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Weighing Wall Street's Appetite for Restaurant Stocks · Choppin’ It Up by Bloomberg Intelligence

0:00
Speaker 1: Welcome to Chopping It Up. I'm your host, Michael Halen,
0:02
Speaker 1: the senior restaurant and food service analyst here at Boomberg Intelligence.
0:06
Speaker 1: This is our Inaorball podcast. I'm happy to introduce my guests.
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Speaker 1: He's a fellow Jersey boy, a fellow Georgetown hoya, Gregory Frankfurt.
0:16
Speaker 1: He's the senior restaurant analyst for Guggenheim. It's up, Greg. Yeah, Mike,
0:21
Speaker 1: thanks for having me on Andy's accident. You got it, man,
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Speaker 1: And unfortunately for our guests is audio only because Greg
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Speaker 1: is rocking meme mustache right now. Uh. He absolutely looked fantastic.
0:34
Speaker 1: He thought it was a video webcast, so my apologies,
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Speaker 1: uh to you. Greg. Alright, alright, I was I need
0:42
Speaker 1: to keep some facial hair for my uh for my girlfriend.
0:45
Speaker 1: I don't think she's ever seen me with a clean
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Speaker 1: shaven face, so that's that's why we kept it on.
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Speaker 1: It looks good, Man, looks great, all right, man, So
0:52
Speaker 1: let's let's get into it. I want to pick your
0:54
Speaker 1: brain on some things. Um. You know, Greg does a
0:57
Speaker 1: great job over there at Guggenheim, and our respect is works.
1:00
Speaker 1: So I'm excited that I could have him on here.
1:01
Speaker 1: First so uh FED chair Powell claims that the U
1:04
Speaker 1: S consumers in a good place, right, But you know,
1:08
Speaker 1: as you and I know McDonald's and Wendy said, low
1:10
Speaker 1: income consumers were pulling back in one queue. Uh so,
1:14
Speaker 1: what's your data telling you about second quarter restaurant performance? Yeah,
1:17
Speaker 1: it's interesting. I mean, we're we're at an absolute time
1:21
Speaker 1: of uncertainty. UM. I've been speaking with a lot of
1:25
Speaker 1: public and private restaurants for the the last couple of weeks,
1:28
Speaker 1: and I think if you would have asked UM any
1:32
Speaker 1: of these restaurants three or four weeks ago, how is
1:35
Speaker 1: the consumer holding up, they would have said, Everything's fine,
1:38
Speaker 1: It's totally fine. Consumers really strong. I mean you look,
1:41
Speaker 1: you look back at uh nasstrack numbers for UM for May,
1:46
Speaker 1: we were still running an up six. UM in April
1:49
Speaker 1: that was that was an up seven. So I mean
1:51
Speaker 1: those results are are are very healthy, and that's usually
1:54
Speaker 1: the middle and higher income guests UM. And then on
1:59
Speaker 1: the quick service you've seen you saw pretty good results
2:01
Speaker 1: in one Q. I think I think some of the
2:03
Speaker 1: UM companies have said very slightly at the margin, you've
2:06
Speaker 1: seen a little bit of degradation UM in the lower
2:09
Speaker 1: and consumer and customer. What I've heard the last couple
2:13
Speaker 1: of weeks is a little bit of office um. But
2:17
Speaker 1: it but it's hard because as anyone who's who's looked
2:21
Speaker 1: at daily or weekly data points before, there's so much
2:24
Speaker 1: noise and and so a week or two doesn't make
2:27
Speaker 1: a trend. But I think with so much scrutiny on
2:29
Speaker 1: the consumer right now, a lot of companies and investors
2:33
Speaker 1: may be trying to extrapolate the trend and so um,
2:37
Speaker 1: it's really hard to tell. I thought that consumer has
2:39
Speaker 1: been in a really good spot. I mean, you've looked
2:41
Speaker 1: at how much people have saved and and and checking
2:44
Speaker 1: account balances, um. And they basically tripled uh, checking account
2:49
Speaker 1: balances in the US during the pandemic. UM people you know,
2:53
Speaker 1: took down revolving credit card balances. That has come back
2:56
Speaker 1: to where it was two years ago. Um. But you
3:00
Speaker 1: could probably have another four or five six months of
3:02
Speaker 1: runway on that. UM. And so I think I think
3:07
Speaker 1: things are okay, um, but there are slight slight cracks
3:11
Speaker 1: at the edges, which which is understandable given how much
3:13
Speaker 1: inflations out there. Yeah, and so what uh you know
3:16
Speaker 1: with some of those companies that you've spoken to some
3:19
Speaker 1: of these management teams, you know, what are some of
3:22
Speaker 1: their concerns around the consumer? Is it inflation? Is it
3:27
Speaker 1: you know, lapping stimulus from last year. Is it? Is
3:30
Speaker 1: it the wealth effect from the implosion we've seen in
3:32
Speaker 1: crypto and and the stock market declines that we've seen.
3:37
Speaker 1: I think all of the above. I mean, there's UM
3:40
Speaker 1: the other one that has not gotten talked about. But
3:42
Speaker 1: I was speaking with an executive today about is UM
3:46
Speaker 1: maybe code COVID has researched a little bit. Maybe that's
3:49
Speaker 1: having a you know, fifty basis points semifive basis point
3:52
Speaker 1: impact on trends And if there's so, I I bring
3:55
Speaker 1: that up because UM, there's just so many different cross
3:59
Speaker 1: currents on the consumer now. I think it's hard to
4:01
Speaker 1: hard to parse it out. UM, but inflation has to
4:04
Speaker 1: be a part of it. And UH. One thing I
4:07
Speaker 1: was looking at recently is if you look at UM
4:12
Speaker 1: the consumer. UH. There's a consumer expenditure survey put out
4:15
Speaker 1: by the Bureau of Labor Statistics, and it shows, UM
4:20
Speaker 1: the amount of money that is basically being spent by
4:24
Speaker 1: pulling the numbers up right here, but the amount of
4:26
Speaker 1: money that's being spent by the lowest death sile of
4:29
Speaker 1: consumer incomes on grocery and restaurants and gas the portion
4:34
Speaker 1: of their total spending UM. The lowest death sile spends
4:39
Speaker 1: UH three of their expenditures on gasoline. The highest death
4:44
Speaker 1: sile spends two point two. So gas is and you're
4:48
Speaker 1: spending one point six of your of your expenditures on gasoline.
4:53
Speaker 1: There's there's eight basis points of higher CPI for the
4:56
Speaker 1: lowest and con consumer. Same thing with food at home,
4:58
Speaker 1: but to a lesser extent. About ten of their expenses
5:02
Speaker 1: are on groceries UM. For the highest it's about five percent,
5:06
Speaker 1: and that's up twelve percent. So you just you just
5:08
Speaker 1: get you know, a few different lines. I guess the
5:11
Speaker 1: point I'm trying to make is the stuff that is
5:13
Speaker 1: inflating the most shelter shelters UM. Actually in the CPI
5:17
Speaker 1: only have five and a half percent, but UM, I
5:19
Speaker 1: think anyone who's gone out there and tried to rent
5:21
Speaker 1: the home recently knows UM that it's the rest are
5:26
Speaker 1: not of five and a half percent UM. That's usually
5:29
Speaker 1: twenty of the lowest incomes expenditure and eight percent for
5:33
Speaker 1: the highest income. And so there's just all these things
5:36
Speaker 1: that are pressuring the CPI inflation the most hit the
5:39
Speaker 1: lowest income consumer the most aggressively. Yeah, and it's uh,
5:44
Speaker 1: you know, my mentor in the stock business taught me that,
5:47
Speaker 1: you know, you think like the other guy. And and
5:50
Speaker 1: part of that included, you know, thinking like middle income
5:54
Speaker 1: consumers of lower income consumers. People in middle America don't
5:57
Speaker 1: live like your I uh Greg, you know Bleo on
6:00
Speaker 1: the coast lived lived very different, right, and so um,
6:03
Speaker 1: fifty dollars out of your budget because of increased gasoline
6:06
Speaker 1: prices is fifty last dollars you're going to spend at
6:09
Speaker 1: a restaurant or or discretionary wise. So um, you know
6:13
Speaker 1: that's why we've seen kind of you know, heard commentary
6:16
Speaker 1: from McDonald's went and he's basically saying that, you know,
6:18
Speaker 1: lower and consumers are starting to trade down, and um, um,
6:23
Speaker 1: you know I'm just being foolish. I guess what they're
6:25
Speaker 1: spending than they have, right. I remember when boj Angles
6:29
Speaker 1: went public, we were talking to them and and just
6:32
Speaker 1: the uh they said they could see it in their
6:36
Speaker 1: daily comps. They could see when people got paid every month,
6:39
Speaker 1: and so um, a lot of Americans live paycheck to
6:43
Speaker 1: paycheck thankfully. Uh, you know, I don't think you or
6:46
Speaker 1: I do. Um. And and so it's it's something as
6:50
Speaker 1: difficult as a restaurant analyst to truly get in the
6:53
Speaker 1: minds of of everywhere in this country who who is
6:56
Speaker 1: in that situation? Um, but that's how a lot of
6:58
Speaker 1: people have to live. Yeah, yeah for sure. All right,
7:01
Speaker 1: So now I'm gonna give some props. Don't get a
7:03
Speaker 1: big head on me. But you know, in November we
7:06
Speaker 1: were restracting our heads about two margin assumptions. Right to
7:10
Speaker 1: your credit estimates have come way down. But are they
7:14
Speaker 1: low enough? Uh No, they're not. Um. And this is
7:19
Speaker 1: where it gets into a little bit of a tricky
7:21
Speaker 1: situation because um, how stops trade. And I've tried to
7:27
Speaker 1: kind of try to emphasis emphasize this to people, is
7:30
Speaker 1: there's two ways to have a stock out perform. You
7:32
Speaker 1: either need to have a belief that the earnings of
7:36
Speaker 1: the company will be higher than the market things, or
7:39
Speaker 1: that the multiple of the company will be higher than
7:41
Speaker 1: the market things. So it's I've always thought it's a
7:43
Speaker 1: little bit arrogant to have a view that the multiple
7:46
Speaker 1: should be higher. And so if you know a lot
7:48
Speaker 1: of it comes down to I think numbers will beat
7:50
Speaker 1: or miss UM. But right now what's embedded in in
7:54
Speaker 1: stock prices is clearly lower than where the sell side is. UM.
7:59
Speaker 1: The sell side numbers are always a bit of bit
8:01
Speaker 1: slow to move. UM. You know. I was just looking
8:05
Speaker 1: h maybe a week ago at earnings revisions so far
8:09
Speaker 1: this year, and you know, most companies for EPs revisions
8:16
Speaker 1: there's somewhere down between two and which with most of
8:19
Speaker 1: being down four or five, six seven percent, which is
8:22
Speaker 1: not a huge move if you if you think the
8:24
Speaker 1: consumer is gonna get really tight, and especially given how
8:27
Speaker 1: much the the cost pressures have moved UM. And a
8:30
Speaker 1: lot of the stocks again this was this was a
8:33
Speaker 1: week or two ago. But we're down you know, fifteen
8:35
Speaker 1: to thirty five percent, and so stocks have gotten cheaper,
8:38
Speaker 1: restaurants stocks have gotten cheaper. UM. But I think very
8:41
Speaker 1: clearly street numbers are generally too high UM. And I
8:45
Speaker 1: think where investors are leaning in right now is where
8:48
Speaker 1: they have confidence that the numbers will be relatively close
8:51
Speaker 1: to where consensus numbers are. UM. And you've you've clearly
8:55
Speaker 1: seen that and how the stocks have traded, Yeah, for sure.
9:00
Speaker 1: Degree And uh, you're comment about multiple is a great one, right,
9:04
Speaker 1: and I think it explains why in this sector of
9:08
Speaker 1: the stock market, long short investors tend to do so
9:11
Speaker 1: much better than long only, right, Like it can be
9:14
Speaker 1: arrogant to to claim that a stock or or some
9:18
Speaker 1: names in the sector deserve a higher multiple. I think
9:20
Speaker 1: it's a lot easier case to say X y Z
9:24
Speaker 1: company should have a superior multiple to ABC for all
9:28
Speaker 1: these reasons. Right, Yeah, completely completely, And I'd love I'd
9:35
Speaker 1: love to talk to some of the some how much
9:37
Speaker 1: things have changed on the expense side from the beginning
9:40
Speaker 1: of this year, Because when companies were guiding and you know,
9:43
Speaker 1: even on fourth Courter earnings call an end of January
9:47
Speaker 1: early February, a lot of companies were saying, look, the
9:50
Speaker 1: labor situations tight. We're maybe paying seven eight nine percent
9:54
Speaker 1: wage inflation year every year this year, expecting that this year, um,
9:58
Speaker 1: but the commodity situation, shion has gone a little bit worse.
10:01
Speaker 1: For expecting five or six percent commodity inflation. Now those
10:04
Speaker 1: numbers are thirteen to sevent on the commodity side, ten
10:08
Speaker 1: to twelve percent of food side. And if you're a restaurant,
10:11
Speaker 1: you just can't really price that through as the margins
10:14
Speaker 1: have been down. Yeah, and actually uh yeah, I mean
10:19
Speaker 1: we've seen unprecedented you know, a menu pricing. Um, you know,
10:24
Speaker 1: and and last time we saw this into a recession,
10:27
Speaker 1: you know, during the Great Financial Crisis, it was the
10:30
Speaker 1: pizza makers, right, it was Dominos and Papa John's raised
10:33
Speaker 1: their prices aggressively into a recession. And even though pizza
10:36
Speaker 1: remains one of the cheapest ways to feed a family, uh,
10:40
Speaker 1: it really hurt transactions for for both of those chains. Right. So, um,
10:45
Speaker 1: I guess can you talk a little bit about pricing
10:47
Speaker 1: and and who's being more conservative, uh, you know in
10:52
Speaker 1: your covered universe, and then also maybe a little bit
10:54
Speaker 1: about who you think can of performed during the recession. Yeah,
10:59
Speaker 1: for sure. And um, the one point I'd make on
11:01
Speaker 1: pricing it it's very difficult right now. If your Chilis
11:06
Speaker 1: or Applebee's are all going, I'm just using those examples,
11:09
Speaker 1: figure out how much your guest is paying. It's pretty easy.
11:12
Speaker 1: Four customers coming to the restaurant, and you take the
11:15
Speaker 1: amount they paid and divided by four and that's your
11:17
Speaker 1: average check. But if you're McDonald's or Taco Bell or
11:20
Speaker 1: Wendy's and you have a car come through the drive through,
11:24
Speaker 1: you don't know if that's one person or two two people,
11:26
Speaker 1: or you know someone's taking home defeat effinitively at six
11:29
Speaker 1: and so trying to part out average checks, particularly for
11:32
Speaker 1: quick service right now is very difficult. But UM, in
11:35
Speaker 1: terms of base level menu pricing, in the fourth quarter,
11:38
Speaker 1: as you exited the year, most companies were taking four
11:42
Speaker 1: or five six percent pricing, and I think McDonald's was
11:45
Speaker 1: probably the quickest UM to get high pricing. I guess
11:50
Speaker 1: Chippola would be another example, but McDonald's and Chippole were
11:53
Speaker 1: probably the two. They were most aggressive quickly about getting
11:57
Speaker 1: pricing into the business. And you saw that margin in
12:00
Speaker 1: the first quarter where McDonald and again I know some
12:03
Speaker 1: of it depends on traffic, but UM, McDonald's margin and
12:06
Speaker 1: were down four or five where a lot of their
12:09
Speaker 1: competitors were down six seven eight percent UM because their
12:13
Speaker 1: pricing was you know, by six seven and it was
12:16
Speaker 1: a couple of points below McDonald's. I think you get
12:18
Speaker 1: through the rest of this year, you're gonna see eight
12:21
Speaker 1: to ten percent pricing across the board you over year
12:23
Speaker 1: for most of these companies. UM. Chipotle has obviously been
12:26
Speaker 1: higher with with around thirteen um. And generally what I've
12:31
Speaker 1: heard is very little, uh consumer pushback and these times
12:35
Speaker 1: have to take more pricing, they have to because of
12:36
Speaker 1: the cost pressure. Yeah, and you know the franchisees are
12:40
Speaker 1: are are going to do it, you know, until they
12:42
Speaker 1: start to start really feeling that pushback. Um. You know.
12:46
Speaker 1: It was interesting though on the first quarter calls, Man,
12:49
Speaker 1: I feel like the Equity Capital Markets guys were in
12:51
Speaker 1: the ears of all of these CEOs because they're all
12:54
Speaker 1: pointing out how you know, there's a couple hundred basis
12:56
Speaker 1: points difference between food at home and food food at
13:01
Speaker 1: home versus food away from home and right, and they're saying, well,
13:04
Speaker 1: food at home is inflation is worse, So that's good
13:07
Speaker 1: for us, and and I get it, but not really
13:11
Speaker 1: because it's still cheaper to buy the food at the
13:13
Speaker 1: grocery store and cook yourself anyway, slice it right. Yeah. Yeah,
13:18
Speaker 1: I've always thought of it's it's a great question, and
13:21
Speaker 1: I've always thought of what what restaurants really provide is
13:26
Speaker 1: they provide people. Um, let's say you're arrestaurant. You're gonna
13:30
Speaker 1: have a hundred customers come through your restaurant, Uh, and
13:34
Speaker 1: give an evening. I'm just making up the number. Um,
13:36
Speaker 1: those customers could all go home and spend an hour cooking,
13:40
Speaker 1: or you could have you know, six seven cooks in
13:45
Speaker 1: the back of the kitchen spent two hours cooking. And
13:47
Speaker 1: so it's a huge labor savings tool in the United
13:50
Speaker 1: States is the restaurant industry. That's kind of the value
13:54
Speaker 1: prop that that we provide a we centralized, pretty individualized cooking.
13:58
Speaker 1: We've we've had huge labor eavings over the last really
14:01
Speaker 1: seventy five years from the rise of restaurants. UM. But um,
14:06
Speaker 1: one of the things that you've seen is you've seen
14:09
Speaker 1: more faster wage growth at the lower income UH worker,
14:15
Speaker 1: and that's usually the restaurant worker. And so the challenge
14:19
Speaker 1: for restaurants right now, I think, more so even than
14:21
Speaker 1: the commodity standpoint, is the fact that broad wages drive
14:25
Speaker 1: your revenue and lower income wages drive your expenses, and
14:29
Speaker 1: lower income wages are rising faster and so there's largin
14:31
Speaker 1: compression and it's actually a bad thing for the economy
14:35
Speaker 1: and the population. But it is a challenge for restaurants
14:37
Speaker 1: right now in the margin front, for sure. All Right,
14:40
Speaker 1: So who's your what's your favorite name right now and
14:42
Speaker 1: why I'm continuing to lean into McDonald and Yum. And
14:48
Speaker 1: this goes back to my common earlier of where do
14:51
Speaker 1: I see pretty high visibility into hitting consensus earnings numbers UM?
15:01
Speaker 1: And you look this year, McDonald's EPs is down two
15:06
Speaker 1: You'll remember that obviously given the Russia situation, that that
15:10
Speaker 1: would make up the majority of that change is just
15:13
Speaker 1: just losing that UM. Yama is down two percent as well.
15:17
Speaker 1: It's some more situation with Russia. So really numbers have
15:20
Speaker 1: not moved a whole bunch, but you have UM some
15:23
Speaker 1: of the full service names UM where numbers are you know,
15:27
Speaker 1: down ten fifteen percent and may and may still move lower.
15:30
Speaker 1: There's a lot more uncertainty when you're in the business
15:33
Speaker 1: of collecting revenue and paying out food and paying out labor.
15:37
Speaker 1: With a company operated model, UM, there's just more risk
15:40
Speaker 1: to numbers right now versus the franchise model, which is
15:44
Speaker 1: generally more UM what McDonald's or Yum or Jack or
15:48
Speaker 1: Wendy's are are employing UM, which your earnings are a
15:52
Speaker 1: little more insulated. I think it's worth getting into the
15:55
Speaker 1: franchise ease as well, because if your franchise, or you're
15:59
Speaker 1: not completely insulated to cost pressures your franchise ease. If
16:02
Speaker 1: they're feeling it um at the end, that will that
16:06
Speaker 1: will cause slower unit growth at some point down the line.
16:09
Speaker 1: And the biggest risk I think too McDonald's, Yum, Wendy's,
16:14
Speaker 1: Jack in the Box two us are dominoes is if
16:18
Speaker 1: you're franchise in two thousand twenty one, when margins were
16:21
Speaker 1: a three basis points, if they kept leveraging six times
16:24
Speaker 1: and put on a whole bunch of debt and there
16:26
Speaker 1: were a lot of franchise e to frenchy transactions at
16:29
Speaker 1: that point in time. Banks have been lending it a
16:31
Speaker 1: little more aggressively into the limited service side to The
16:34
Speaker 1: concern I would have is that you may have some
16:37
Speaker 1: challenges in the bank, on the bank lending side to
16:40
Speaker 1: franchise ease in this space. That's that's the that's the
16:43
Speaker 1: spot to watch. Yeah, yeah, i'd agree. You know, on
16:46
Speaker 1: Wall Street loves their unit growth, man, that's for sure,
16:49
Speaker 1: you know. And I'd add to something to that too, man,
16:52
Speaker 1: I think scale matters right. Like McDonald's can put items
16:56
Speaker 1: on their value menu for a dollar or three dollars
16:59
Speaker 1: that you know, Jack in the box and when they's
17:01
Speaker 1: just just can't match right, well, then McDonald's has done
17:05
Speaker 1: a great job. I mean, obviously they got a little
17:07
Speaker 1: bit um tripped up if you go back to kind
17:11
Speaker 1: of two thousand twelve to sort of fifteen range Thompson
17:16
Speaker 1: and US what negative um And then they and then
17:20
Speaker 1: obviously with the lunch ball, they breakfast starts start to
17:23
Speaker 1: turn around this business. They if you drive around the
17:26
Speaker 1: US and you go look at the assets that McDonald's
17:29
Speaker 1: has put in the ground the last three or four
17:31
Speaker 1: or five years of experience of the future and compare
17:33
Speaker 1: it to some of the other brands. Um, their stores
17:37
Speaker 1: look better and and it's just a more enjoyable experience
17:39
Speaker 1: of the sales volumes are three million dollars. A lot
17:42
Speaker 1: of their peers are um one eight to two million dollars,
17:46
Speaker 1: and so the franchise ese are making a hundred and
17:50
Speaker 1: fifty two hundred thousand dollars a year more in cash
17:53
Speaker 1: flow from some of their peers. That's a great position
17:55
Speaker 1: to be in when your prices are are even more
17:58
Speaker 1: reasonable than your peers. That's a great point. Yeah, management
18:01
Speaker 1: Guns management has done a hell of a job over there. UM. Yeah,
18:05
Speaker 1: I guess let's talk about Jack in the Box a
18:07
Speaker 1: little bit. Man. It's a name we've talked about a
18:09
Speaker 1: little bit, you know. It's There's a lot of things
18:12
Speaker 1: going on right now. Right. I think it's kind of
18:15
Speaker 1: a story. I think it's a story where a lot
18:18
Speaker 1: of people lost money on it in the past or
18:21
Speaker 1: underperformed to being invested in the past. So I think
18:24
Speaker 1: it's it may be a hard sell, UM, but there's
18:27
Speaker 1: definitely some things that are interesting going on right the acquisition,
18:30
Speaker 1: potential sale at least back. Why don't you talk to
18:32
Speaker 1: us a little bit about Jack in the Box. Yeah,
18:35
Speaker 1: I know it's it's um, Jack in the Boxes. It's
18:39
Speaker 1: it's got a new management team, UM. Darren Harris was
18:42
Speaker 1: just came out of the CTO a couple of years ago, UM,
18:45
Speaker 1: and he's he's made a few changes. Obviously. They sold
18:48
Speaker 1: Cadoba a few years ago to Apollo. UM just recently
18:52
Speaker 1: closed on the acquisition of Del Taco. And I think
18:55
Speaker 1: some out there go, all right, you're swapping one Mexican
18:57
Speaker 1: chain for another Mexican chain. What are a doing? UM?
19:01
Speaker 1: But I think they're completely different stories. And I say
19:04
Speaker 1: that because UM and not to criticize Cadoba, but Cadoba
19:09
Speaker 1: really tried to be a Chipole national competitor. UM. You know,
19:13
Speaker 1: they rushed into a lot of markets and generally got
19:15
Speaker 1: to a little bit low lesser scale than Chipole and
19:18
Speaker 1: say did very stretched UM unit base they were I
19:22
Speaker 1: think it was in forty eight states there there um
19:25
Speaker 1: uh their portfolio, whereas Dell talk was much more concentrated
19:29
Speaker 1: into I think it's thirteen to fifteen states out west UM,
19:33
Speaker 1: very similar states toward Jack's unit presences UM. And so
19:38
Speaker 1: I actually think the acquisition from that perspective makes some sense. UM.
19:43
Speaker 1: I think the criticism that investors have for this is
19:46
Speaker 1: an increasing your company operated exposure UM and and that
19:50
Speaker 1: just creates more earnings volatility, which is which is fair UM.
19:55
Speaker 1: But but but Jack's managing I think has done a
19:58
Speaker 1: pretty good job of le into you just set yourself.
20:01
Speaker 1: I think two questions ago. Uh. Wall Street loves the
20:04
Speaker 1: unit growth. UM. They've been signing up a ton of
20:07
Speaker 1: development agreements. UM. The goal is to get to four
20:10
Speaker 1: percent unit growth in the next couple of years from
20:13
Speaker 1: zero today. I don't think Wall Street expects really any acceleration.
20:18
Speaker 1: And so even if they start, you know, getting units
20:20
Speaker 1: in the ground and show a path to one and
20:23
Speaker 1: a half to two and a half percent unit growth
20:25
Speaker 1: sometime in the next two to three years. That would
20:27
Speaker 1: be a very very positive sign for the stock. Um.
20:31
Speaker 1: It's uh, it's very it's very cheap. Um. Cheap isn't
20:36
Speaker 1: necessarily working in this market. Um, but it's I think
20:41
Speaker 1: the manager team is doing the right things on trying
20:44
Speaker 1: to accelerate store growth. Yeah. And if you know, if
20:48
Speaker 1: you think the stock is cheap, they're gonna have they
20:50
Speaker 1: should have a lot of cash to you know, between
20:54
Speaker 1: the refranchising and the sale least back to buy back
20:56
Speaker 1: cheap stock. So as a former equity trader, uh, you
21:00
Speaker 1: know that always gets the intendants up, you know. Um. Yes,
21:05
Speaker 1: and if they if they think the stocks cheap, I
21:07
Speaker 1: think they'll lean into repurchase this to your point, sorry
21:09
Speaker 1: I cut you off. No, No, it's all good man. Um.
21:13
Speaker 1: So let's get into a couple more of your names
21:14
Speaker 1: before we finished up here. What's it gonna take for
21:17
Speaker 1: Burger King to turn its US business around? Yeah, Burgusking
21:22
Speaker 1: is an interesting one because, um, the volumes of their
21:25
Speaker 1: stores are kind of more than the one point four
21:27
Speaker 1: to one point five million dollar range. We talked earl
21:29
Speaker 1: about McDonald up for three and so the franchisy cash
21:32
Speaker 1: flows are not as healthy as at a Wendy's or McDonald's. UM.
21:37
Speaker 1: And the other big challenge they have is that, UM,
21:40
Speaker 1: I think because of that, franchisees have not put the
21:43
Speaker 1: capital into the back, into the brands, into the assets
21:46
Speaker 1: in the way that McDonald's has the last couple of years. UM.
21:51
Speaker 1: You know, they've got a new brand management in Tom Curtis,
21:54
Speaker 1: who's a former Domino's executive. UM. He's looking at things
21:58
Speaker 1: a lot, a lot differently. A lot of what he's
22:00
Speaker 1: focused early on so far has been on the operational
22:03
Speaker 1: side of things. UM. You know, they've done several things
22:06
Speaker 1: the last couple of years. They they started handbreading their chicken, UM,
22:10
Speaker 1: which initially drove sales a bit, but from from every indication, UM,
22:15
Speaker 1: is a little bit too complicated and adding too much
22:17
Speaker 1: labor versus the benefit that they're seeing on the sales side. UM.
22:21
Speaker 1: And so he's going through and he's changing a few
22:23
Speaker 1: things that I expect that to UM kind of shift
22:26
Speaker 1: back towards UH, you know, non handbreaded chicken. At some
22:29
Speaker 1: point in the next few months. UM. You know, they've
22:32
Speaker 1: taken the whopper back out of some of the value
22:35
Speaker 1: platforms and they're trying to premium Premium is eyes I
22:38
Speaker 1: don't know if that's a word, but premium eye it again.
22:42
Speaker 1: And so I think he's doing the right things on
22:44
Speaker 1: the on the operational side. But you look at UH.
22:47
Speaker 1: They have a public French as he Carrol's t a
22:50
Speaker 1: sp UM and the stock is down massively over the
22:54
Speaker 1: last twelve months because of this margin pressure on the business.
22:58
Speaker 1: Because of this margin pressure on the industy treat UM.
23:01
Speaker 1: And when you're a little bit lower on the totem
23:02
Speaker 1: pole on a u V s your French as you
23:05
Speaker 1: feel it more aggressively. UM. The company has a lot
23:08
Speaker 1: of cash importance, has been generally performing, you know, okay, UM,
23:13
Speaker 1: and I think they're gonna make some reinvestments into the business.
23:15
Speaker 1: We expect a big advertising fund investments sometime in the
23:18
Speaker 1: next three months. UM. That could be a couple hundred
23:21
Speaker 1: million dollars UM. But I think at some point they
23:25
Speaker 1: probably have to make and investment co investment the French
23:27
Speaker 1: at ease on the assets, on reimaging the stores, UM.
23:32
Speaker 1: And so we'll see how this plays out. But I
23:34
Speaker 1: have a neutral on the stock just because I think
23:36
Speaker 1: you need some more certainty on these things before you
23:38
Speaker 1: can can get involved. Um, but that's that's where heads
23:42
Speaker 1: are heads are at. Yeah, the asset base is definitely dated,
23:45
Speaker 1: and you know, to your point, money flows to where
23:47
Speaker 1: it's treated best. And with so many multi un multi
23:51
Speaker 1: concept of multi chain operators out there, they're going to
23:54
Speaker 1: invest in the brands that are not going to cover
23:56
Speaker 1: off the ball before they're going to invest in somebody
23:59
Speaker 1: like Burger King has been been struggling, you know for
24:03
Speaker 1: a while here, especially since Wendy's launched for breakfast. Yeah,
24:06
Speaker 1: I think that's where if restaurant brands international kind of
24:10
Speaker 1: UH ponies up some money, I think, um, that will
24:13
Speaker 1: convince the franchise ease to invest alongside of them, and
24:17
Speaker 1: that probably is the catalyst that you need to see
24:20
Speaker 1: a turnaround there for sure. Alright, And since you mentioned Wendy's,
24:24
Speaker 1: let's finish up with Wendy's. Man, what's what are the
24:26
Speaker 1: odds try and UH pulls the trigger and acquires the company.
24:31
Speaker 1: I don't think it's high. I think it's low. Um,
24:34
Speaker 1: you know, I think if you're trying and I understand
24:37
Speaker 1: the sentiment. You've you've done a pretty good job the
24:39
Speaker 1: last few years on the business. UM sales for restaurant
24:43
Speaker 1: or up loaded mid double digits UM, your earnings are
24:47
Speaker 1: up substantially, and the stock has gone from you knows
24:53
Speaker 1: a share hit sixteen before they filed there UM there.
24:57
Speaker 1: I think it was at UM say that they that
25:00
Speaker 1: they were looking at it UM. It's a business that's
25:04
Speaker 1: been running well. They've they've got sort of three levels
25:07
Speaker 1: of how they're trying to accelerate their growth. The first
25:10
Speaker 1: one is they're trying to accelerate international unit expansion UM.
25:14
Speaker 1: The second is by pushing to breakfast the last couple
25:17
Speaker 1: of years, and the third is by pushing the Ghost
25:19
Speaker 1: Kitchens partner with Reef Kitchens UM. I think the one
25:23
Speaker 1: that has the greatest chance of actually structurally changing the
25:27
Speaker 1: algorithms of the business is if international really works. However,
25:31
Speaker 1: there's nothing to truly gone poorly this this is a
25:33
Speaker 1: business is performing pretty well UM, and the market for
25:38
Speaker 1: a few reasons, I think one has punished them for
25:41
Speaker 1: a few reasons. I think one is the company has
25:43
Speaker 1: set their expectations always with a little bit of a
25:47
Speaker 1: bullish outlook UM and, So I think it gets back
25:49
Speaker 1: to the question of maybe there's a little bit more
25:52
Speaker 1: risk to the numbers and there's a McDonald's yum UM.
25:55
Speaker 1: I think that's one part of it, and the other
25:58
Speaker 1: part of it is is a couple of these drivers
26:00
Speaker 1: Breakfast and Reef have had a little bit of a
26:02
Speaker 1: hiccups recently. But stock is sort of ridiculously cheap, and
26:07
Speaker 1: I think that's what try and was trying to highlight
26:09
Speaker 1: and emphasize with their UM with their release and UM.
26:15
Speaker 1: But I don't I don't think it's something that will
26:18
Speaker 1: necessarily close or happen UM as long as the market
26:22
Speaker 1: kind of uh trades to stock a little bit more
26:25
Speaker 1: favorably than it was when it was down at fifteen
26:27
Speaker 1: six year. Yeah, that's interesting because to your point, you know, uh,
26:32
Speaker 1: Top Pentagor and the team there has has done a
26:34
Speaker 1: nice job, right. So I don't I don't see really,
26:37
Speaker 1: um too many areas of improvement for try And. So
26:41
Speaker 1: I don't know if it makes an attractive takeover candidate.
26:45
Speaker 1: But the one thing I think that I point out
26:47
Speaker 1: is franchise margins are a lot lower there uh than
26:52
Speaker 1: there are a lot of their competitors, Do you have
26:54
Speaker 1: any insight into that the franchise e margins the franchise
26:59
Speaker 1: market original corporate side. So they're they're burning lower margins
27:04
Speaker 1: on that franchise business than most of their competitors. It's
27:07
Speaker 1: it's so hard to parse out some of the frenchise
27:09
Speaker 1: margin components. UM. Wendy's is involved a bit more in
27:13
Speaker 1: the real estate than some of its peers. And obviously
27:16
Speaker 1: there's there's a few different ways if you're a franchise
27:18
Speaker 1: or to make money. You can make money on a
27:20
Speaker 1: royalty stream, which is generally four to five percent of
27:23
Speaker 1: sales and carries with it a very high margin of UM.
27:28
Speaker 1: Real estate, which can be six to ten percent of sales,
27:32
Speaker 1: will carry with it a thirty or forty percent margin UM.
27:36
Speaker 1: And then there's the advertising funds, which if you're flowing
27:39
Speaker 1: in through your p n L maybe four or five
27:41
Speaker 1: percent of sales but at zero percent margin UM. And so,
27:44
Speaker 1: and then there's technology fees which will have varying degrees
27:46
Speaker 1: in margins UM. But so it's a little bit hard
27:49
Speaker 1: to stack up the franchise margins UM. You know, I
27:53
Speaker 1: think one of the things that is a part of
27:55
Speaker 1: the cataus and why the stock is always with a
27:57
Speaker 1: little uh chief on e VD, but's odd expensive on
28:00
Speaker 1: PE is the fact that they flow thirty to forty
28:04
Speaker 1: million dollars more of d n A through their income
28:08
Speaker 1: statement than they run in capex um and so that
28:11
Speaker 1: should come down over time and help the EPs growth
28:15
Speaker 1: um and make the stock look a little more attractive
28:17
Speaker 1: on a P basis. But even here it's pretty reasonably priced. Alright,
28:21
Speaker 1: good stuff, man. Well listen, we're running up on time,
28:24
Speaker 1: so uh, I appreciate you, thanks for coming on. Um,
28:28
Speaker 1: you know, I learned a few things hopefully uh hopefully
28:31
Speaker 1: our our audience picks up a few tidbits as well. Man,
28:35
Speaker 1: But thanks for thanks for coming on, and uh I
28:38
Speaker 1: look forward to you to having you on again. Like
28:41
Speaker 1: thanks and congrats on your recent award. I respect what
28:44
Speaker 1: you do in the industry and you're you're you're very good. Um,
28:47
Speaker 1: you're a very good analysts and and very on top
28:49
Speaker 1: of your relationships and trends. So thanks for the time.
28:54
Speaker 1: Thanks Greig,