to you know, buy
2:42
Speaker 2: into what they're saying, right and uh and not have
2:45
Speaker 2: you know, some independent thinking which allow you to come
2:49
Speaker 2: to sometimes different conclusions than the traditional seal side analysts
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Speaker 2: at for sure.
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Speaker 1: So what you know, Onyce, you kick us off too
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Speaker 1: about you know about talking about the macro outlook at
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Speaker 1: a hedgehie.
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Speaker 2: So, so we're pretty bearish right now on the consumer,
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Speaker 2: and I think that's probably not I mean, I don't
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Speaker 2: know if that's out of consensus right now, but we're
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Speaker 2: pretty barissed about where the consumer's heading, especially into the
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Speaker 2: fourth quarter, in terms of you know, we're we're what
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Speaker 2: I guess September one, people are starting to accrue interest
3:24
Speaker 2: on their student loans again. October first, people are gonna
3:27
Speaker 2: have to start making paying student loans again. I don't
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Speaker 2: know if you saw this, Michael, but McDonald's traffic mismeasured
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Speaker 2: by placer has gone through a I think a five
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Speaker 2: week sequential deceleration and is now negative for the first
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Speaker 2: time in two years, which is remarkable. And then if
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Speaker 2: you put that together with dollar general and you know
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Speaker 2: a few other things, what Momart's saying the low end consumer,
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Speaker 2: I think is really struggling, and I think it's getting worse, frankly,
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Speaker 2: So we're we're pretty bearish in terms of, you know,
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Speaker 2: where the consumers headed headed, sorry for the next for
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Speaker 2: the next three months and into the first quarter. And
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Speaker 2: then when you think about the restaurant industry in particular,
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Speaker 2: you know, we had the industry had a difficult period
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Speaker 2: in July and August last year because of gas prices
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Speaker 2: and what that been, the pressure that put on sales,
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Speaker 2: and we're now heading into a period where comparisons get
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Speaker 2: really difficult for the industry. So we see a lot
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Speaker 2: of challenges ahead, especially for the consumer, and that's being
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Speaker 2: echoed with what I think companies are saying. And you know,
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Speaker 2: Dollar General I think is probably the stock as you
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Speaker 2: are right in terms of talking about what the low
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Speaker 2: end consumer's doing. But then you have companies like Chipotle,
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Speaker 2: which completely you know, they're not seeing any of that,
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Speaker 2: and they're talking about a strengthening of the consumer, which
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Speaker 2: is a little counterintuitive to you know, what most of
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Speaker 2: the macro data is showing. But we're pretty embarrasses to,
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Speaker 2: you know, pretty as to what things are going to
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Speaker 2: look like heading into the end of the year.
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Speaker 1: Yeah, I hadn't seen them Donald's data yet, but that's cure.
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Speaker 1: That's interesting because in the second quarter they were one
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Speaker 1: of the few restaurant chains that didn't see a deceleration
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Speaker 1: in their four years seem star sales trend. So and
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Speaker 1: you know, with fourteen thousand stores in the United States,
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Speaker 1: I think that's a pretty good indicator maybe of where
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Speaker 1: things are going. And you know, in Chipotle, you know,
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Speaker 1: that one's interesting because people give them a pass because
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Speaker 1: they've done so well over the last few years, but
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Speaker 1: their their trends and Starbucks as well, slowed pretty significantly
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Speaker 1: in the second quarter, but they kind of got a
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Speaker 1: pass by the street.
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Speaker 2: Yeah, and you know, understandably. So, I mean, David Nicol
5:38
Speaker 2: has done a tremendous job fixing Chipotle since he's been
5:43
Speaker 2: in the business, or since he's been running the business,
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Speaker 2: and coming out of the pandemic, they were the best
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Speaker 2: performing chain in terms of margin improvement EBIT margin improvement.
5:53
Speaker 2: I think their EBIT margins relative to twenty nineteen or
5:56
Speaker 2: up some eight hundred basis points for something ridiculous like that.
6:02
Speaker 2: So they've done a great job running the business. So
6:05
Speaker 2: he deserves the accolades that he's had, but it feels
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Speaker 2: like that story is in evidence, not just feels like,
6:12
Speaker 2: but there's evidence that's that story is getting a little
6:15
Speaker 2: long in the tooth.
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Speaker 1: Yeah, yeah, and the evaluations rich to be sure, they
6:22
Speaker 1: finally fixed one of the issues I had with it,
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Speaker 1: which was they were didn't want to franchise internationally forever
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Speaker 1: and growth just it was non existent. So signing up
6:34
Speaker 1: with All Shai in the Middle East, I think is
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Speaker 1: a good start. Obviously, it's going to take some time
6:39
Speaker 1: for that part of the business to move the needle though.
6:42
Speaker 2: Yeah. They well so interestingly enough, right, So, yes, they're
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Speaker 2: going to franchise parts of the you know, the international component,
6:51
Speaker 2: but they're also beginning to invest in you know, they
6:54
Speaker 2: do run fifty stores outside the United States and Canada,
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Speaker 2: so they're going to be investing in infrastructure to be
7:02
Speaker 2: able to grow the store base. Because that's how I mean,
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Speaker 2: if they're going to keep that you know, sort of
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Speaker 2: mid single high single digit unit growth story going, right
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Speaker 2: in two years, they're going to need an international component
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Speaker 2: to it. So spending is going up to support the
7:17
Speaker 2: infrastructure needed to keep that. There were two accelerate international
7:22
Speaker 2: unit openings.
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Speaker 1: Yeah, for sure, so I think they're planning on ten
7:26
Speaker 1: new company owned stores in Canada, but i'd like to
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Speaker 1: see them ref you know, maybe if Canada, if they
7:32
Speaker 1: have an opportunity to build stores there, that makes sense.
7:34
Speaker 1: But I don't like to see them refranchise the UK
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Speaker 1: and Germany and try to accelerate that that that growth overseas.
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Speaker 1: But you know, who knows, we'll see still such a
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Speaker 1: small piece of that business. But it's interesting, you know,
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Speaker 1: and you talked a lot about the restaurant traffic slowing
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Speaker 1: here in the US. What are some of the trends
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Speaker 1: that are causing that?
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Speaker 2: So I think there's a couple of things. Consumer I'll
7:59
Speaker 2: say consumer normalization is one. So the return to full
8:04
Speaker 2: service restaurants. Right, You're no longer spending much as much
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Speaker 2: on large group meals through drive throughs, right, so the
8:13
Speaker 2: average check, So that drove average check much higher into
8:17
Speaker 2: the pandemic. So as that's coming back, you're seeing a
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Speaker 2: slowing in sort of people buying singular entrees instead of
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Speaker 2: you know, four people that are going with your family
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Speaker 2: for through a drive through. Independence are also coming back,
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Speaker 2: So I think there is a you know, not a
8:35
Speaker 2: new popularity, but maybe independence are becoming more popular again.
8:40
Speaker 2: They were very popular heading into the pandemic, but obviously
8:44
Speaker 2: struggled into the pandemic and coming out of the pandemic.
8:46
Speaker 2: So and you're seeing that in the case volumes for
8:49
Speaker 2: the distributors. So you know, Cisco and some of the
8:52
Speaker 2: other companies are showing pretty good case volume growth, you know,
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Speaker 2: low single day to case volume growth, but not like
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Speaker 2: the decline to three percent decline in traffic that you're
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Speaker 2: seeing for you know, the whether it's black Box or
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Speaker 2: an Aptrac, which are the two big companies that measure
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Speaker 2: sales for the industry. Price is also coming in, So traffic,
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Speaker 2: as I said, has been negative, but you're seeing menu
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Speaker 2: prices come down significantly, so which is also helping or
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Speaker 2: hurting depending on how you want to look at it.
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Speaker 2: And then you know, Walmart on their most recent conference
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Speaker 2: called sort of mentioned specifically the consumers are stretching their
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Speaker 2: dollars further and seeking better value across more categories, right,
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Speaker 2: and they said specifically grocery staples and in home meal
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Speaker 2: options were being purchased more often. So you've got that
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Speaker 2: element to it, So, which kind of gets back to
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Speaker 2: what we were talking before about you know McDonald's right,
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Speaker 2: and McDonald's seeing a deceleration. I mean if if people
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Speaker 2: are buying you know, in home meals at Walmart, right,
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Speaker 2: which their grocery business is doing really well, that's that's
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Speaker 2: not an insignificant competitor for the restaurant industry. So and
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Speaker 2: all this is going to have you know, an impact
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Speaker 2: into the fourth quarter and into twenty twenty four for
10:16
Speaker 2: Morgi dollars and margin dollar growth for how that's going
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Speaker 2: to look into especially into the fourth quarter. So if
10:22
Speaker 2: you've got you know, independence coming back, price coming down,
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Speaker 2: supermarkets are more competitive, Labor inflation is still around, right,
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Speaker 2: that's not going away. Well, there is some you know,
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Speaker 2: food costs are coming down. There could be some margin
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Speaker 2: pressure heading into the fourth quarter and certainly into twenty
10:38
Speaker 2: twenty four for a lot of these restaurant companies.
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Speaker 1: Yeah, for sure. I guess there was two pieces of
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Speaker 1: that that I you know, find interesting. You know, one
10:46
Speaker 1: thing is how bad traffic's been, even though a lot
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Speaker 1: of these group orders are breaking into individual orders, and
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Speaker 1: I know some chains try to do their best to
10:55
Speaker 1: count entrees on a large order, but you know, how
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Speaker 1: much how bad is traffic really if they're getting some
11:03
Speaker 1: sort of a benefit there with orders fracturing, right, So.
11:08
Speaker 2: The biggest culprit is shake check. Like they're like to me,
11:12
Speaker 2: they're they're they're a perfect example of what you're saying, right,
11:16
Speaker 2: because you know, I don't remember the exact numbers off
11:20
Speaker 2: the top of my head, but they're they're saying their
11:23
Speaker 2: traffic was down like one to two percent, right. But
11:26
Speaker 2: you know, if you look at the difference between menu
11:28
Speaker 2: price and mix and what their traffic is, that the
11:32
Speaker 2: traffic suggests that it's down four or five percent, not
11:35
Speaker 2: down one to two percent. But that totally can be
11:39
Speaker 2: accounted for the way they count for entrees, right, So
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Speaker 2: if you're one person coming in and ordering for four
11:46
Speaker 2: four entrees, right, that's you know, one, that's just one person, right,
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Speaker 2: But but really entrees are down four percent or four
11:56
Speaker 2: or three or four it's kind of depending on what
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Speaker 2: the number is. So they're kind of like, for me,
12:00
Speaker 2: the poster child for what you're talking about and the
12:05
Speaker 2: way people really count on trees. And there's something to
12:07
Speaker 2: do it, right, But I think and I like to
12:10
Speaker 2: pick on Shakeshack.
12:14
Speaker 1: I know you do. We've been picking on Shakeshack since
12:16
Speaker 1: the IPO together. But yeah, we'll get back into shakeshack
12:22
Speaker 1: because I asked you questions. I want to know what
12:24
Speaker 1: you think about, uh, the activists and stuff like that.
12:26
Speaker 1: But so we'll return to that. The other thing that
12:29
Speaker 1: I found interesting, you know that that really resonated with
12:32
Speaker 1: me with your land last answer was, uh, you know
12:35
Speaker 1: about the food at home versus food away from home,
12:38
Speaker 1: and restaurants are trying to catch up with the pricing
12:41
Speaker 1: this year, and so there's a massive delta right now
12:44
Speaker 1: in terms of inflation at eating you know, in a
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Speaker 1: restaurant versus what we're seeing at the grocery store.
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Speaker 2: Right Yeah, And I you know, I have I struggle
12:54
Speaker 2: with that metric because a lot of people like to,
12:57
Speaker 2: you know, sort of look at the absolute levels in
12:59
Speaker 2: place and say, okay, restaurant prices are going up more
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Speaker 2: than you know, supermarket prices the other way around, and
13:06
Speaker 2: this is going to impact consumption when the reality of
13:08
Speaker 2: it is, it is always significantly cheaper to go to
13:13
Speaker 2: a supermarket and buy your food and bring it home
13:15
Speaker 2: and cooking, right because you are doing the cooking, you're
13:18
Speaker 2: doing the dishes, and you're doing the cooking. So no
13:21
Speaker 2: matter what that stat says it's always cheaper to go
13:24
Speaker 2: buy you can buy a dozen eggs for six bucks
13:27
Speaker 2: and you know, and have four meals, right if you
13:30
Speaker 2: want to eat eggs for two days. Right. So I
13:33
Speaker 2: just don't like, I understand how people want to look
13:36
Speaker 2: at it that way, but the fact of the matter
13:39
Speaker 2: is it will always be and has always been cheaper
13:42
Speaker 2: to go to a supermarket and buy a meal and
13:45
Speaker 2: bring it home. Now.
13:46
Speaker 1: Yeah, And it was such a big talking point in
13:48
Speaker 1: twenty twenty two for all these companies like, yeah, well
13:51
Speaker 1: we're raising our prices, but they're not up as much
13:53
Speaker 1: as the grocery stores. And it was like it was
13:55
Speaker 1: like Equity Capital markets guys all over the street. We're
13:59
Speaker 1: just like telling it, you know, parading this to all
14:01
Speaker 1: the management teams, and then the management teams will get
14:03
Speaker 1: on the call and all say the same thing, and
14:05
Speaker 1: you're one hundred percent right, it's always cheaper to eat
14:08
Speaker 1: us myself. Yeah, okay, cool. So you think the second
14:15
Speaker 1: half of the year is going to be difficult transition,
14:19
Speaker 1: and you talked about some of the things that are
14:22
Speaker 1: going on with the macro, some of the things that
14:24
Speaker 1: are going on with inflation. You know, is there anything
14:29
Speaker 1: else you think that we should should should mention. You know,
14:31
Speaker 1: labor inflation continues to be pretty high for the industry.
14:34
Speaker 2: Right, I mean, I think that's the you know, the big,
14:37
Speaker 2: the big wild card sort of into the fourth quarter,
14:40
Speaker 2: because you don't, you know, depending on what your menu
14:43
Speaker 2: looks like, whether you're a bee centric, chicken centric, or
14:45
Speaker 2: seafood centric, right, you're gonna have different levels of food inflation. Right.
14:50
Speaker 2: You're seeing red meat prices are still very inflationary. So
14:54
Speaker 2: if I was to pick a group a menu, right
14:57
Speaker 2: or not to pick on shakescheck again. But just think
15:02
Speaker 2: of a ret meat centric menu that has food inflation
15:06
Speaker 2: and labor inflation and pricing coming in. Those groups of
15:10
Speaker 2: names are going to have the most trouble in the
15:13
Speaker 2: fourth quarter, right because you're still seeing four to five
15:17
Speaker 2: percent labor inflation, and that's probably not going to go lower.
15:20
Speaker 2: It's not nine percent anymore, it's not eight percent anymore,
15:24
Speaker 2: but there is still going to be labor inflation and
15:27
Speaker 2: there will never be deflation right way in a wage
15:30
Speaker 2: is always going to go up, and you're always going
15:34
Speaker 2: to find you one concept competing and get another concept
15:37
Speaker 2: for a restaurant manager or you know, having to pay
15:40
Speaker 2: bonuses to lure people to come to your concept, whatever
15:43
Speaker 2: the structure may be. But labor inflation will always be there.
15:46
Speaker 2: So the wild card really is going to be food
15:49
Speaker 2: inflation for some concepts into the fourth quarter, so you
15:52
Speaker 2: got slowing sales for a number of reasons. We got
15:56
Speaker 2: Manu prices coming in. So then the determining factor is,
15:59
Speaker 2: you know, what what the labor inflations look like and
16:03
Speaker 2: what the margin structure is for a lot of these companies.
16:05
Speaker 2: And then into the first quarter of next year when
16:08
Speaker 2: the when we're up against just insane comparisons. It just
16:14
Speaker 2: it's really going to be a difficult time for a
16:16
Speaker 2: lot of these names. And across the board. I don't
16:20
Speaker 2: know anybody that's not gonna that's going to do well. Frankly,
16:24
Speaker 2: even even the mighty Chipotle is going to struggle into
16:27
Speaker 2: the first quarter.
16:28
Speaker 1: Yeah, well, we know they've raised prices a lot over
16:31
Speaker 1: the last you know, three years, but yeah, yeah, this
16:34
Speaker 1: inflation thing is interesting. Man. So I'm a fan of
16:38
Speaker 1: Jim Rodgers and his book Cut Hot Commodities. I don't
16:41
Speaker 1: know if you've ever read it.
16:42
Speaker 2: No, I have not.
16:44
Speaker 1: You have to, you have to. He talks about the
16:47
Speaker 1: history of commodity cycles and on average they last seventeen years,
16:50
Speaker 1: and he goes into all the details of why they last.
16:53
Speaker 1: And it's just such a great, clearly written book. And
16:57
Speaker 1: you know, throughout history, you know, we've seen it repeat
17:00
Speaker 1: over and over, and the last cycle was shortened. I
17:05
Speaker 1: don't know why. Maybe I haven't he hasn't written a
17:07
Speaker 1: follow up book to it. Maybe because of you know,
17:10
Speaker 1: technological advances in drilling and fracking and all these different things.
17:16
Speaker 1: But if he's right, you know, about these cycles, and
17:21
Speaker 1: if we're at the beginning of another commodity cycle, which
17:25
Speaker 1: could last anywhere from ten to twenty years, you know,
17:30
Speaker 1: that could be troublesome for restaurants. I mean, the industry
17:34
Speaker 1: has definitely benefited from very modest inflation for a very
17:38
Speaker 1: long time. So that's always something I just kind of
17:41
Speaker 1: keep in the back of my head. But you should
17:42
Speaker 1: check that book out. I think you'd really like it.
17:46
Speaker 1: I will, okay, So, based on all the things that
17:49
Speaker 1: you mentioned, all the difficulties, and you know, you know me,
17:52
Speaker 1: i'mbarished with you. I couldn't agree more. Who do you
17:55
Speaker 1: think is going to win? And who do you think
17:57
Speaker 1: is going to lose in this environment that we're entering.
18:00
Speaker 2: Yeah, so I just add one more thing to what
18:02
Speaker 2: you were saying before. You know, it's surprising to see
18:06
Speaker 2: in the second quarter the number of companies that missed
18:10
Speaker 2: revenue estimates. Right, So they missed revenue but beat earnings, yep. Right. So,
18:17
Speaker 2: but when you're running six, seven, eight, nine, ten, whatever price,
18:21
Speaker 2: it's easy because that flows through at ninety nine percent
18:25
Speaker 2: gross margin. Right, you can beat earnings, but sales are slowing.
18:28
Speaker 2: That's going to get worse into the second quarter, right, Yet,
18:32
Speaker 2: roll off prices are rolling off, you know, and traffic
18:36
Speaker 2: is slowing, and the and the sell side analysts don't
18:41
Speaker 2: it's not real time like they'll wait to hear from
18:44
Speaker 2: the management team to lower their estimates or raisor estimates
18:47
Speaker 2: or whatever it may be. So I was surprised to
18:50
Speaker 2: see the number of even Chipotle missed revenue estimates for
18:54
Speaker 2: the second quarter, right, And that's only going to get
18:57
Speaker 2: worse because we're still seeing sales slowing, right and and
19:01
Speaker 2: as estimates are not coming down. So it's just one
19:06
Speaker 2: of those things that I just wanted to add to
19:08
Speaker 2: that because I was just thinking about the issues that
19:11
Speaker 2: we're going to be facing into the third and fourth quarter,
19:13
Speaker 2: and certainly into the third quarter because sales continues. So
19:16
Speaker 2: now you can ask that question again.
19:19
Speaker 1: Who's going to win and who's winners?
19:21
Speaker 2: Yeah, so we're pretty pretty bearish. We don't have many
19:27
Speaker 2: winners right now.
19:29
Speaker 1: Well, everything's gone straight up for six months.
19:31
Speaker 2: Yeah, we do, like we do like Dominoes. Frankly, young
19:36
Speaker 2: young Dominoes in the big franchise companies are pretty much,
19:42
Speaker 2: you know, sort of the top of the list. I
19:44
Speaker 2: guess you could say, but let me just check who
19:48
Speaker 2: else do I have here? So we've got restaurant I'm
19:52
Speaker 2: a big fan of what's going on at restaurant brands, Dominoes, uh,
19:56
Speaker 2: you and then and then we're there's a couple of
20:01
Speaker 2: names that we want to buy into the downturn, uh,
20:05
Speaker 2: that we're going to see coming into the fourth quarter,
20:07
Speaker 2: like Darden. Taste has been on the long list for
20:10
Speaker 2: us as well. First Watch. I think First Watch is
20:13
Speaker 2: a really cool little company. Frankly, it's a you know,
20:17
Speaker 2: a breakfast, brunch and lunch concept.
20:19
Speaker 1: But those are one shift model.
20:21
Speaker 2: Yeah, I love it, but those are the ones that
20:24
Speaker 2: sort of stick out to me as as the winners,
20:28
Speaker 2: and I actually have a brinker as along as well.
20:32
Speaker 2: I think there's some interesting things that are going on there,
20:34
Speaker 2: but you know that's a longer tail turnaround. Mm hmm.
20:40
Speaker 1: All right, cool, so let's go, I guess for the
20:42
Speaker 1: Winter Winners. Yeah, you know, I think we're on the
20:46
Speaker 1: side seams side on most of these. Russell Wiener I'm
20:48
Speaker 1: a fan of, and I'm a fan of his former mentor,
20:51
Speaker 1: Patrick Doyle. I think restaurant bands is I think it
20:56
Speaker 1: sounds like he's changing the culture over there and changing
20:58
Speaker 1: the focus and and and kind of got management focused
21:00
Speaker 1: on the right things. So yeah, it's interesting. What are
21:06
Speaker 1: your thoughts on on the turnaround at restaurant brands and
21:11
Speaker 1: what they're doing at BK and Popeyes right now?
21:13
Speaker 2: Yeah, so I think it's it's the focus on what matters,
21:20
Speaker 2: right and well, frankly three G destroyed the business, right,
21:27
Speaker 2: so it was you know, like craft Tiants and a
21:30
Speaker 2: couple of the other buglisers, Craft Tients and restaurant brands
21:33
Speaker 2: are the three sort of three G companies that have
21:35
Speaker 2: been destroyed by their you know, way of running their businesses.
21:40
Speaker 1: So with an iron fist, with.
21:41
Speaker 2: An iron fist right, And they didn't care about franchise
21:45
Speaker 2: profitability right. All they cared about was you know, sitting
21:49
Speaker 2: on you making sure you know, the people at Burger
21:52
Speaker 2: King were sitting on pickle buckets in Miami because they
21:55
Speaker 2: just cut G and A to the you know, to
21:58
Speaker 2: the bottom. So read undoing what was what was done
22:04
Speaker 2: in the last you know, ten years is important and
22:07
Speaker 2: you know, Patrick Doyle coming in and focusing on franchise
22:10
Speaker 2: profitability will be you know why that stock wins. And
22:15
Speaker 2: that can happen a couple of ways. Most importantly, sales
22:19
Speaker 2: go up. But before that happens, you're seeing them force
22:25
Speaker 2: franchise's out of the system. I don't know, that's maybe
22:28
Speaker 2: not a good way to put it, but the reality
22:30
Speaker 2: of the matter is when you look at you know,
22:33
Speaker 2: McDonald's or Wendy's or Young you know, Taco Bell, KFC,
22:38
Speaker 2: Pizza Hunt, any one of these big brands that have
22:41
Speaker 2: been successful in the turnaround, it's all because they have
22:45
Speaker 2: fixed the franchise system right, and they take the old franchisees,
22:50
Speaker 2: they force them out. You know, whether it's a generational
22:53
Speaker 2: thing or you know, a forced sale or closures or however,
22:57
Speaker 2: you fix the system but that calling of the system
23:00
Speaker 2: will immediately have an impact on what the street cares about,
23:04
Speaker 2: and that's an improvement in franchise profitability. And as soon
23:07
Speaker 2: as you begin to see that improvement in franchise profitability,
23:11
Speaker 2: Sorry about that if you can't hear that background on,
23:14
Speaker 2: but that's what will really drive the the you know,
23:19
Speaker 2: the stock hire is that improvement in in franchise profitability.
23:23
Speaker 2: And that's Patrick Doyle coming in, right, And that's how
23:26
Speaker 2: you that that's that's what will ultimately be you know,
23:31
Speaker 2: why this stock wins. And then and then you can
23:34
Speaker 2: get to the you know, the burger King turnaround, right,
23:37
Speaker 2: the Burger King. They sort of played lip service to
23:41
Speaker 2: the success that Burger King has experienced here so far,
23:46
Speaker 2: but the reality of it is traffic's still negative, right,
23:49
Speaker 2: So there is no turnaround at Burger King yet. But
23:52
Speaker 2: that's fine. You've got to you've got to fix the
23:55
Speaker 2: franchise system first. And once you fix the franchise system first,
23:58
Speaker 2: you close those doors. You get this door base looking better,
24:01
Speaker 2: you get healthy franchisees in there who want to be
24:03
Speaker 2: in there and want to run the business, and then
24:05
Speaker 2: you'll see the traffic improved. Yep. For sure.
24:08
Speaker 1: And then also, you know, the unit unit economics look better,
24:12
Speaker 1: fdds improve, you get a little buzz around the system,
24:15
Speaker 1: and then people want to start opening stores again.
24:17
Speaker 2: Right Yeah, yeah, yeah, yeah, that's that's you know, two
24:21
Speaker 2: or three years down the road.
24:23
Speaker 1: Yeah, but they already have strong internationals, so you know,
24:27
Speaker 1: there's there's other pieces of that business that that's kind
24:30
Speaker 1: of going to push.
24:31
Speaker 2: It along a little bit. This is a little inside
24:33
Speaker 2: baseball with respect to QSR. But Patrick Doyle, who was
24:39
Speaker 2: the ex CEO Dominoes who turned around that company. There
24:43
Speaker 2: are I think eight or nine different master franchisees for
24:49
Speaker 2: Burger King that are also Dominos franchisees. So there's an
24:54
Speaker 2: element to this story that has Dominoes all over it, right,
24:59
Speaker 2: because you've got really healthy, strong franchisees globally, right, not
25:04
Speaker 2: not in the US, but globally. That will allow this
25:06
Speaker 2: company to a creep value to shareholders over an extended
25:10
Speaker 2: period of time because they do have that international unit
25:13
Speaker 2: growth from strong, healthy franchisees.
25:16
Speaker 1: Great, you mentioned Brinker. You know, we we linked up
25:21
Speaker 1: a couple months ago at the at their investor day.
25:23
Speaker 1: You mentioned that's one of the names that you like
25:26
Speaker 1: in casual dining, which is obviously not a place we
25:28
Speaker 1: think is mostly safety play. What are your thoughts on that?
25:32
Speaker 2: Cool? I'm maybe I'm coming back to the world too
25:36
Speaker 2: many times, but I'm a fan of the Chili's brand. Right,
25:41
Speaker 2: Applebee's is a disaster, so their biggest competitor is failing
25:45
Speaker 2: and is a melting ice cube. So you have a
25:48
Speaker 2: new CEO coming in. He shrinks the menu, focuses on
25:52
Speaker 2: a few items, right, he gets better advertising, you know. There,
25:57
Speaker 2: It's just if you look at turnaround across the restaurant
26:01
Speaker 2: space over the years, right, this is a classic turnaround
26:05
Speaker 2: or there's classic signposts, signed posts of a successful turnaround,
26:11
Speaker 2: and and he's got it all. It will take time, right,
26:14
Speaker 2: because it's casual dining and whatnot. But I do think
26:19
Speaker 2: Kevin is making all the right moves, and you will
26:23
Speaker 2: once we get past this period of self inflicted wounds,
26:26
Speaker 2: which we've got another quarter. We do have difficult comparisons coming,
26:30
Speaker 2: but this is the name that the street loves to hate,
26:34
Speaker 2: and you know, I just it feels like there's enough
26:38
Speaker 2: going on. You can see enough going on that will ultimately,
26:43
Speaker 2: you know, be successful. And it will take time. But
26:46
Speaker 2: this This is one where you know, if you buy
26:49
Speaker 2: Darden today, you might make twenty percent upside, right, But
26:52
Speaker 2: if you're buying Brinker today and the turnaround does work,
26:56
Speaker 2: it's a double right. This is not just you know,
26:58
Speaker 2: it's not just ten to fifteen percent upside. This is
27:03
Speaker 2: literally a company that you could go up you know,
27:06
Speaker 2: fifty one hundred percent over the next two years if
27:10
Speaker 2: this works. And there's no reason why it shouldn't work, frankly,
27:13
Speaker 2: other than the macro, because it is a tried and
27:17
Speaker 2: true turnaround in the restaurant space that we've seen executed
27:21
Speaker 2: over and over again.
27:23
Speaker 1: Yeah, it should be interesting. And we talked about it
27:26
Speaker 1: when I did hedge I TV with you, and one
27:28
Speaker 1: of the things that I forgot to mention is that
27:30
Speaker 1: they have not done really anything with strategic pricing.
27:35
Speaker 2: And so.
27:37
Speaker 1: From what I hear is that that they've gone out
27:40
Speaker 1: and they're trying to find someone to help them do that,
27:45
Speaker 1: and that could provide some some upside here to the
27:48
Speaker 1: numbers man, because you know, that's that's process has become
27:53
Speaker 1: a lot more scientific over the last few years, and
27:55
Speaker 1: it's allowed some of these chains like Popeyes to Popeyes,
27:58
Speaker 1: I'm sorry I'm mentropol to increase their prices so much
28:03
Speaker 1: over the last couple of years while minimizing the traffic laws.
28:08
Speaker 2: You know, this is a subject for another podcast, but
28:13
Speaker 2: I spoke with a private company that helps install dynamic
28:19
Speaker 2: pricing for the restaurant industry and it is hugely successful
28:25
Speaker 2: and there's an element to you know, I know it's
28:29
Speaker 2: you don't see any of the big change doing dynamic
28:31
Speaker 2: pricing yet, but I do after talking to this person yesterday,
28:35
Speaker 2: I think that's coming for the restaurant industry. Like this,
28:38
Speaker 2: you know, peak times, why not raise price? Right? It
28:44
Speaker 2: just it makes a ton of sense. Now, I think
28:46
Speaker 2: uning is is going to be interesting. But that is
28:49
Speaker 2: the future of the restaurant industry, dynamic pricing, and it's coming.
28:53
Speaker 2: I just I believe it's coming. Young Brands is actually
28:57
Speaker 2: working with the company to do it, so a few
29:01
Speaker 2: of the big guys are looking at it. But I
29:02
Speaker 2: think that this is a subject that we can go
29:04
Speaker 2: on another time with. But dynamic pricing will hit the
29:07
Speaker 2: restaurant industry at some point.
29:09
Speaker 1: Yeah, for sure. It's made such a you know, impact
29:12
Speaker 1: on the travel industry and the hotel industry and things
29:16
Speaker 1: of that nature. Yeah, I don't think there's anything stopping it.
29:19
Speaker 1: I'm curious about your thoughts on Kava.
29:22
Speaker 2: Oh man, I you know, God blessed Ron shake Right.
29:25
Speaker 2: He buys Zoe's for three hundred million dollars, combines it
29:30
Speaker 2: with Kava, and then all of a sudden has a
29:32
Speaker 2: five billion dollar company. Like, there is no better CEO
29:37
Speaker 2: in the restaurant space than Ron shake right. I just
29:40
Speaker 2: think the guy has got the magic touch. So it is.
29:44
Speaker 2: It's stupid, leap riced. The evaluation is just stupid, but
29:49
Speaker 2: the performance is unreal. Yeah, and they've got you know,
29:54
Speaker 2: they've got some really strong numbers in terms of you know,
30:01
Speaker 2: not only just what they've posted in the past quarter,
30:05
Speaker 2: but when you when you compare Kaba to the other
30:09
Speaker 2: change in the space. Right, I'll just pick Sweet Greens
30:12
Speaker 2: just because I like to pick on screen Greens and
30:14
Speaker 2: Chase ex But you know, two point five million averaging
30:17
Speaker 2: the volume right in twenty twenty three with twenty three
30:19
Speaker 2: percent restaurant level margin. That's like Chipoli's at two point
30:24
Speaker 2: nine million, you buy with twenty six Right. So the Kava,
30:28
Speaker 2: the numbers that Kaba are putting up are exceptional and
30:32
Speaker 2: just to put it in perspective to Sweet Greens, which
30:36
Speaker 2: I think is you know, A zero has two point
30:38
Speaker 2: eight million in averaging the voyants and a's seventeen percent
30:42
Speaker 2: re level margins. So slee Greens has significant issues. But
30:48
Speaker 2: Kava is just and now if you you know, Tava's
30:50
Speaker 2: got nine to you know, six seven whatever percentage same
30:55
Speaker 2: store sales growth and twenty five thirty percent unit growth
30:58
Speaker 2: and you're putting up you have that kind of square
31:01
Speaker 2: foot is growth with those kinds of full wall economics,
31:05
Speaker 2: you get a one hundred times eed. Even now it
31:09
Speaker 2: won't always trade there, but I love to you know,
31:14
Speaker 2: I love to find great shorts in the restaurant space.
31:17
Speaker 2: But this is, you know, other than valuation, which is
31:19
Speaker 2: never a reason to short the stock. You know, this
31:22
Speaker 2: is a really, really strong company that has you know,
31:27
Speaker 2: a huge future ahead of it in terms of being
31:30
Speaker 2: the growth and potential now it you know, will it
31:33
Speaker 2: you find a few bumps in the road over time, yeah, absolutely,
31:36
Speaker 2: but for the time being, it is you know, it
31:40
Speaker 2: is built to succeed. Yeah.
31:42
Speaker 1: Yeah, It's very impressive at the store level for sure.
31:45
Speaker 1: And we'll see how quickly they can leverage DNA, you know,
31:47
Speaker 1: hopefully it don't end up like Shakeshack, where you're like
31:50
Speaker 1: eight years later still waiting for them to leverage GNA.
31:53
Speaker 1: So you know, to that point, can you talk a
31:58
Speaker 1: little bit about the activist investor and what's going on
32:00
Speaker 1: there and if that's changed your opinion about Shakeshack at all.
32:04
Speaker 2: No, it actually reinforced my opinion. Frankly, we were short Shakeshack,
32:09
Speaker 2: and we're short Shakeshack because it is a poorly run
32:13
Speaker 2: coporate company and it's poorly run because the management team
32:18
Speaker 2: is incentive. The long term incentive comp is structured around
32:22
Speaker 2: growing revenues and epidoc so revenue growth and EBIDC growth,
32:25
Speaker 2: so they can just all they have to do is
32:27
Speaker 2: just you know, take the balance sheet, open up stores,
32:31
Speaker 2: right to grow their revenues and grow the ebadah and
32:34
Speaker 2: not caring about averaging the volumes, not caring about margins,
32:37
Speaker 2: and the CEO can get paid.
32:39
Speaker 1: And that is that and not operating income and operating
32:43
Speaker 1: income margin inst crazy to me, insane, but that that
32:47
Speaker 1: structure has led to significant inefficiencies.
32:51
Speaker 2: So this is not a typical QSR model, right, So
32:56
Speaker 2: you know, if you think about you know, McDonald's, it's
32:59
Speaker 2: got those it's got, you know, the same four walls
33:03
Speaker 2: that it opens up. You know, across the country. Shakeshack
33:07
Speaker 2: has a different box in Orlando than it does in Texas,
33:11
Speaker 2: that it does in California, that it does in you know,
33:14
Speaker 2: all these different cities. And that has led to significant inefficiencies.
33:19
Speaker 2: And that's obvious in their margin structure of the company.
33:23
Speaker 2: And now you have an activist coming in and they
33:26
Speaker 2: see all these inefficiencies, right, and they're going to try
33:29
Speaker 2: to fix it. I just don't know how they can, frankly.
33:33
Speaker 2: I mean there are some some small things they can do, right,
33:37
Speaker 2: But if you think about you know, go back to that.
33:39
Speaker 2: You know the number that I was with the fash
33:42
Speaker 2: casual average un and volumes and mart restaurant level margins.
33:46
Speaker 2: They've got three point seven million in averaging and volume
33:49
Speaker 2: and then nineteen percent restaurant level margin, which is crazy, right.
33:53
Speaker 2: Tavas got two point five million and twenty three percent
33:57
Speaker 2: restaurant level margins. How come Shakeshack is low? Well, it's
34:01
Speaker 2: so low with that averaging volume because of the inefficiencies,
34:04
Speaker 2: because of the food costs, because of the labor costs,
34:07
Speaker 2: and the inefficiencies that are built in the system, so
34:10
Speaker 2: they have to begin to try to fix that, and
34:12
Speaker 2: I just don't know how they could do that right now.
34:16
Speaker 1: Yeah, and the amount of money they were spending on
34:18
Speaker 1: the store builds and oh my.
34:20
Speaker 2: God, yeah, so much waste.
34:23
Speaker 1: Yeah. So who do you like in the fast casual
34:26
Speaker 1: space and are there any other ones that you have
34:28
Speaker 1: concerns about?
34:29
Speaker 2: So I really don't the answer your question is, I
34:31
Speaker 2: really don't like a lot in fast casual, right. I
34:34
Speaker 2: just the valuation. Chipotle is twenty four times NTM e
34:40
Speaker 2: v ed badah, right, Shake Check's price right on top
34:43
Speaker 2: of that. That's those Those are just ridiculously egregious multiples
34:50
Speaker 2: for all these businesses, and it's heading into a slowdown, right,
34:55
Speaker 2: So I'm not a big fan, I think, you know.
34:59
Speaker 2: I mean, the only one that I positively disposed to
35:02
Speaker 2: what we're talking about it is Cava, and I still
35:04
Speaker 2: wouldn't buy it. And Sweet Greens is a zero at
35:08
Speaker 2: some point like the store. The big the biggest joke
35:12
Speaker 2: in fast casual today, right, is that Sweet Greens is
35:16
Speaker 2: going to have robotics stores in five years? Like are
35:22
Speaker 2: you kidding me? That is not going to happen? And
35:25
Speaker 2: I don't know, if you've seen the store in Naperville,
35:28
Speaker 2: Illinois that they open, but it's two stores, two stories,
35:32
Speaker 2: and they claim that they're going to convert every one
35:35
Speaker 2: of their existing restaurants into a robotics store. Well, you know,
35:41
Speaker 2: robots breakdown, right, you know what about depreciation? Right? Yes,
35:47
Speaker 2: you might be substituting labor costs you know for robots, right,
35:54
Speaker 2: but you still have DNA. Right, So the restaurant level
35:57
Speaker 2: margin is not going to twenty six percent. And just
36:00
Speaker 2: to come back to what we've been talking about with
36:02
Speaker 2: fast casual, the strength and those margins, right, Sweet Greens
36:06
Speaker 2: is at sixteen percent or seventeen percent level margins. They're
36:09
Speaker 2: magically saying that a robotics store after one month of
36:13
Speaker 2: testing is going to twenty six percent. It's not going
36:15
Speaker 2: to happen. Yeah, and even if you plug in twenty
36:18
Speaker 2: six percent on the second quarter numbers, they're still losing money.
36:24
Speaker 2: Are you kidding me? And you've got these self side
36:27
Speaker 2: analysts that are buying into this nonsense that they're going
36:31
Speaker 2: to have robotics like it is it literally is. It's
36:35
Speaker 2: it's hilarious to watch that's unfold in the stocks, you know,
36:39
Speaker 2: the stocks, the stock has spiked on that well whatever reason,
36:44
Speaker 2: you know, well we know why, because people are buying
36:46
Speaker 2: into this management team thinks that they're going to have
36:48
Speaker 2: robots serving salads.
36:51
Speaker 1: It's I mean, you know, even at iPod I you
36:54
Speaker 1: know what I wrote. My note was like, you know,
36:57
Speaker 1: I hesitate to use a a price of sales mallable
37:00
Speaker 1: to ever you know, value a restaurant stock, but since
37:03
Speaker 1: they can't generate E but I have no the choice,
37:07
Speaker 1: you know, And like, call me old school, but it's
37:09
Speaker 1: like I feel like you're supposed to figure out the
37:11
Speaker 1: store level economics on the first unit before you build
37:15
Speaker 1: the second and the third and the fourth, as opposed
37:17
Speaker 1: to still trying to figure out the unit economics when
37:20
Speaker 1: you're building one hundred and twenty or whatever number.
37:22
Speaker 2: You know.
37:24
Speaker 1: So we talked a lot about the low and middle
37:28
Speaker 1: income consumers and quick service and fast casual. Obviously our
37:32
Speaker 1: companies don't have a lot of exposure to find dining.
37:36
Speaker 1: But the same store sales have been in decline since
37:38
Speaker 1: March according to black Box, and now luxury retail seems
37:42
Speaker 1: to be slowing. You know, I just find that interesting
37:46
Speaker 1: because we've had this k shape recovery where the high
37:48
Speaker 1: end has done well post pandemic, and the low income
37:52
Speaker 1: not so much. So what are you hearing about the
37:54
Speaker 1: higher income consumering.
37:55
Speaker 2: Yeah, so same idea, right, and it's it actually slowed
38:00
Speaker 2: faster than so if you go, I look at the
38:07
Speaker 2: nap Steakhouse data, and it really started slowing in March,
38:13
Speaker 2: so it's slowed earlier. And there's an element to that
38:17
Speaker 2: that's hard to know because it's a little different than
38:21
Speaker 2: high end retail, right, because this is more T and
38:24
Speaker 2: E based, Right, it's you know, you're not you know,
38:28
Speaker 2: I'm not taking a client out to dinner this week
38:30
Speaker 2: because whatever reason, you know, business is soft or whatever.
38:34
Speaker 2: So it has a little bit more to do with
38:37
Speaker 2: business spending than it does with you know, sort of consumers,
38:42
Speaker 2: you know, whether they have a job and feeling like
38:44
Speaker 2: they can buy a Gucci purse or whatever. So to me,
38:48
Speaker 2: that's a little bit more discretionary and that that's a sign.
38:52
Speaker 2: That was one of the first signs back in March
38:55
Speaker 2: that things were slowing. And you know, not the reason
38:59
Speaker 2: why we're going to embarrassed in the industry, but one
39:01
Speaker 2: of the reasons, like okay, this is you know, this
39:05
Speaker 2: is this is not good, right, you know, the high
39:08
Speaker 2: end stakehounsils have been slowing for a while and have
39:10
Speaker 2: slowed and continue to slow, like it's not getting better.
39:13
Speaker 2: So it just it's it's an indicator to me that
39:17
Speaker 2: you know, businesses are getting a little bit more cautious. Yeah,
39:20
Speaker 2: because they're not, you know, people aren't taking their clients
39:23
Speaker 2: out to dinner as much. Cool.
39:27
Speaker 1: Well, listen, Thanks again, Howard, that was a lot of fun.
39:30
Speaker 2: Man.
39:30
Speaker 1: Where where can people find you on social media?
39:33
Speaker 2: Had Howard Penny on Twitter? Howard W. Penny. I should
39:38
Speaker 2: say so, but thank you Michael. This has been awesome.
39:42
Speaker 2: Love having you on Hedge TV and thank you for
39:45
Speaker 2: having me on your podcast. Really love it for sure.
39:48
Speaker 1: Thing man, it was great and thanks to the audience
39:50
Speaker 1: for tuning in. If you liked the episode, please subscribe
39:53
Speaker 1: and leave a review and tune in again later this
39:57
Speaker 1: month for a discussion with bet Oaklahom though, CEO of
40:01
Speaker 1: Plays Pizza. Have a good day, everybody.
40:04
Speaker 2: H