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Negative Earnings Revisions Loom for Restaurants · Choppin’ It Up by Bloomberg Intelligence

0:23
Speaker 1: Welcome to Chopping It Up.
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Speaker 2: I'm your host, Mike Halon, the senior restaurant food Service
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Speaker 2: analyst at Bloomberg Intelligence. Our research and that of bi's
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Speaker 2: five hundred analysts around the globe can be found exclusively
0:34
Speaker 2: on the Bloomberg terminal. Today, we're joined by Greg Frankfurt,
0:37
Speaker 2: Director and lead restaurant analyst at Gougenheim Partners.
0:40
Speaker 1: Thanks for joining me, Greg.
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Speaker 3: Of course I love this. I think I was your
0:44
Speaker 3: first first guest mic on this, so we had to
0:47
Speaker 3: go back for round two.
0:49
Speaker 1: Yes, you are our first guest. That was a little
0:51
Speaker 1: over two years ago. Now you're our first repeat guest.
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Speaker 3: Oh this is great.
0:56
Speaker 1: Yeah, it's great to have you back.
0:57
Speaker 3: Do I get Do I get a T shirt? Or
0:59
Speaker 3: do I get a award or something like that?
1:03
Speaker 2: Yeah, I could see to put something. I can see
1:06
Speaker 2: to put something together. I definitely can get you some
1:08
Speaker 2: Bloomberg swag, that's for sure.
1:10
Speaker 1: Sweet. All right, so I.
1:13
Speaker 2: Guess let's start at the top. You having fun picking
1:15
Speaker 2: stocks right now?
1:17
Speaker 1: No, No, not at all.
1:20
Speaker 3: It's a very difficult environment, I think, both from a
1:26
Speaker 3: restaurant industry environment but also from a stock picking environment
1:32
Speaker 3: the industry. If I just kind of step back and
1:34
Speaker 3: look at twenty twenty four. You know, we came into
1:40
Speaker 3: sort of first quarter earning season with sales under some challenges,
1:45
Speaker 3: and I think a lot of companies approached earnings and
1:48
Speaker 3: this was back in April with a hope that the
1:51
Speaker 3: year would get better and that that was kind of transitory.
1:54
Speaker 3: I don't think things have gotten a lot worse, but
1:57
Speaker 3: I would definitely say they haven't gotten better, and and
2:00
Speaker 3: that puts a lot of a lot of the guidances
2:03
Speaker 3: for this year under some probably negative earnings revisions rather
2:07
Speaker 3: than positive earnings revisions. That's the backdrop for the space.
2:12
Speaker 3: I think even in the last three or four weeks
2:15
Speaker 3: maybe have been under even a little bit more sales pressure.
2:17
Speaker 3: And so I think there's a lot of investors out
2:19
Speaker 3: there really worried that the low income consumers tapping out
2:23
Speaker 3: a bit, and restaurants where maybe historically have been viewed
2:29
Speaker 3: as very defensive, I think likely are. But I think
2:33
Speaker 3: that that kind of assumption is is getting a second
2:36
Speaker 3: look from a stock perspective. I don't know if I've
2:41
Speaker 3: seen a point at which companies that are beating there
2:46
Speaker 3: seems to be no valuation ceiling, and if you have
2:49
Speaker 3: positive traffic, you look at Wingstop, you look at Cavo,
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Speaker 3: you look some of those names. If you are missing
2:56
Speaker 3: or if you're under some pressure. I mean, I'm starting
2:59
Speaker 3: to get deep down you folks looking at some quick
3:01
Speaker 3: service uh, restaurant, restaurant, franchise ors that that hasn't happened
3:06
Speaker 3: in the twelve years I cover the space, so that
3:10
Speaker 3: that just that just goes to show you where.
3:12
Speaker 1: We are.
3:14
Speaker 3: And uh and and for a lot of those names,
3:17
Speaker 3: are you hitting a level where you don't even necessarily
3:19
Speaker 3: need a catalyst because the valuations are low up? I
3:21
Speaker 3: mean that that seems to be the outstanding question right now.
3:25
Speaker 2: Yeah, some of these stocks have gotten beaten down over
3:27
Speaker 2: the last month or so. You know, somebody must know
3:31
Speaker 2: something that I don't. But yeah, it's a it's a
3:34
Speaker 2: tough environment, man. You know, comps are getting easier, but
3:38
Speaker 2: low income consumer seems to be to your point, tapping
3:41
Speaker 2: out a bit here.
3:42
Speaker 3: I just looked I think revolving credits up. I think
3:47
Speaker 3: it was around eighty five billion year over year, which
3:50
Speaker 3: on the grand scheme of things, that's not a big number.
3:53
Speaker 3: I mean, you're you're talking about twenty trillion dollars of
3:55
Speaker 3: annual UH consumer expenditures one hundred billion dollars here, one
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Speaker 3: hundred billion dollars. There's are big numbers, but not big
4:01
Speaker 3: in the scheme of things. But that number is up
4:04
Speaker 3: I think seven percent year over year. And the loan
4:08
Speaker 3: consumer has been leaning on credit in a way they
4:10
Speaker 3: had it for a while, and that's concerning because you
4:16
Speaker 3: can't do that for effort. Yeah, it just doesn't work.
4:19
Speaker 3: That doesn't work.
4:20
Speaker 2: Yeah, interesting, you know, we look, we look at a
4:23
Speaker 2: few data points. We look at total credit card total
4:28
Speaker 2: credit card debt, and it was up thirteen percent in
4:31
Speaker 2: the first quarter. Wow, not not a great number, but
4:35
Speaker 2: creative change actually improved the fourth quarter and the third
4:38
Speaker 2: quarter were up seventeen eighteen percent, so that's kind of improved.
4:41
Speaker 2: Where we see some stresses on delinquencies, those are actually
4:45
Speaker 2: credit card and auto loan delinquents are actually actually accelerated
4:49
Speaker 2: in the first quarter. So yeah, that's something we watch
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Speaker 2: pretty closely. All right, cool, let's talk coffee. Man, you're
4:57
Speaker 2: neutral on Starbucks and Dutch Bros. What do we need
5:00
Speaker 2: to know about those those two stories right now?
5:04
Speaker 3: I think coffee and look, we just updated our numbers
5:07
Speaker 3: recently on On Bros. I think coffee has been one
5:11
Speaker 3: of the most fascinating categories for the rest of industry,
5:16
Speaker 3: and the reason for that is because it is probably
5:19
Speaker 3: the area, alongside chicken, with the fastest demand growth. Consumers
5:25
Speaker 3: are rotating towards that they're increasing their caffeine consumption every year,
5:30
Speaker 3: and so that provides a lot of tailwind to store development.
5:34
Speaker 3: It provides a lot of opportunity for new chains and
5:37
Speaker 3: new brands to emerge without necessarily having to have a
5:39
Speaker 3: big impact on the existing chains. I think the challenges
5:45
Speaker 3: we see it is there may just be a bit
5:47
Speaker 3: too much supply coming on. And I mean, you look,
5:51
Speaker 3: you think about the category. Starbucks just posted a negative
5:54
Speaker 3: comp in the US for the first time. I don't
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Speaker 3: even know if we have it recorded get it before
6:02
Speaker 3: the UH and then Dutch Bros. Even last year the
6:07
Speaker 3: sales had slowed quite a bit to the point where
6:09
Speaker 3: they were kind of bouncing around barely positive to a
6:12
Speaker 3: big acceleration their sales in the first quarter. So it's
6:14
Speaker 3: it's it's it's very dynamic. We're looking at Starbucks now
6:20
Speaker 3: has about sixteen thousand locations in the US and is
6:23
Speaker 3: adding about four percent a year or is trying to
6:25
Speaker 3: get their unit growth about four percent a year. That
6:26
Speaker 3: would be six hundred locations, six hundred fifty locations year.
6:30
Speaker 3: That's a lot of stores to go in on a
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Speaker 3: brand that's doing about thirty billion in sales. And then
6:36
Speaker 3: and then Dutch Bros. Isn't really the only one that's
6:38
Speaker 3: kind of this upstart category that is that is growing
6:43
Speaker 3: really quickly. You have seven Brew and Scooters and Big
6:45
Speaker 3: b and Caribou and Eliano's, and there's there's probably ten
6:50
Speaker 3: or fifteen chains that represent about four thousand locations adding
6:53
Speaker 3: eight hundred a year, adding twenty percent growth. So there's
6:56
Speaker 3: a lot of capacity coming on in the category. I
6:59
Speaker 3: think we're gonna see that start to shake out a
7:01
Speaker 3: little bit this year. We've we've gone through a bunch
7:03
Speaker 3: of industry data points to suggest that that some of
7:07
Speaker 3: those chains are starting to slow. I think that will
7:11
Speaker 3: be healthy, and we're gonna be watching it very closely.
7:13
Speaker 3: But I think that's been our biggest issue for the categories.
7:17
Speaker 3: Demand's great. Demand growth is great. Supply growth might be
7:21
Speaker 3: even greater.
7:22
Speaker 2: Yeah, yeah, no, And you've been right, So that's good stuff.
7:24
Speaker 2: You know, Historically they've always had such good, nice premium
7:28
Speaker 2: multiples because of that strong unit economics, right, the strong
7:32
Speaker 2: the low investment of sales ratios, the strong margins. But yeah,
7:38
Speaker 2: with they've definitely been under pressure now for some time.
7:42
Speaker 3: It's great. It's great selling something that's mostly water. Great,
7:46
Speaker 3: it's a great margin business.
7:48
Speaker 1: Fantastic, and it's addictive, right and need.
7:51
Speaker 3: Too and sugar you get to two different components to it.
7:55
Speaker 2: Yeah, and these companies aren't afraid to get kids hooked
7:57
Speaker 2: on the caffeine and sugar early either. So yeah, did
8:01
Speaker 2: the estimates reflect the jump in green coffee prices that
8:04
Speaker 2: we've seen over the last ten months.
8:07
Speaker 3: You've seen that I think, I mean Starbucks has historically
8:11
Speaker 3: hedged out about eighteen months, and so I mean sometimes
8:15
Speaker 3: that's bled down to kind of twelve fifteen months. But
8:18
Speaker 3: we're likely going to see that on you know, probably
8:21
Speaker 3: six nine months from now, maybe start to flow through
8:24
Speaker 3: the P and L.
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Speaker 1: So yeah, that.
8:26
Speaker 3: That's that's gonna cause some pressure. It's interesting for Starbucks specifically.
8:33
Speaker 3: I think I think some of the challenges they've gotten
8:35
Speaker 3: into is they they initially gave a long term guidance
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Speaker 3: range under under Howard Schultz when it was about two
8:43
Speaker 3: to three months post peak CPI, and I think that's
8:47
Speaker 3: was a very difficult time to give a guidance range.
8:51
Speaker 3: And they gave seven to nine percent comps, which they've
8:54
Speaker 3: done at points in various points in history, but not
8:57
Speaker 3: when they've had sixteen thousand locations. And I think that
9:01
Speaker 3: put the incoming CEO in a bit of a tough
9:04
Speaker 3: position where he was trying to chase and earnings an
9:06
Speaker 3: earnings algorithm that was going to have to be more
9:09
Speaker 3: margin driven if he was to get there, and he's
9:11
Speaker 3: pivoted that way. He's taken the camp guidance down, he's
9:15
Speaker 3: taken the margin guidance up, and I think they've had
9:18
Speaker 3: some other idiosyncratic factors that have driven comps even lower
9:21
Speaker 3: than maybe he would have expected as a possibility.
9:25
Speaker 2: Yeah, that that stock's been under a ton of pressure,
9:30
Speaker 2: How do you feel about their initiatives that they they've
9:33
Speaker 2: they've they put in place on that last earnings call.
9:37
Speaker 3: It's interesting. I think the stock just at seventy six
9:40
Speaker 3: bucks a share, and it's it's as of when we're
9:43
Speaker 3: recording this, it's below that it does have an over
9:46
Speaker 3: three percent dividing yields, So I think it's going to
9:47
Speaker 3: attract some investors who are focused on the yield, which
9:51
Speaker 3: which has not been someone who's r Star Wicks has
9:54
Speaker 3: been more of a growth story, less of a value
9:56
Speaker 3: dividend story in a long time. But yeah, I think
10:00
Speaker 3: I think, look, the initiatives are doing kind of makes sense.
10:04
Speaker 3: I mean, like like, particularly from a product standpoint. I mean,
10:06
Speaker 3: I've tried most of them. I've tried the spicy lemonades.
10:10
Speaker 3: We had the whole sales desk trying the spicy lemonades.
10:13
Speaker 3: I had the bubble tea one of the few clients,
10:16
Speaker 3: and we went and tried the energy drinks. I think
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Speaker 3: they're all decent products. I'm not sure they are are
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Speaker 3: visible enough to the consumer with how much they're putting
10:27
Speaker 3: out there. From a product perspective, it almost I think
10:32
Speaker 3: might get lost in the shuffle and the noise. One
10:34
Speaker 3: of my concerns is that trying to address the customer's
10:38
Speaker 3: not using your mobile phone with digital apps and and
10:43
Speaker 3: trying to push text messages to them may not be
10:46
Speaker 3: the right strategy to re engage some of those customers.
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Speaker 3: I think I think maybe a little bit more aggressive
10:53
Speaker 3: invisible marketing in terms of what they're actually putting out there.
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Speaker 3: From a product perspective, is is what I would suggests
10:59
Speaker 3: as the right way to get more visibility.
11:01
Speaker 1: Yeah.
11:01
Speaker 2: I think that's a great point. What do you feel about, Uh,
11:03
Speaker 2: how do you feel about the discounting?
11:05
Speaker 3: The discounting is a industry wide phenomenon right now and
11:09
Speaker 3: so and I think part of it is if you
11:12
Speaker 3: did not have the discounting, you would have had very
11:15
Speaker 3: strong margins in twenty twenty four. And this industry is
11:21
Speaker 3: too big and too competitive and too fragmented for everyone
11:26
Speaker 3: to have structurally higher margins. And so I think what's
11:28
Speaker 3: happening is you're seeing these companies, One the consumers under
11:31
Speaker 3: a little bit of pressure, and two the margin the
11:34
Speaker 3: cost inflation to come down, and they're kind of chasing
11:37
Speaker 3: that back down. I went in, I had three of
11:40
Speaker 3: the energy drinks, and I think I've paid twenty three
11:44
Speaker 3: bucks for it. Wow, that's expensive. Ook Starbucks has always
11:47
Speaker 3: been expensive, But that's that's that's a lot. If you're
11:51
Speaker 3: a while, it's under some pressure.
11:52
Speaker 2: Yeah, yeah, for sure. And they're seeing that in China too.
11:55
Speaker 2: China's a concern. But I'd like to like to move
11:57
Speaker 2: keep this movement does the social media. The attention around
12:00
Speaker 2: Chipotle's portion sizes concern you.
12:04
Speaker 4: Oh man, yeah, my my, my ability to follow the
12:09
Speaker 4: hottest thing on TikTok and and the complaints of the
12:13
Speaker 4: of of each of each consumer on TikTok has been
12:16
Speaker 4: very difficult.
12:17
Speaker 3: I I'm not that concerned about it. I thought it
12:20
Speaker 3: was interesting. I saw the report You probably saw it too,
12:23
Speaker 3: that the Wells Fargo I think it was Zach Fadam
12:27
Speaker 3: put out at Wells Fargo a couple of weeks ago
12:29
Speaker 3: on the variability of portion sizing. I thought it was interesting,
12:34
Speaker 3: not surprising. I mean, I'm a pretty regular Chipotle customer.
12:40
Speaker 3: I think the challenges with a lot of these stocks
12:45
Speaker 3: is that they're great businesses with great traffic growth. It's
12:49
Speaker 3: just a matter of what you want to pay for them.
12:51
Speaker 3: And that's what we've struggled with for a while, and
12:54
Speaker 3: I think we we've tended to try to lean into
12:58
Speaker 3: businesses with some level of growth, high returns, but maybe
13:03
Speaker 3: a little bit of a more reasonable valuation. I think
13:05
Speaker 3: Texas Roadhouse would fit fit in well into that uh
13:08
Speaker 3: into that that bucket?
13:10
Speaker 2: All right, that's one of your favorite names. Uh, why
13:13
Speaker 2: don't you talk to us a little bit about that one.
13:16
Speaker 3: Yeah, it's look, I hadn't covered it for a long time.
13:19
Speaker 3: We just picked it up early last year, and I
13:22
Speaker 3: mean I've kind of followed it from a from an
13:26
Speaker 3: arms length for a while, and I don't think I realized.
13:29
Speaker 3: I think if you're not paying attention that close to
13:32
Speaker 3: the industry, it's hard to realize how good of a
13:35
Speaker 3: competitive position they're in. I mean, I think that the
13:38
Speaker 3: restaurants that are performing best right now are ones where
13:42
Speaker 3: they have a mode on pricing and traffic. Do you
13:45
Speaker 3: think about Domino's and Pizza and how much how much
13:49
Speaker 3: cheaper they are than than than Pizza and Papa John's.
13:53
Speaker 3: Do you think about Chipotle in a fast casual space?
13:56
Speaker 3: You think about Texas Roadhouse, think about even wing stopping.
14:00
Speaker 3: I mean some people have tried to figure out what
14:01
Speaker 3: wingstop strengths are. Go to Indianapolis, go to Wichita, and
14:07
Speaker 3: go to the four or five local wing joints. They're
14:10
Speaker 3: fifteen percent more expensive than wingstop. I think that has
14:12
Speaker 3: a lot to do with it. And Texas road has
14:16
Speaker 3: just recently in the last couple of years, passed out
14:18
Speaker 3: back as the number one stake player by sales in
14:21
Speaker 3: the US, and I think if you go, it's actually
14:27
Speaker 3: very easy. Steaks are very standardized, so you have like
14:30
Speaker 3: your eight ounce fil A, you have your Surlo and
14:32
Speaker 3: there they're by weight and everything comes with two sides,
14:35
Speaker 3: so it's like it's very easy to stack them up
14:37
Speaker 3: against each other. And Roadhouse is double digits cheaper than
14:41
Speaker 3: their biggest competitors, and yet they're doing seventy eighty percent
14:44
Speaker 3: more traffic per chair. It's not even like the restaurants
14:47
Speaker 3: are the restaurant's a little bit bigger, but not substantially bigger.
14:51
Speaker 3: They are just winning on a low price point where
14:54
Speaker 3: they are getting customers through more quickly than their competition.
14:57
Speaker 3: And that is a fantastic competitive position to be in.
15:02
Speaker 3: And so I think, and the other thing that's missed
15:04
Speaker 3: is that's it's not just stakes. Their drinks are forty
15:06
Speaker 3: fifty percent cheaper than a lot of their competitors. Their
15:08
Speaker 3: average check is twenty percent lower. I mean, it is
15:11
Speaker 3: in a fantastic competitive position. They're still growing five percent
15:15
Speaker 3: unit growth in the US, and it's one that's I mean,
15:18
Speaker 3: the stocks expand it's up a lot the last six nine,
15:20
Speaker 3: twelve months, but you know, when you look at the
15:24
Speaker 3: realm of who's growing traffic and who's growing double digit
15:27
Speaker 3: revenue growth, kind of a load of mid twenty times
15:30
Speaker 3: pe multiple is not crazy for this stock.
15:32
Speaker 2: Yeah, and they're they're operators, man, I love I love
15:37
Speaker 2: restaurant chains that are operator lad.
15:39
Speaker 3: Oh yeah, I mean it's it's I feel like Jerry
15:42
Speaker 3: jumps on the call and you want to run through
15:44
Speaker 3: a wall for the brand. You know. I come away
15:46
Speaker 3: feeling like I'm I'm working Texas Roads and I'm excited.
15:50
Speaker 3: It's like he's very, very and uh. I think in
15:53
Speaker 3: the in the shift from Kent to Jerry, there was
15:56
Speaker 3: some concern about maintaining that, but I think he's proven
15:59
Speaker 3: absolutely be a good leader for this concept.
16:02
Speaker 2: And it's so important, you know, it's so important to
16:05
Speaker 2: have a leader that you know, team members believe in
16:08
Speaker 2: and gms believe in and want to work for and
16:10
Speaker 2: bust their butts for. You know, It's it's it's critical.
16:14
Speaker 2: So yeah, I think it's it's awesome. It's awesome to see.
16:18
Speaker 2: It's been a fun one to cover.
16:19
Speaker 1: For sure.
16:20
Speaker 3: Sometimes us on Wall Street, I think we forget how
16:22
Speaker 3: important it is to have the general manager in place.
16:26
Speaker 3: That's really strong. I mean I've kind of realized that
16:28
Speaker 3: over the years, but it's taken me some time.
16:31
Speaker 2: Right, and that that general, the fact that their gms
16:34
Speaker 2: have skin in the game is great.
16:35
Speaker 1: You know, that's that old old school's outback model.
16:39
Speaker 2: You know that not everybody can do uh these and
16:43
Speaker 2: and Longhorn and Texas road House sales tend historically tend
16:47
Speaker 2: to do pretty well amid stake inflation.
16:49
Speaker 3: Right, Yeah, I mean, that's that's that's been We've started
16:54
Speaker 3: to see evidence of that moving. I think the last
16:57
Speaker 3: couple of years, pasture conditions have been pretty poor, and
17:02
Speaker 3: so a lot of farmers have just been sending cattle
17:07
Speaker 3: to slaughter rather than leaving them in the field, which
17:09
Speaker 3: is exacerbated it was already a pretty bad supply condition.
17:14
Speaker 3: You're starting to see that reverse, and you're starting to
17:16
Speaker 3: see state prices go up quite a bit, and Roadhouse
17:19
Speaker 3: has underpriced that. I think anyone looking at next three, six,
17:23
Speaker 3: nine months of earnings may get a little freaked out
17:26
Speaker 3: if you get a little bit of a bump in inflation.
17:29
Speaker 3: But this data has proven to be kind of add
17:32
Speaker 3: to Roadhouse's strength rather than detract from it.
17:36
Speaker 1: All, Right, let's stick to full service here. Darden is
17:39
Speaker 1: one of the names you like.
17:40
Speaker 2: What were the key takeaways for you from last month's
17:44
Speaker 2: earning squall?
17:45
Speaker 3: Yeah, I think the they're the bell weather for the industry.
17:49
Speaker 3: They're the first ones to have to really guide the
17:51
Speaker 3: next four quarters, the next twelve months. Sales have been
17:57
Speaker 3: under some pressure. There's no doubt about that. They may
18:00
Speaker 3: bet during COVID to basically take six seventy eight percent
18:04
Speaker 3: less pricing over the next several years in their peers,
18:08
Speaker 3: and the way they funded that, or at least how
18:10
Speaker 3: I see it as the way they funded that by
18:12
Speaker 3: lowering their advertising, so they're advertising is kind of one
18:16
Speaker 3: percent of sales. It was three percent of sales. That's
18:18
Speaker 3: a big change. And I think the other thing they've
18:22
Speaker 3: done is they've reduced the discounting. And I think when
18:25
Speaker 3: people look at the opportunities that Darden has to reinvigorate traffic,
18:29
Speaker 3: they go, well, you got to advertise more and discount more.
18:33
Speaker 3: And the company's very hesitant to to discount. But I
18:39
Speaker 3: think if they were to add thirty forty to fifty
18:41
Speaker 3: BIFs of advertising back into the business, not necessarily a
18:45
Speaker 3: discount of price points just to get the visibility back up.
18:48
Speaker 3: I think investors would be very receptive to that as
18:51
Speaker 3: a strategy. You know, they've talked a little bit about
18:56
Speaker 3: pressure on the under seventy five thousand income households and
19:00
Speaker 3: we're worried about that. We're worried about that across the industry.
19:03
Speaker 3: But I think Darden should be in a position where
19:08
Speaker 3: competitively they are winning over their peers.
19:12
Speaker 1: Scale matters, It totally does. Yeah, all right, let's flip
19:17
Speaker 1: to QSR.
19:19
Speaker 2: We haven't spoken about QSR really too much yet, so
19:22
Speaker 2: seemingly in an effort to remind consumers that they can
19:26
Speaker 2: provide value, McDonald's offered their five dollars meal two three
19:31
Speaker 2: weeks ago. Burger King actually beat them to the punch
19:33
Speaker 2: with their five dollars combo. Is this as low as
19:38
Speaker 2: these QSR chains are going to go? Are we going
19:40
Speaker 2: to see deeper discounting in the next six to twelve months.
19:43
Speaker 3: I don't know. If you're going to see deeper discounting,
19:45
Speaker 3: you might see lower price points. I think McDonald's a
19:50
Speaker 3: few years ago made this pivot to dollar one, two
19:53
Speaker 3: three from the dollar menu, and I think that was
19:54
Speaker 3: just a realization that sticking at one price point was
19:58
Speaker 3: hard to do. I think finding a solution to replace that,
20:03
Speaker 3: is it with visibility and equity in the platform, is
20:06
Speaker 3: going to be the number one focus. I don't think
20:09
Speaker 3: the four for five dollars meal is that solution. I
20:13
Speaker 3: think this is them trying to remind people that they
20:16
Speaker 3: have good value. I see. It's pretty interesting. I've been
20:19
Speaker 3: seeing in the in the mobile app recently dollar sodas
20:23
Speaker 3: in a way that I had not seen in a
20:25
Speaker 3: long time, and I know that was a change. I
20:27
Speaker 3: think in the twenty two they got off of that
20:30
Speaker 3: in a lot of markets, and I think that was
20:31
Speaker 3: a big part of the price increases that they've seen
20:33
Speaker 3: the last few years. And so that to me is
20:37
Speaker 3: you're going to see some of that pop up in
20:39
Speaker 3: different areas. But I think a solution to replace D one,
20:44
Speaker 3: two three, at some point, which we expect will come
20:46
Speaker 3: later this year, maybe more meaningful to actually driving lower
20:50
Speaker 3: price points in the industry.
20:51
Speaker 2: Yeah, they definitely catch some shade for not offering anything
20:54
Speaker 2: that's actually a buck.
20:55
Speaker 1: You know.
20:55
Speaker 2: It's like maybe if you're in like the Middle America,
20:58
Speaker 2: maybe you can get something for one, you know.
21:01
Speaker 3: But it's like the dollar stores offering things for five
21:04
Speaker 3: bucks you know how many dollars?
21:06
Speaker 1: Yeah, yeah, exactly exactly.
21:10
Speaker 2: But you know they've proven they can win in this environment, right,
21:13
Speaker 2: So even though one q fell short of expectations, do
21:16
Speaker 2: you feel the bolk case is still in talc here.
21:18
Speaker 3: I think I wouldn't bet against McDonald's. I think that's
21:22
Speaker 3: proven to be a very bad bet Historically. They just
21:26
Speaker 3: have such scale advantages, and I think they're they're going
21:29
Speaker 3: right after others in QSR who I think have owned
21:33
Speaker 3: this this this four and five dollars bundle in a
21:37
Speaker 3: way that McDonald's is not historically, and they're throwing a
21:39
Speaker 3: lot of advertising that I mean, if they had to,
21:42
Speaker 3: if sales do not find traction, they'll get they'll get
21:45
Speaker 3: Taylor Swift, or they'll get they'll they'll get Michael Jordan
21:48
Speaker 3: and they'll pay him a whole bunch of money to
21:50
Speaker 3: do a new meal. I mean that they are not
21:51
Speaker 3: going to just sit back there and and kind of
21:54
Speaker 3: take what's going on in the industry. I think the
22:00
Speaker 3: concern I have for Quick Service is I think you
22:05
Speaker 3: probably you've been around long enough to remember this as well, Mike,
22:08
Speaker 3: but the move to one hundred percent franchise business models
22:12
Speaker 3: over twenty twelve, thirteen, fourteen, fifteen sixteen. I think they
22:16
Speaker 3: haven't been stressed stressed in a way that the volatility
22:20
Speaker 3: inflation has stressed that relationship the last two years. And
22:24
Speaker 3: that's probably my biggest long term concern for McDonald's and
22:28
Speaker 3: Wendy's and RBI and but I think that I mean
22:33
Speaker 3: McDonald's the partnership they haven't owning the real estate is
22:36
Speaker 3: a huge structural competitive advantage. It allows them to make
22:40
Speaker 3: investments that others can't make. And I think that they'll
22:46
Speaker 3: they'll figure it out, but they're clearly hitting a lull
22:48
Speaker 3: right now in the business.
22:50
Speaker 2: Yeah, they've they've been a marketing machine under easter Brook
22:54
Speaker 2: and now Kemchinsky. They've done a phenomenal job. I don't
22:58
Speaker 2: watch much TV. Have they done any celebrity endorsements around
23:02
Speaker 2: the five dollars meal done?
23:04
Speaker 3: I have not that I've seen. I was hoping for
23:06
Speaker 3: a Mike Hale and Mike Halen meal and it just
23:09
Speaker 3: was like, you know, a whole bunch of mcflurries and
23:11
Speaker 3: you know it would be great, But I haven't seen anything.
23:15
Speaker 3: But again, I've seen different discount and yeah, I think
23:18
Speaker 3: what they did was they used to have a I
23:21
Speaker 3: think it was a twenty percent off promotion in the
23:23
Speaker 3: app for for orders over. I believe it was five bucks.
23:26
Speaker 3: They've raised that to effectively make you kind of buy
23:31
Speaker 3: the five dollars offer at full price. So that's been
23:36
Speaker 3: where I guess they've pulled back as an offset. But
23:39
Speaker 3: but they're I think they're gonna be pretty aggressive here
23:41
Speaker 3: going forward. And I it's just the stores look good.
23:47
Speaker 3: They've been all been remodeled the last five or six years.
23:50
Speaker 3: I think the strategy is good. I think the new
23:52
Speaker 3: products are good, and I just wouldn't bet against them.
23:56
Speaker 1: Yeah, I agree.
23:58
Speaker 2: And for the record, the centerpiece of the Mike Hanlon
24:01
Speaker 2: meal would be the quarter pounder with cheese and big
24:04
Speaker 2: mac sauce.
24:05
Speaker 3: I just had a quarter pounder for lunch, so I'm
24:07
Speaker 3: right there with you.
24:11
Speaker 2: Nice, Nice, And my guilty pleasure is a flay of
24:15
Speaker 2: fish with an extra extra piece of really yeah yeah,
24:18
Speaker 2: but you got to get the extra piece of cheese,
24:20
Speaker 2: or you get it with like extra.
24:24
Speaker 1: Extra tartar, so you know it comes out fresh.
24:27
Speaker 3: I'll let you know tomorrow.
24:30
Speaker 2: All right, what are your thoughts on young brands you know,
24:34
Speaker 2: they had a really rough first quarter. Yeah, you know,
24:38
Speaker 2: and historically they've known to be you know, top of
24:41
Speaker 2: the food chain when it comes to marketing.
24:43
Speaker 1: You know, can they write the ship there.
24:46
Speaker 3: Yeah. I mean, they've been fantastic marketers historically. I think
24:49
Speaker 3: it's probably their biggest strength as a as an overall organization.
24:53
Speaker 3: What i'd say McDonald's maybe scale. I think the challenge
24:57
Speaker 3: for young is, I mean they've historically had a pizza
25:00
Speaker 3: Hut US brand which isn't massively meaningful to the profitability.
25:04
Speaker 3: It's probably seven or eight percent of overall profits that's
25:07
Speaker 3: been pressured by Dominoes. And now they have the KFC
25:12
Speaker 3: US business, which I think is starting to come under
25:15
Speaker 3: pressure from raising Canes and Chick fil A and pop
25:19
Speaker 3: Eyes and some of these businesses that are starting to
25:21
Speaker 3: actually get even get to an even bigger size where
25:25
Speaker 3: they're having a bigger impact on KFC. I think if
25:28
Speaker 3: both of those businesses are struggling, it starts to cause
25:31
Speaker 3: a problem. But I mean, so much of the strength
25:34
Speaker 3: for this concept is also in the global pace of
25:38
Speaker 3: unit growth, and I think one of the challenges for
25:41
Speaker 3: the US franchise market is there's been I think excessive
25:45
Speaker 3: leverage on the franchise e side of things. For the
25:47
Speaker 3: past i'd call it six or seven years, a lot
25:50
Speaker 3: of low covenant loans being made by the banking system
25:54
Speaker 3: that has allowed kind of permanently high debt structures. Internationally,
25:59
Speaker 3: I think a lot of the franchisees that Youum is
26:02
Speaker 3: growing alongside really don't have leverage issues. They have much
26:07
Speaker 3: better balance sheets, and so if you can continue to
26:09
Speaker 3: post maybe it's not five and a half six percent
26:13
Speaker 3: unit growth, but five to five and a half percent
26:14
Speaker 3: unit growth globally, this is a stock that's trading probably
26:18
Speaker 3: too cheap for that. And we made a point in
26:21
Speaker 3: our note recently on Yum. I remember when Hilton marrying
26:25
Speaker 3: some of these hotels traded at two three four turned
26:29
Speaker 3: discounts to McDonald's and Yum because there was more confidence
26:32
Speaker 3: in the growth of McDonald's andy Youum. Globally, that has
26:36
Speaker 3: completely flipped. They are now trading it around twenty times earn,
26:40
Speaker 3: twenty times PE and a lot of those hotel brands
26:44
Speaker 3: franchise ors are trading the mid twenties. And when I've
26:47
Speaker 3: heard talk to investors, I've heard more confidence on the
26:53
Speaker 3: ability to expand those networks overseas. I wouldn't count Yum
26:58
Speaker 3: out on their pace of global development. They've they've had
27:02
Speaker 3: a very strong engine on networks with a lot of
27:06
Speaker 3: these master franchises in different markets around.
27:08
Speaker 2: The globe, a long track record of success. So absolutely, Yeah,
27:12
Speaker 2: I wouldn't been against them internationally either. Yeah, you touched
27:16
Speaker 2: on a little bit Chicken, you expect it to remain hot.
27:20
Speaker 3: Given my personal consumption, it's it shifted a lot to
27:23
Speaker 3: a lot more aggressively towards Chicken. I think I think
27:27
Speaker 3: we would expect that to be pretty, to be a
27:30
Speaker 3: strong growth category, continue to be a strong growth category.
27:34
Speaker 3: And I remember I put a note out I think
27:36
Speaker 3: it was in twenty twenty seventeens. This is seven years stale,
27:41
Speaker 3: but just looking at the impact of Chick fil A
27:44
Speaker 3: and Subway on the on the US restaurant industry and
27:47
Speaker 3: how they were kind of offsetting dynamics and offsetting pressure,
27:52
Speaker 3: Like you were getting a benefit from the fact that
27:54
Speaker 3: somebody was donating share and you were getting a drag
27:56
Speaker 3: from the fact that Chick fil A was was taking share.
27:58
Speaker 3: But they were relatively offset I think with how much
28:02
Speaker 3: pressure Canes and Chick fil A are applying to the
28:04
Speaker 3: to the overall sector. That may partially explain what's going
28:08
Speaker 3: on from a quick service backdrop. And and and I
28:13
Speaker 3: think some of that's just the shift to chicken. I
28:16
Speaker 3: think some of that's the business models, and and that
28:19
Speaker 3: the corporate entity is aligned with the operators of the
28:22
Speaker 3: stores in a way that some of the public usrs.
28:26
Speaker 3: It's it's not as much or not as apparent.
28:29
Speaker 2: Yeah, Chick fil A is such a monster man. And
28:32
Speaker 2: I still haven't been to a raising canes.
28:33
Speaker 1: I have to. I have to get on that.
28:36
Speaker 3: Your options, I think are chicken fingers, chicken fingers or
28:38
Speaker 3: chicken fingers when you go, so I can tell you
28:41
Speaker 3: what you're going to order.
28:44
Speaker 2: And sauces too, Right, sauces have have been a hot,
28:48
Speaker 2: uh like kind of hot this year. Right first was
28:50
Speaker 2: KFC had saucy nugs, and then Wendy's followed suit.
28:54
Speaker 1: Right, sauces are are back in a big way.
28:57
Speaker 3: It seems like we we we bought that I think
29:00
Speaker 3: it was four of the different flavors of Wendy's Saucy
29:03
Speaker 3: Nugs and brought them out to the trading floor and
29:10
Speaker 3: someone and they were a little bit undersauce, but someone said, Wow,
29:12
Speaker 3: I sort of forgot how good Wendy's nuggets are. And
29:15
Speaker 3: so some of it, I think is it's very easy
29:17
Speaker 3: operationally to take an existing product that you already think
29:20
Speaker 3: is good if you're the brand, and do a little
29:23
Speaker 3: bit to it. You don't have to add a lot
29:24
Speaker 3: of skews. It's it's kind of a simple product line extension.
29:27
Speaker 3: And a lot of those guys are pulling the lever.
29:29
Speaker 1: And you remind me, do cover Wendy's.
29:31
Speaker 3: I do cover Wendy's.
29:32
Speaker 2: What your thoughts on Wendy's right now? Because I mean
29:36
Speaker 2: they for the longest time they ever had that like
29:38
Speaker 2: QSR plus positioning, and you know that's now there's like
29:42
Speaker 2: QSR plus plus with.
29:44
Speaker 1: Via like Chick fil A, right, And so.
29:48
Speaker 2: I don't know have they lost some of that, like
29:50
Speaker 2: cachet of being a better player. And at the same time,
29:52
Speaker 2: we've also seen everybody else kind of up their game, right,
29:55
Speaker 2: McDonald's put a lot of effort and improving their burgers
29:57
Speaker 2: and their chicken.
29:59
Speaker 1: So where does Wendy the stand right now?
30:02
Speaker 3: The stock's been under tremendous pressure, and I think some
30:06
Speaker 3: of that has been They've made some aggressive promises over
30:11
Speaker 3: the years. I mean, I think Reef Kitchen and the
30:14
Speaker 3: impact of that to accelerate unit growth really hurt their
30:18
Speaker 3: credibility on a lot of their long term guidances.
30:20
Speaker 1: International did not work out well either for them.
30:23
Speaker 3: It's been okay, and I think the positive I would
30:27
Speaker 3: say in the international business is the flow through when
30:30
Speaker 3: they open up stores. The flow through is higher than
30:33
Speaker 3: when Yamer McDonald open up lower AUV boxes in China
30:37
Speaker 3: with low royalty rates. So I think from that perspective
30:40
Speaker 3: it's been all right. But when you guide aggressively and
30:45
Speaker 3: you kind of disappoint it a few times, people start
30:49
Speaker 3: just kind of ignoring the guidance, and they don't have
30:53
Speaker 3: a long term framework out there right now. I think
30:55
Speaker 3: they're gonna likely do something on that front as we
30:58
Speaker 3: get later here later this year. And I mean the
31:03
Speaker 3: stock is, the stock is tremendously cheap, particularly if they
31:08
Speaker 3: can just plod along with a couple points the unit
31:10
Speaker 3: growth and a few points of comps. It's it's a
31:14
Speaker 3: very strong brand and I think has a lot of
31:16
Speaker 3: franchisey demand, just which is shows up in the fact
31:20
Speaker 3: that they get six and a half seven turns of
31:24
Speaker 3: EBITDA and a lot of their franchise sales multiples, which
31:28
Speaker 3: I think shows you that there is demand from franchise
31:30
Speaker 3: and there's demand for the returns.
31:32
Speaker 1: Yeah. I was always a big fan of Wendy's.
31:34
Speaker 2: I don't know if they had like a really really
31:37
Speaker 2: top notch franchisee in New Jersey, which may be part
31:40
Speaker 2: of the case, but growing up, it was like the
31:43
Speaker 2: best QSR experience was so good.
31:45
Speaker 3: The taco salad because we're giving, we're spilling our our
31:49
Speaker 3: our number one items here, the taco salad with just
31:53
Speaker 3: a frosty on the side, chocolate frosty. I I can't.
31:56
Speaker 1: You can't beat it. Oh so good man.
31:58
Speaker 2: Yeah, I always was a fan of Wendy's and I'm
32:00
Speaker 2: interested to see because that first quarter wasn't that bad, no,
32:05
Speaker 2: you know what I mean. And I thought there was
32:07
Speaker 2: kind of an overreaction there, you know.
32:09
Speaker 1: I think, guess the new CEO has.
32:11
Speaker 2: To has to, you know, gain the faith of the
32:15
Speaker 2: investor base after a tough initial earnings call.
32:18
Speaker 3: But I think investors are concerned that they're in the
32:22
Speaker 3: crossairs from from McDonald's with this five dollars platform. I
32:25
Speaker 3: think that's weighing on the stock as well, if if
32:28
Speaker 3: if we get through this and Wendy's didn't take a
32:30
Speaker 3: big sales hit, I think that will relieve a lot
32:33
Speaker 3: of pressure.
32:34
Speaker 1: Makes a lot of sense, all right, gun to the head.
32:36
Speaker 2: What kind of comps can quick service and casual dining
32:39
Speaker 2: put up in the second half, like on average?
32:42
Speaker 1: You know what I mean?
32:42
Speaker 3: Like? What?
32:43
Speaker 1: Yeah?
32:44
Speaker 3: I think we should be able to see point point
32:48
Speaker 3: or two of acceleration. I I I I think one
32:53
Speaker 3: of the challenges that's that's that we've experienced is as
32:57
Speaker 3: you've moved from high inflation to kind of benign inflation,
33:01
Speaker 3: it just makes it very difficult to push through pricing.
33:05
Speaker 3: But if you start to see cogs inflation pick up
33:10
Speaker 3: a little bit as you go through the year, I
33:11
Speaker 3: think you're gonna see a little bit more confidence from
33:14
Speaker 3: some of these companies in terms of their ability to
33:18
Speaker 3: to not have to take pricing to zero. And so
33:22
Speaker 3: I from that perspective, I'm somewhat optimistic that maybe resurging
33:26
Speaker 3: cogs inflation could help. But I don't think you're gonna
33:29
Speaker 3: see a big step up the consumer. The loancome consumer
33:33
Speaker 3: is just a bit tapped out, So I wouldn't expect
33:35
Speaker 3: two three four points of acceleration. It just that's just
33:38
Speaker 3: not happening.
33:39
Speaker 1: Yeah, for sure, it's gonna be uh, it's gonna be interesting.
33:42
Speaker 2: And we have the Olympics and the election, and you know,
33:46
Speaker 2: higher costs for advertising, so you know, it's always something.
33:50
Speaker 1: I'm sure.
33:51
Speaker 2: I'm sure the companies we cover can't wait to get
33:53
Speaker 2: to December and those really easy comps from last year.
33:56
Speaker 3: We we should own whatever stock sells the cell the
34:00
Speaker 3: food that's going to be delivered to us and our
34:01
Speaker 3: bunkers around the around the election. That's who who was
34:05
Speaker 3: delivered to the bunker. Maybe maybe it's a uber into DoorDash.
34:08
Speaker 1: I don't know. I have to check out the valuations
34:13
Speaker 1: on those form my p A.
34:14
Speaker 2: Yeah, Greg, you're the best man.
34:17
Speaker 1: Thanks for doing this, Oky, thanks for your time. I
34:19
Speaker 1: appreciate Mike, and a big thanks to the audience for
34:22
Speaker 1: tuning in. If you liked the episode, please share it
34:24
Speaker 1: with your colleagues and friends.
34:26
Speaker 2: Check back soon for a conversation with Andrew Smith, the
34:29
Speaker 2: managing partner and co founder of Savory Fund.