Stock Analyst Examines Restaurant Market, Subway Faces Management-Owner Conflict Regarding Declining Sales, and Small Format IHOP Opens

A Wall Street stock analyst looks at restaurant chains. Subway’s management and owners disagree on how to deal with declining sales and market share. IHOP introduces a new small prototype. McDonald’s racks up a strong quarter. These stories and a whole lot more This Week in Foodservice.

Gregory Francfort, the restaurant stock analyst for Merrill Lynch, provided a quick look at the restaurant market. He noted that the stocks he covers were up 1.0 percent, however, the S&P 400 is up 14 percent, over the past quarter. Some stocks are doing better than the S&P 500, namely McDonald’s, Restaurant Brands International, Yum! Brands, and Domino’s. Others, such as Starbucks and Chipotle, are not. Casual-dining chains, which have lower capitalization, are not doing well, including Brinker and The Cheesecake Factory.

Francfort attributes soft sales performance to weak disposable income growth, unit growth outpacing population growth and menu prices increasing more than commodity prices, which makes restaurant prices look expensive vs. the cost of eating at home.

Finally, Francfort favors franchised chains with strong franchisee unit economics. Interestingly, Technomic’s analysis of its top 500 chains concluded that operations that own most or all of their own units do better than using a franchise model.

Economic News This Week

  • Real gross domestic product increased 3.0 percent at an annual rate in the third quarter according to the advance estimate from the Bureau of Economic Analysis. The Bureau said that second quarter GDP rose 3.1 percent, which marks the first time since mid-2014 that the economy has had 2 consecutive quarterly increases of +3.0 percent or more. It appears the economy is in good shape with low unemployment, low inflation, and a booming stock market. Further, the increase took place despite the impact of two major hurricanes.
  • Initial jobless claims rose 10,000 to a level of 233,000 for the week ending Oct. 10. The 4-week moving average fell 9,000 to a level of 239,500. The Department of Labor continued to report that processing new claims remains very difficult in Puerto Rico and the Virgin Islands because of disruption by the hurricanes.
  • Personal income rose 0.4 percent in September and Personal consumption expenditures increased 1.0 percent according to the Bureau of Economic Analysis.
  • Sales of new homes increased at a seasonally adjusted annual rate of 667,000 in September. This is an increase of 18.9 percent over August and a 17.0 percent over September 2016.
  • Manufactured durable goods orders increased 2.2 percent in September according to the U.S. Census Bureau’s Advance Report. New orders are up for three of the last four months. Transportation equipment led the increase. Without transportation equipment, durable goods orders were up 0.7 percent. Excluding defense orders, the increase in new orders was up 2.0 percent. Shipments and unfilled orders were up 1.0 percent and 0.2 percent respectively.
  • The University of Michigan Index of Consumer Sentiment slipped a bit near the end of October but still closed at 100.7. This is the highest reading since 2004 and an increase of 5.9 percent from September. The Current Economic Conditions Index was up 4.3 percent from September at 116.5 while the Index of Consumer Expectations rose 7.2 percent from September to 90.5 percent. All three indexes are up double digits from October last year. 

Foodservice News This Week

  • Subway looks to reverse its drop in sales and share of market. But, various factions disagree on how to proceed. Supposedly, the widow of Subway’s founder, Fred Deluca, who controls 50 percent of the privately held company’s shares, wants to maintain the status quo and doesn’t wish to spend on expansion. Dr. Peter Buck, who owns the other half of Subway’s stock, wants to introduce a sub-brand to better take on competitors, while Deluca’s youngest daughter, Greco, whom Deluca picked to succeed him as CEO, has no stock and is virtually powerless to make changes. And, Dr. Buck has made it clear that he doesn’t back her as CEO.
  • IHOP introduced a small prototype targeting airports, travel centers, casinos and universities. The first iteration of this prototype is at the Dallas/Fort Worth International Airport. It features a coffee bar offering lattes and espresso beverages, grab ‘n go hot items including burritos and bowls, and a full bar with wine, spirits, brunch-inspired cocktails and local craft beers.
  • McDonald’s reported a strong third quarter. The world’s largest restaurant chain said worldwide comparable store sales rose 6.0 percent. The U.S., McDonald’s largest market, saw comp store sales rise 4.1 percent. The increase was attributed to beverage and McPick 2 promotions along with the successful Signature Crafted premium sandwiches. System-wide total sales rose 7.0 percent. Consolidated revenues declined 12 percent due to refranchising. Net income rose 48 percent while earnings per share increased 55 percent.
  • McDonald’s will introduce a new value menu next year which features $1, $2 and $3 menu items. McDonald’s franchisees were not happy with the old Dollar Menu because of the impact on profitability. The corporate headquarters said almost 100 percent of franchisees have signed up to participate in the new value program.
  • Grubhub announced double-digit sales growth. The largest restaurant takeout delivery company said in the quarter ending Sept. 30, sales rose to $163.1 million from $123.5 million, a year-over-year increase of 32 percent. Grubhub said what it calls “active diners” grew 28 percent to 9.81 million. The company also said profits fell 1.0 percent.
  • New York City is known for good restaurants and for expensive ones, too. But the “cheap eats” version of the Michelin Guide lists 127 restaurants in the 5 boroughs that offer a 2-course meal with either desert or wine for $40 or less. Unfortunately, that doesn’t not include tax or tip and for those of us in “fly over country,” 40 bucks is still pricey.
  • Eby-Brown reached an agreement to purchase AJ Silberman, a distributor serving convenience stores in Maryland, Ohio, Pennsylvania and West Virginia. The press release seems to indicate that AJ Silberman will continue to operate as separate company. Price of the acquisition was not revealed.
  • Growth Chains: IHOP will add 85 to 95 restaurants by the end of the year, all featuring their new design. Blaze Pizza plans on having 65 restaurants by 2018. Fatburger and Buffalo’s Express have signed an agreement to open 15 co-branded units in the U.K. Chipotle Mexican Grill will scale back the number of openings in the next 12-to-18 months to 130 to 150 restaurants.
  • Comparable Store Sales Reports: Baskin-Robbins down 0.4 percent, Blaze Pizza up 5.5 percent, BJ’s Restaurants down 1.7 percent, Buffalo Wild Wings (corporate owned down 2.3 percent and franchised down 3.2 percent), Burger King up 4.0 percent, Chipotle Mexican Grill up 1.0 percent, Dunkin’ Donuts up 0.6 percent, McDonald’s up 4.1 percent, Popeyes Louisiana Kitchen down 2.6 percent, and Tim Hortons down 0.3 percent.

For details and same-store sales of other chains, please click here for the Green Sheet.

 

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