September 6, 2023 • 40 mins
“We see a lot of challenges ahead, especially for the US consumer,” Howard Penney, managing director and consumables analyst at Hedgeye Risk Management, tells Bloomberg Intelligence. In this episode of the Choppin’ It Up podcast, Penney sits down with BI’s senior restaurant and foodservice analyst Michael Halen to discuss his near-term outlook for restaurant spending and which companies can thrive in a difficult environment. Spoiler alert -– large, franchise chains can outperform. He also commented on stubborn beef inflation, overstated Wall Street sales estimates and turnaround plans at Brinker and Burger King.
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Episode Transcript
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Speaker 1 (00:20):
Welcome to Chopping it Up. I'm your host, Mike Halon,
the senior restaurant and food service analyst at Bloomberg Intelligence.
We got a go one today. We're joined by Howard Penny.
Howard's the managing director, consumables analysts and overall restaurant guru
at hedge Eye Risk Management. For those of you who
aren't familiar with Hedge Eye, the firm does a great
(00:42):
job helping its clients, including institutional investors, retail investors, and corporations,
navigate the markets and the economy. Thanks for doing this, Howard.
Speaker 2 (00:50):
Hey, thank you. Michael. Glad to be here.
Speaker 1 (00:53):
Yeah, man, this is this is cool. I've been looking
forward to this one. Why don't you just start us
off by telling the listeners a bit about Hedge Eye
and how your research differs from the traditional cell side
research that's out there.
Speaker 2 (01:04):
Sure. So, HEDGEI has been around for about fifteen years now.
We started with four of us, basically in Keith Softas
Keith McCullough's my boss, founder of PEDGI as a consumer analyst. Right,
so we've had four consumer analysts that got together. It's
an independent research firm, so we don't manage money We
(01:25):
don't trade stocks. We literally get paid by providing money
making ideas to clients and if you know, they can
fire us every four every three months if they don't
like us, which is why what I really like about
it is because we are literally focused on picking stocks
and making money and that's you know, that's the name
of the game, frankly. And so we've got as I said,
(01:49):
we've been in business for fifteen years. We now have
what I'm a sector head that I cover as you said,
I cover consumer wolves. There are twelve of us now
there's seventy employee East total. H and Keith does my
boss does commodities, countries' currencies, and manages the overall business.
Speaker 1 (02:10):
Yeah, it's a great product. And I really like what
you said about there about picking stocks and helping your
clients make money. I feel like on the cell side
sometimes that gets put to the back burner.
Speaker 2 (02:21):
You know, Well, it makes me independent, right, Elements of
it more important because there's a lot of times when
you you can talk to management teams and they'll tell
you one thing, and if you're trying to do a
raise the Flag tour and take them on some promotional
tour to visit clients you're going to you know, buy
(02:42):
into what they're saying, right and uh and not have
you know, some independent thinking which allow you to come
to sometimes different conclusions than the traditional seal side analysts
at for sure.
Speaker 1 (02:55):
So what you know, Onyce, you kick us off too
about you know about talking about the macro outlook at
a hedgehie.
Speaker 2 (03:02):
So, so we're pretty bearish right now on the consumer,
and I think that's probably not I mean, I don't
know if that's out of consensus right now, but we're
pretty barissed about where the consumer's heading, especially into the
fourth quarter, in terms of you know, we're we're what
I guess September one, people are starting to accrue interest
(03:24):
on their student loans again. October first, people are gonna
have to start making paying student loans again. I don't
know if you saw this, Michael, but McDonald's traffic mismeasured
by placer has gone through a I think a five
week sequential deceleration and is now negative for the first
time in two years, which is remarkable. And then if
(03:47):
you put that together with dollar general and you know
a few other things, what Momart's saying the low end consumer,
I think is really struggling, and I think it's getting worse, frankly,
So we're we're pretty bearish in terms of, you know,
where the consumers headed headed, sorry for the next for
the next three months and into the first quarter. And
then when you think about the restaurant industry in particular,
(04:09):
you know, we had the industry had a difficult period
in July and August last year because of gas prices
and what that been, the pressure that put on sales,
and we're now heading into a period where comparisons get
really difficult for the industry. So we see a lot
of challenges ahead, especially for the consumer, and that's being
echoed with what I think companies are saying. And you know,
(04:31):
Dollar General I think is probably the stock as you
are right in terms of talking about what the low
end consumer's doing. But then you have companies like Chipotle,
which completely you know, they're not seeing any of that,
and they're talking about a strengthening of the consumer, which
is a little counterintuitive to you know, what most of
the macro data is showing. But we're pretty embarrasses to,
(04:54):
you know, pretty as to what things are going to
look like heading into the end of the year.
Speaker 1 (04:58):
Yeah, I hadn't seen them Donald's data yet, but that's cure.
That's interesting because in the second quarter they were one
of the few restaurant chains that didn't see a deceleration
in their four years seem star sales trend. So and
you know, with fourteen thousand stores in the United States,
I think that's a pretty good indicator maybe of where
things are going. And you know, in Chipotle, you know,
(05:20):
that one's interesting because people give them a pass because
they've done so well over the last few years, but
their their trends and Starbucks as well, slowed pretty significantly
in the second quarter, but they kind of got a
pass by the street.
Speaker 2 (05:34):
Yeah, and you know, understandably. So, I mean, David Nicol
has done a tremendous job fixing Chipotle since he's been
in the business, or since he's been running the business,
and coming out of the pandemic, they were the best
performing chain in terms of margin improvement EBIT margin improvement.
I think their EBIT margins relative to twenty nineteen or
(05:56):
up some eight hundred basis points for something ridiculous like that.
So they've done a great job running the business. So
he deserves the accolades that he's had, but it feels
like that story is in evidence, not just feels like,
but there's evidence that's that story is getting a little
long in the tooth.
Speaker 1 (06:17):
Yeah, yeah, and the evaluations rich to be sure, they
finally fixed one of the issues I had with it,
which was they were didn't want to franchise internationally forever
and growth just it was non existent. So signing up
with All Shai in the Middle East, I think is
a good start. Obviously, it's going to take some time
(06:39):
for that part of the business to move the needle though.
Speaker 2 (06:42):
Yeah. They well so interestingly enough, right, So, yes, they're
going to franchise parts of the you know, the international component,
but they're also beginning to invest in you know, they
do run fifty stores outside the United States and Canada,
so they're going to be investing in infrastructure to be
(07:02):
able to grow the store base. Because that's how I mean,
if they're going to keep that you know, sort of
mid single high single digit unit growth story going, right
in two years, they're going to need an international component
to it. So spending is going up to support the
infrastructure needed to keep that. There were two accelerate international
unit openings.
Speaker 1 (07:23):
Yeah, for sure, so I think they're planning on ten
new company owned stores in Canada, but i'd like to
see them ref you know, maybe if Canada, if they
have an opportunity to build stores there, that makes sense.
But I don't like to see them refranchise the UK
and Germany and try to accelerate that that that growth overseas.
(07:43):
But you know, who knows, we'll see still such a
small piece of that business. But it's interesting, you know,
and you talked a lot about the restaurant traffic slowing
here in the US. What are some of the trends
that are causing that?
Speaker 2 (07:55):
So I think there's a couple of things. Consumer I'll
say consumer normalization is one. So the return to full
service restaurants. Right, You're no longer spending much as much
on large group meals through drive throughs, right, so the
average check, So that drove average check much higher into
(08:17):
the pandemic. So as that's coming back, you're seeing a
slowing in sort of people buying singular entrees instead of
you know, four people that are going with your family
for through a drive through. Independence are also coming back,
So I think there is a you know, not a
new popularity, but maybe independence are becoming more popular again.
(08:40):
They were very popular heading into the pandemic, but obviously
struggled into the pandemic and coming out of the pandemic.
So and you're seeing that in the case volumes for
the distributors. So you know, Cisco and some of the
other companies are showing pretty good case volume growth, you know,
low single day to case volume growth, but not like
the decline to three percent decline in traffic that you're
(09:01):
seeing for you know, the whether it's black Box or
an Aptrac, which are the two big companies that measure
sales for the industry. Price is also coming in, So traffic,
as I said, has been negative, but you're seeing menu
prices come down significantly, so which is also helping or
(09:24):
hurting depending on how you want to look at it.
And then you know, Walmart on their most recent conference
called sort of mentioned specifically the consumers are stretching their
dollars further and seeking better value across more categories, right,
and they said specifically grocery staples and in home meal
(09:44):
options were being purchased more often. So you've got that
element to it, So, which kind of gets back to
what we were talking before about you know McDonald's right,
and McDonald's seeing a deceleration. I mean if if people
are buying you know, in home meals at Walmart, right,
which their grocery business is doing really well, that's that's
not an insignificant competitor for the restaurant industry. So and
(10:09):
all this is going to have you know, an impact
into the fourth quarter and into twenty twenty four for
Morgi dollars and margin dollar growth for how that's going
to look into especially into the fourth quarter. So if
you've got you know, independence coming back, price coming down,
supermarkets are more competitive, Labor inflation is still around, right,
(10:30):
that's not going away. Well, there is some you know,
food costs are coming down. There could be some margin
pressure heading into the fourth quarter and certainly into twenty
twenty four for a lot of these restaurant companies.
Speaker 1 (10:40):
Yeah, for sure. I guess there was two pieces of
that that I you know, find interesting. You know, one
thing is how bad traffic's been, even though a lot
of these group orders are breaking into individual orders, and
I know some chains try to do their best to
count entrees on a large order, but you know, how
much how bad is traffic really if they're getting some
(11:03):
sort of a benefit there with orders fracturing, right, So.
Speaker 2 (11:08):
The biggest culprit is shake check. Like they're like to me,
they're they're they're a perfect example of what you're saying, right,
because you know, I don't remember the exact numbers off
the top of my head, but they're they're saying their
traffic was down like one to two percent, right. But
you know, if you look at the difference between menu
price and mix and what their traffic is, that the
(11:32):
traffic suggests that it's down four or five percent, not
down one to two percent. But that totally can be
accounted for the way they count for entrees, right, So
if you're one person coming in and ordering for four
four entrees, right, that's you know, one, that's just one person, right,
But but really entrees are down four percent or four
(11:56):
or three or four it's kind of depending on what
the number is. So they're kind of like, for me,
the poster child for what you're talking about and the
way people really count on trees. And there's something to
do it, right, But I think and I like to
pick on Shakeshack.
Speaker 1 (12:14):
I know you do. We've been picking on Shakeshack since
the IPO together. But yeah, we'll get back into shakeshack
because I asked you questions. I want to know what
you think about, uh, the activists and stuff like that.
But so we'll return to that. The other thing that
I found interesting, you know that that really resonated with
me with your land last answer was, uh, you know
(12:35):
about the food at home versus food away from home,
and restaurants are trying to catch up with the pricing
this year, and so there's a massive delta right now
in terms of inflation at eating you know, in a
restaurant versus what we're seeing at the grocery store.
Speaker 2 (12:51):
Right Yeah, And I you know, I have I struggle
with that metric because a lot of people like to,
you know, sort of look at the absolute levels in
place and say, okay, restaurant prices are going up more
than you know, supermarket prices the other way around, and
this is going to impact consumption when the reality of
it is, it is always significantly cheaper to go to
(13:13):
a supermarket and buy your food and bring it home
and cooking, right because you are doing the cooking, you're
doing the dishes, and you're doing the cooking. So no
matter what that stat says it's always cheaper to go
buy you can buy a dozen eggs for six bucks
and you know, and have four meals, right if you
want to eat eggs for two days. Right. So I
(13:33):
just don't like, I understand how people want to look
at it that way, but the fact of the matter
is it will always be and has always been cheaper
to go to a supermarket and buy a meal and
bring it home. Now.
Speaker 1 (13:46):
Yeah, And it was such a big talking point in
twenty twenty two for all these companies like, yeah, well
we're raising our prices, but they're not up as much
as the grocery stores. And it was like it was
like Equity Capital markets guys all over the street. We're
just like telling it, you know, parading this to all
the management teams, and then the management teams will get
on the call and all say the same thing, and
you're one hundred percent right, it's always cheaper to eat
(14:08):
us myself. Yeah, okay, cool. So you think the second
half of the year is going to be difficult transition,
and you talked about some of the things that are
going on with the macro, some of the things that
are going on with inflation. You know, is there anything
(14:29):
else you think that we should should should mention. You know,
labor inflation continues to be pretty high for the industry.
Speaker 2 (14:34):
Right, I mean, I think that's the you know, the big,
the big wild card sort of into the fourth quarter,
because you don't, you know, depending on what your menu
looks like, whether you're a bee centric, chicken centric, or
seafood centric, right, you're gonna have different levels of food inflation. Right.
You're seeing red meat prices are still very inflationary. So
if I was to pick a group a menu, right
(14:57):
or not to pick on shakescheck again. But just think
of a ret meat centric menu that has food inflation
and labor inflation and pricing coming in. Those groups of
names are going to have the most trouble in the
fourth quarter, right because you're still seeing four to five
(15:17):
percent labor inflation, and that's probably not going to go lower.
It's not nine percent anymore, it's not eight percent anymore,
but there is still going to be labor inflation and
there will never be deflation right way in a wage
is always going to go up, and you're always going
to find you one concept competing and get another concept
(15:37):
for a restaurant manager or you know, having to pay
bonuses to lure people to come to your concept, whatever
the structure may be. But labor inflation will always be there.
So the wild card really is going to be food
inflation for some concepts into the fourth quarter, so you
got slowing sales for a number of reasons. We got
Manu prices coming in. So then the determining factor is,
(15:59):
you know, what what the labor inflations look like and
what the margin structure is for a lot of these companies.
And then into the first quarter of next year when
the when we're up against just insane comparisons. It just
it's really going to be a difficult time for a
lot of these names. And across the board. I don't
(16:20):
know anybody that's not gonna that's going to do well. Frankly,
even even the mighty Chipotle is going to struggle into
the first quarter.
Speaker 1 (16:28):
Yeah, well, we know they've raised prices a lot over
the last you know, three years, but yeah, yeah, this
inflation thing is interesting. Man. So I'm a fan of
Jim Rodgers and his book Cut Hot Commodities. I don't
know if you've ever read it.
Speaker 2 (16:42):
No, I have not.
Speaker 1 (16:44):
You have to, you have to. He talks about the
history of commodity cycles and on average they last seventeen years,
and he goes into all the details of why they last.
And it's just such a great, clearly written book. And
you know, throughout history, you know, we've seen it repeat
over and over, and the last cycle was shortened. I
(17:05):
don't know why. Maybe I haven't he hasn't written a
follow up book to it. Maybe because of you know,
technological advances in drilling and fracking and all these different things.
But if he's right, you know, about these cycles, and
if we're at the beginning of another commodity cycle, which
(17:25):
could last anywhere from ten to twenty years, you know,
that could be troublesome for restaurants. I mean, the industry
has definitely benefited from very modest inflation for a very
long time. So that's always something I just kind of
keep in the back of my head. But you should
check that book out. I think you'd really like it.
(17:46):
I will, okay, So, based on all the things that
you mentioned, all the difficulties, and you know, you know me,
i'mbarished with you. I couldn't agree more. Who do you
think is going to win? And who do you think
is going to lose in this environment that we're entering.
Speaker 2 (18:00):
Yeah, so I just add one more thing to what
you were saying before. You know, it's surprising to see
in the second quarter the number of companies that missed
revenue estimates. Right, So they missed revenue but beat earnings, yep. Right. So,
but when you're running six, seven, eight, nine, ten, whatever price,
(18:21):
it's easy because that flows through at ninety nine percent
gross margin. Right, you can beat earnings, but sales are slowing.
That's going to get worse into the second quarter, right, Yet,
roll off prices are rolling off, you know, and traffic
is slowing, and the and the sell side analysts don't
(18:41):
it's not real time like they'll wait to hear from
the management team to lower their estimates or raisor estimates
or whatever it may be. So I was surprised to
see the number of even Chipotle missed revenue estimates for
the second quarter, right, And that's only going to get
worse because we're still seeing sales slowing, right and and
(19:01):
as estimates are not coming down. So it's just one
of those things that I just wanted to add to
that because I was just thinking about the issues that
we're going to be facing into the third and fourth quarter,
and certainly into the third quarter because sales continues. So
now you can ask that question again.
Speaker 1 (19:19):
Who's going to win and who's winners?
Speaker 2 (19:21):
Yeah, so we're pretty pretty bearish. We don't have many
winners right now.
Speaker 1 (19:29):
Well, everything's gone straight up for six months.
Speaker 2 (19:31):
Yeah, we do, like we do like Dominoes. Frankly, young
young Dominoes in the big franchise companies are pretty much,
you know, sort of the top of the list. I
guess you could say, but let me just check who
else do I have here? So we've got restaurant I'm
(19:52):
a big fan of what's going on at restaurant brands, Dominoes, uh,
you and then and then we're there's a couple of
names that we want to buy into the downturn, uh,
that we're going to see coming into the fourth quarter,
like Darden. Taste has been on the long list for
us as well. First Watch. I think First Watch is
(20:13):
a really cool little company. Frankly, it's a you know,
a breakfast, brunch and lunch concept.
Speaker 1 (20:19):
But those are one shift model.
Speaker 2 (20:21):
Yeah, I love it, but those are the ones that
sort of stick out to me as as the winners,
and I actually have a brinker as along as well.
I think there's some interesting things that are going on there,
but you know that's a longer tail turnaround. Mm hmm.
Speaker 1 (20:40):
All right, cool, so let's go, I guess for the
Winter Winners. Yeah, you know, I think we're on the
side seams side on most of these. Russell Wiener I'm
a fan of, and I'm a fan of his former mentor,
Patrick Doyle. I think restaurant bands is I think it
sounds like he's changing the culture over there and changing
the focus and and and kind of got management focused
(21:00):
on the right things. So yeah, it's interesting. What are
your thoughts on on the turnaround at restaurant brands and
what they're doing at BK and Popeyes right now?
Speaker 2 (21:13):
Yeah, so I think it's it's the focus on what matters,
right and well, frankly three G destroyed the business, right,
so it was you know, like craft Tiants and a
couple of the other buglisers, Craft Tients and restaurant brands
are the three sort of three G companies that have
(21:35):
been destroyed by their you know, way of running their businesses.
Speaker 1 (21:40):
So with an iron fist, with.
Speaker 2 (21:41):
An iron fist right, And they didn't care about franchise
profitability right. All they cared about was you know, sitting
on you making sure you know, the people at Burger
King were sitting on pickle buckets in Miami because they
just cut G and A to the you know, to
the bottom. So read undoing what was what was done
(22:04):
in the last you know, ten years is important and
you know, Patrick Doyle coming in and focusing on franchise
profitability will be you know why that stock wins. And
that can happen a couple of ways. Most importantly, sales
go up. But before that happens, you're seeing them force
(22:25):
franchise's out of the system. I don't know, that's maybe
not a good way to put it, but the reality
of the matter is when you look at you know,
McDonald's or Wendy's or Young you know, Taco Bell, KFC,
Pizza Hunt, any one of these big brands that have
been successful in the turnaround, it's all because they have
(22:45):
fixed the franchise system right, and they take the old franchisees,
they force them out. You know, whether it's a generational
thing or you know, a forced sale or closures or however,
you fix the system but that calling of the system
will immediately have an impact on what the street cares about,
and that's an improvement in franchise profitability. And as soon
(23:07):
as you begin to see that improvement in franchise profitability,
Sorry about that if you can't hear that background on,
but that's what will really drive the the you know,
the stock hire is that improvement in in franchise profitability.
And that's Patrick Doyle coming in, right, And that's how
you that that's that's what will ultimately be you know,
(23:31):
why this stock wins. And then and then you can
get to the you know, the burger King turnaround, right,
the Burger King. They sort of played lip service to
the success that Burger King has experienced here so far,
but the reality of it is traffic's still negative, right,
So there is no turnaround at Burger King yet. But
(23:52):
that's fine. You've got to you've got to fix the
franchise system first. And once you fix the franchise system first,
you close those doors. You get this door base looking better,
you get healthy franchisees in there who want to be
in there and want to run the business, and then
you'll see the traffic improved. Yep. For sure.
Speaker 1 (24:08):
And then also, you know, the unit unit economics look better,
fdds improve, you get a little buzz around the system,
and then people want to start opening stores again.
Speaker 2 (24:17):
Right Yeah, yeah, yeah, yeah, that's that's you know, two
or three years down the road.
Speaker 1 (24:23):
Yeah, but they already have strong internationals, so you know,
there's there's other pieces of that business that that's kind
of going to push.
Speaker 2 (24:31):
It along a little bit. This is a little inside
baseball with respect to QSR. But Patrick Doyle, who was
the ex CEO Dominoes who turned around that company. There
are I think eight or nine different master franchisees for
Burger King that are also Dominos franchisees. So there's an
(24:54):
element to this story that has Dominoes all over it, right,
because you've got really healthy, strong franchisees globally, right, not
not in the US, but globally. That will allow this
company to a creep value to shareholders over an extended
period of time because they do have that international unit
growth from strong, healthy franchisees.
Speaker 1 (25:16):
Great, you mentioned Brinker. You know, we we linked up
a couple months ago at the at their investor day.
You mentioned that's one of the names that you like
in casual dining, which is obviously not a place we
think is mostly safety play. What are your thoughts on that?
Speaker 2 (25:32):
Cool? I'm maybe I'm coming back to the world too
many times, but I'm a fan of the Chili's brand. Right,
Applebee's is a disaster, so their biggest competitor is failing
and is a melting ice cube. So you have a
new CEO coming in. He shrinks the menu, focuses on
a few items, right, he gets better advertising, you know. There,
(25:57):
It's just if you look at turnaround across the restaurant
space over the years, right, this is a classic turnaround
or there's classic signposts, signed posts of a successful turnaround,
and and he's got it all. It will take time, right,
because it's casual dining and whatnot. But I do think
(26:19):
Kevin is making all the right moves, and you will
once we get past this period of self inflicted wounds,
which we've got another quarter. We do have difficult comparisons coming,
but this is the name that the street loves to hate,
and you know, I just it feels like there's enough
going on. You can see enough going on that will ultimately,
(26:43):
you know, be successful. And it will take time. But
this This is one where you know, if you buy
Darden today, you might make twenty percent upside, right, But
if you're buying Brinker today and the turnaround does work,
it's a double right. This is not just you know,
it's not just ten to fifteen percent upside. This is
literally a company that you could go up you know,
(27:06):
fifty one hundred percent over the next two years if
this works. And there's no reason why it shouldn't work, frankly,
other than the macro, because it is a tried and
true turnaround in the restaurant space that we've seen executed
over and over again.
Speaker 1 (27:23):
Yeah, it should be interesting. And we talked about it
when I did hedge I TV with you, and one
of the things that I forgot to mention is that
they have not done really anything with strategic pricing.
Speaker 2 (27:35):
And so.
Speaker 1 (27:37):
From what I hear is that that they've gone out
and they're trying to find someone to help them do that,
and that could provide some some upside here to the
numbers man, because you know, that's that's process has become
a lot more scientific over the last few years, and
it's allowed some of these chains like Popeyes to Popeyes,
(27:58):
I'm sorry I'm mentropol to increase their prices so much
over the last couple of years while minimizing the traffic laws.
Speaker 2 (28:08):
You know, this is a subject for another podcast, but
I spoke with a private company that helps install dynamic
pricing for the restaurant industry and it is hugely successful
and there's an element to you know, I know it's
(28:29):
you don't see any of the big change doing dynamic
pricing yet, but I do after talking to this person yesterday,
I think that's coming for the restaurant industry. Like this,
you know, peak times, why not raise price? Right? It
just it makes a ton of sense. Now, I think
uning is is going to be interesting. But that is
(28:49):
the future of the restaurant industry, dynamic pricing, and it's coming.
I just I believe it's coming. Young Brands is actually
working with the company to do it, so a few
of the big guys are looking at it. But I
think that this is a subject that we can go
on another time with. But dynamic pricing will hit the
restaurant industry at some point.
Speaker 1 (29:09):
Yeah, for sure. It's made such a you know, impact
on the travel industry and the hotel industry and things
of that nature. Yeah, I don't think there's anything stopping it.
I'm curious about your thoughts on Kava.
Speaker 2 (29:22):
Oh man, I you know, God blessed Ron shake Right.
He buys Zoe's for three hundred million dollars, combines it
with Kava, and then all of a sudden has a
five billion dollar company. Like, there is no better CEO
in the restaurant space than Ron shake right. I just
think the guy has got the magic touch. So it is.
(29:44):
It's stupid, leap riced. The evaluation is just stupid, but
the performance is unreal. Yeah, and they've got you know,
they've got some really strong numbers in terms of you know,
not only just what they've posted in the past quarter,
(30:05):
but when you when you compare Kaba to the other
change in the space. Right, I'll just pick Sweet Greens
just because I like to pick on screen Greens and
Chase ex But you know, two point five million averaging
the volume right in twenty twenty three with twenty three
percent restaurant level margin. That's like Chipoli's at two point
nine million, you buy with twenty six Right. So the Kava,
(30:28):
the numbers that Kaba are putting up are exceptional and
just to put it in perspective to Sweet Greens, which
I think is you know, A zero has two point
eight million in averaging the voyants and a's seventeen percent
re level margins. So slee Greens has significant issues. But
Kava is just and now if you you know, Tava's
(30:50):
got nine to you know, six seven whatever percentage same
store sales growth and twenty five thirty percent unit growth
and you're putting up you have that kind of square
foot is growth with those kinds of full wall economics,
you get a one hundred times eed. Even now it
won't always trade there, but I love to you know,
(31:14):
I love to find great shorts in the restaurant space.
But this is, you know, other than valuation, which is
never a reason to short the stock. You know, this
is a really, really strong company that has you know,
a huge future ahead of it in terms of being
the growth and potential now it you know, will it
you find a few bumps in the road over time, yeah, absolutely,
(31:36):
but for the time being, it is you know, it
is built to succeed. Yeah.
Speaker 1 (31:42):
Yeah, It's very impressive at the store level for sure.
And we'll see how quickly they can leverage DNA, you know,
hopefully it don't end up like Shakeshack, where you're like
eight years later still waiting for them to leverage GNA.
So you know, to that point, can you talk a
little bit about the activist investor and what's going on
there and if that's changed your opinion about Shakeshack at all.
Speaker 2 (32:04):
No, it actually reinforced my opinion. Frankly, we were short Shakeshack,
and we're short Shakeshack because it is a poorly run
coporate company and it's poorly run because the management team
is incentive. The long term incentive comp is structured around
growing revenues and epidoc so revenue growth and EBIDC growth,
(32:25):
so they can just all they have to do is
just you know, take the balance sheet, open up stores,
right to grow their revenues and grow the ebadah and
not caring about averaging the volumes, not caring about margins,
and the CEO can get paid.
Speaker 1 (32:39):
And that is that and not operating income and operating
income margin inst crazy to me, insane, but that that
structure has led to significant inefficiencies.
Speaker 2 (32:51):
So this is not a typical QSR model, right, So
you know, if you think about you know, McDonald's, it's
got those it's got, you know, the same four walls
that it opens up. You know, across the country. Shakeshack
has a different box in Orlando than it does in Texas,
(33:11):
that it does in California, that it does in you know,
all these different cities. And that has led to significant inefficiencies.
And that's obvious in their margin structure of the company.
And now you have an activist coming in and they
see all these inefficiencies, right, and they're going to try
to fix it. I just don't know how they can, frankly.
(33:33):
I mean there are some some small things they can do, right,
But if you think about you know, go back to that.
You know the number that I was with the fash
casual average un and volumes and mart restaurant level margins.
They've got three point seven million in averaging and volume
and then nineteen percent restaurant level margin, which is crazy, right.
(33:53):
Tavas got two point five million and twenty three percent
restaurant level margins. How come Shakeshack is low? Well, it's
so low with that averaging volume because of the inefficiencies,
because of the food costs, because of the labor costs,
and the inefficiencies that are built in the system, so
they have to begin to try to fix that, and
I just don't know how they could do that right now.
Speaker 1 (34:16):
Yeah, and the amount of money they were spending on
the store builds and oh my.
Speaker 2 (34:20):
God, yeah, so much waste.
Speaker 1 (34:23):
Yeah. So who do you like in the fast casual
space and are there any other ones that you have
concerns about?
Speaker 2 (34:29):
So I really don't the answer your question is, I
really don't like a lot in fast casual, right. I
just the valuation. Chipotle is twenty four times NTM e
v ed badah, right, Shake Check's price right on top
of that. That's those Those are just ridiculously egregious multiples
(34:50):
for all these businesses, and it's heading into a slowdown, right,
So I'm not a big fan, I think, you know.
I mean, the only one that I positively disposed to
what we're talking about it is Cava, and I still
wouldn't buy it. And Sweet Greens is a zero at
some point like the store. The big the biggest joke
(35:12):
in fast casual today, right, is that Sweet Greens is
going to have robotics stores in five years? Like are
you kidding me? That is not going to happen? And
I don't know, if you've seen the store in Naperville,
Illinois that they open, but it's two stores, two stories,
(35:32):
and they claim that they're going to convert every one
of their existing restaurants into a robotics store. Well, you know,
robots breakdown, right, you know what about depreciation? Right? Yes,
you might be substituting labor costs you know for robots, right,
(35:54):
but you still have DNA. Right, So the restaurant level
margin is not going to twenty six percent. And just
to come back to what we've been talking about with
fast casual, the strength and those margins, right, Sweet Greens
is at sixteen percent or seventeen percent level margins. They're
magically saying that a robotics store after one month of
testing is going to twenty six percent. It's not going
(36:15):
to happen. Yeah, and even if you plug in twenty
six percent on the second quarter numbers, they're still losing money.
Are you kidding me? And you've got these self side
analysts that are buying into this nonsense that they're going
to have robotics like it is it literally is. It's
it's hilarious to watch that's unfold in the stocks, you know,
(36:39):
the stocks, the stock has spiked on that well whatever reason,
you know, well we know why, because people are buying
into this management team thinks that they're going to have
robots serving salads.
Speaker 1 (36:51):
It's I mean, you know, even at iPod I you
know what I wrote. My note was like, you know,
I hesitate to use a a price of sales mallable
to ever you know, value a restaurant stock, but since
they can't generate E but I have no the choice,
you know, And like, call me old school, but it's
like I feel like you're supposed to figure out the
store level economics on the first unit before you build
(37:15):
the second and the third and the fourth, as opposed
to still trying to figure out the unit economics when
you're building one hundred and twenty or whatever number.
Speaker 2 (37:22):
You know.
Speaker 1 (37:24):
So we talked a lot about the low and middle
income consumers and quick service and fast casual. Obviously our
companies don't have a lot of exposure to find dining.
But the same store sales have been in decline since
March according to black Box, and now luxury retail seems
to be slowing. You know, I just find that interesting
(37:46):
because we've had this k shape recovery where the high
end has done well post pandemic, and the low income
not so much. So what are you hearing about the
higher income consumering.
Speaker 2 (37:55):
Yeah, so same idea, right, and it's it actually slowed
faster than so if you go, I look at the
nap Steakhouse data, and it really started slowing in March,
so it's slowed earlier. And there's an element to that
(38:17):
that's hard to know because it's a little different than
high end retail, right, because this is more T and
E based, Right, it's you know, you're not you know,
I'm not taking a client out to dinner this week
because whatever reason, you know, business is soft or whatever.
So it has a little bit more to do with
(38:37):
business spending than it does with you know, sort of consumers,
you know, whether they have a job and feeling like
they can buy a Gucci purse or whatever. So to me,
that's a little bit more discretionary and that that's a sign.
That was one of the first signs back in March
that things were slowing. And you know, not the reason
(38:59):
why we're going to embarrassed in the industry, but one
of the reasons, like okay, this is you know, this
is this is not good, right, you know, the high
end stakehounsils have been slowing for a while and have
slowed and continue to slow, like it's not getting better.
So it just it's it's an indicator to me that
you know, businesses are getting a little bit more cautious. Yeah,
(39:20):
because they're not, you know, people aren't taking their clients
out to dinner as much. Cool.
Speaker 1 (39:27):
Well, listen, Thanks again, Howard, that was a lot of fun.
Speaker 2 (39:30):
Man.
Speaker 1 (39:30):
Where where can people find you on social media?
Speaker 2 (39:33):
Had Howard Penny on Twitter? Howard W. Penny. I should
say so, but thank you Michael. This has been awesome.
Love having you on Hedge TV and thank you for
having me on your podcast. Really love it for sure.
Speaker 1 (39:48):
Thing man, it was great and thanks to the audience
for tuning in. If you liked the episode, please subscribe
and leave a review and tune in again later this
month for a discussion with bet Oaklahom though, CEO of
Plays Pizza. Have a good day, everybody.
Speaker 2 (40:04):
H
Welcome to Chopping it Up. I'm your host, Mike Halon,
the senior restaurant and food service analyst at Bloomberg Intelligence.
We got a go one today. We're joined by Howard Penny.
Howard's the managing director, consumables analysts and overall restaurant guru
at hedge Eye Risk Management. For those of you who
aren't familiar with Hedge Eye, the firm does a great
(00:42):
job helping its clients, including institutional investors, retail investors, and corporations,
navigate the markets and the economy. Thanks for doing this, Howard.
Speaker 2 (00:50):
Hey, thank you. Michael. Glad to be here.
Speaker 1 (00:53):
Yeah, man, this is this is cool. I've been looking
forward to this one. Why don't you just start us
off by telling the listeners a bit about Hedge Eye
and how your research differs from the traditional cell side
research that's out there.
Speaker 2 (01:04):
Sure. So, HEDGEI has been around for about fifteen years now.
We started with four of us, basically in Keith Softas
Keith McCullough's my boss, founder of PEDGI as a consumer analyst. Right,
so we've had four consumer analysts that got together. It's
an independent research firm, so we don't manage money We
(01:25):
don't trade stocks. We literally get paid by providing money
making ideas to clients and if you know, they can
fire us every four every three months if they don't
like us, which is why what I really like about
it is because we are literally focused on picking stocks
and making money and that's you know, that's the name
of the game, frankly. And so we've got as I said,
(01:49):
we've been in business for fifteen years. We now have
what I'm a sector head that I cover as you said,
I cover consumer wolves. There are twelve of us now
there's seventy employee East total. H and Keith does my
boss does commodities, countries' currencies, and manages the overall business.
Speaker 1 (02:10):
Yeah, it's a great product. And I really like what
you said about there about picking stocks and helping your
clients make money. I feel like on the cell side
sometimes that gets put to the back burner.
Speaker 2 (02:21):
You know, Well, it makes me independent, right, Elements of
it more important because there's a lot of times when
you you can talk to management teams and they'll tell
you one thing, and if you're trying to do a
raise the Flag tour and take them on some promotional
tour to visit clients you're going to you know, buy
(02:42):
into what they're saying, right and uh and not have
you know, some independent thinking which allow you to come
to sometimes different conclusions than the traditional seal side analysts
at for sure.
Speaker 1 (02:55):
So what you know, Onyce, you kick us off too
about you know about talking about the macro outlook at
a hedgehie.
Speaker 2 (03:02):
So, so we're pretty bearish right now on the consumer,
and I think that's probably not I mean, I don't
know if that's out of consensus right now, but we're
pretty barissed about where the consumer's heading, especially into the
fourth quarter, in terms of you know, we're we're what
I guess September one, people are starting to accrue interest
(03:24):
on their student loans again. October first, people are gonna
have to start making paying student loans again. I don't
know if you saw this, Michael, but McDonald's traffic mismeasured
by placer has gone through a I think a five
week sequential deceleration and is now negative for the first
time in two years, which is remarkable. And then if
(03:47):
you put that together with dollar general and you know
a few other things, what Momart's saying the low end consumer,
I think is really struggling, and I think it's getting worse, frankly,
So we're we're pretty bearish in terms of, you know,
where the consumers headed headed, sorry for the next for
the next three months and into the first quarter. And
then when you think about the restaurant industry in particular,
(04:09):
you know, we had the industry had a difficult period
in July and August last year because of gas prices
and what that been, the pressure that put on sales,
and we're now heading into a period where comparisons get
really difficult for the industry. So we see a lot
of challenges ahead, especially for the consumer, and that's being
echoed with what I think companies are saying. And you know,
(04:31):
Dollar General I think is probably the stock as you
are right in terms of talking about what the low
end consumer's doing. But then you have companies like Chipotle,
which completely you know, they're not seeing any of that,
and they're talking about a strengthening of the consumer, which
is a little counterintuitive to you know, what most of
the macro data is showing. But we're pretty embarrasses to,
(04:54):
you know, pretty as to what things are going to
look like heading into the end of the year.
Speaker 1 (04:58):
Yeah, I hadn't seen them Donald's data yet, but that's cure.
That's interesting because in the second quarter they were one
of the few restaurant chains that didn't see a deceleration
in their four years seem star sales trend. So and
you know, with fourteen thousand stores in the United States,
I think that's a pretty good indicator maybe of where
things are going. And you know, in Chipotle, you know,
(05:20):
that one's interesting because people give them a pass because
they've done so well over the last few years, but
their their trends and Starbucks as well, slowed pretty significantly
in the second quarter, but they kind of got a
pass by the street.
Speaker 2 (05:34):
Yeah, and you know, understandably. So, I mean, David Nicol
has done a tremendous job fixing Chipotle since he's been
in the business, or since he's been running the business,
and coming out of the pandemic, they were the best
performing chain in terms of margin improvement EBIT margin improvement.
I think their EBIT margins relative to twenty nineteen or
(05:56):
up some eight hundred basis points for something ridiculous like that.
So they've done a great job running the business. So
he deserves the accolades that he's had, but it feels
like that story is in evidence, not just feels like,
but there's evidence that's that story is getting a little
long in the tooth.
Speaker 1 (06:17):
Yeah, yeah, and the evaluations rich to be sure, they
finally fixed one of the issues I had with it,
which was they were didn't want to franchise internationally forever
and growth just it was non existent. So signing up
with All Shai in the Middle East, I think is
a good start. Obviously, it's going to take some time
(06:39):
for that part of the business to move the needle though.
Speaker 2 (06:42):
Yeah. They well so interestingly enough, right, So, yes, they're
going to franchise parts of the you know, the international component,
but they're also beginning to invest in you know, they
do run fifty stores outside the United States and Canada,
so they're going to be investing in infrastructure to be
(07:02):
able to grow the store base. Because that's how I mean,
if they're going to keep that you know, sort of
mid single high single digit unit growth story going, right
in two years, they're going to need an international component
to it. So spending is going up to support the
infrastructure needed to keep that. There were two accelerate international
unit openings.
Speaker 1 (07:23):
Yeah, for sure, so I think they're planning on ten
new company owned stores in Canada, but i'd like to
see them ref you know, maybe if Canada, if they
have an opportunity to build stores there, that makes sense.
But I don't like to see them refranchise the UK
and Germany and try to accelerate that that that growth overseas.
(07:43):
But you know, who knows, we'll see still such a
small piece of that business. But it's interesting, you know,
and you talked a lot about the restaurant traffic slowing
here in the US. What are some of the trends
that are causing that?
Speaker 2 (07:55):
So I think there's a couple of things. Consumer I'll
say consumer normalization is one. So the return to full
service restaurants. Right, You're no longer spending much as much
on large group meals through drive throughs, right, so the
average check, So that drove average check much higher into
(08:17):
the pandemic. So as that's coming back, you're seeing a
slowing in sort of people buying singular entrees instead of
you know, four people that are going with your family
for through a drive through. Independence are also coming back,
So I think there is a you know, not a
new popularity, but maybe independence are becoming more popular again.
(08:40):
They were very popular heading into the pandemic, but obviously
struggled into the pandemic and coming out of the pandemic.
So and you're seeing that in the case volumes for
the distributors. So you know, Cisco and some of the
other companies are showing pretty good case volume growth, you know,
low single day to case volume growth, but not like
the decline to three percent decline in traffic that you're
(09:01):
seeing for you know, the whether it's black Box or
an Aptrac, which are the two big companies that measure
sales for the industry. Price is also coming in, So traffic,
as I said, has been negative, but you're seeing menu
prices come down significantly, so which is also helping or
(09:24):
hurting depending on how you want to look at it.
And then you know, Walmart on their most recent conference
called sort of mentioned specifically the consumers are stretching their
dollars further and seeking better value across more categories, right,
and they said specifically grocery staples and in home meal
(09:44):
options were being purchased more often. So you've got that
element to it, So, which kind of gets back to
what we were talking before about you know McDonald's right,
and McDonald's seeing a deceleration. I mean if if people
are buying you know, in home meals at Walmart, right,
which their grocery business is doing really well, that's that's
not an insignificant competitor for the restaurant industry. So and
(10:09):
all this is going to have you know, an impact
into the fourth quarter and into twenty twenty four for
Morgi dollars and margin dollar growth for how that's going
to look into especially into the fourth quarter. So if
you've got you know, independence coming back, price coming down,
supermarkets are more competitive, Labor inflation is still around, right,
(10:30):
that's not going away. Well, there is some you know,
food costs are coming down. There could be some margin
pressure heading into the fourth quarter and certainly into twenty
twenty four for a lot of these restaurant companies.
Speaker 1 (10:40):
Yeah, for sure. I guess there was two pieces of
that that I you know, find interesting. You know, one
thing is how bad traffic's been, even though a lot
of these group orders are breaking into individual orders, and
I know some chains try to do their best to
count entrees on a large order, but you know, how
much how bad is traffic really if they're getting some
(11:03):
sort of a benefit there with orders fracturing, right, So.
Speaker 2 (11:08):
The biggest culprit is shake check. Like they're like to me,
they're they're they're a perfect example of what you're saying, right,
because you know, I don't remember the exact numbers off
the top of my head, but they're they're saying their
traffic was down like one to two percent, right. But
you know, if you look at the difference between menu
price and mix and what their traffic is, that the
(11:32):
traffic suggests that it's down four or five percent, not
down one to two percent. But that totally can be
accounted for the way they count for entrees, right, So
if you're one person coming in and ordering for four
four entrees, right, that's you know, one, that's just one person, right,
But but really entrees are down four percent or four
(11:56):
or three or four it's kind of depending on what
the number is. So they're kind of like, for me,
the poster child for what you're talking about and the
way people really count on trees. And there's something to
do it, right, But I think and I like to
pick on Shakeshack.
Speaker 1 (12:14):
I know you do. We've been picking on Shakeshack since
the IPO together. But yeah, we'll get back into shakeshack
because I asked you questions. I want to know what
you think about, uh, the activists and stuff like that.
But so we'll return to that. The other thing that
I found interesting, you know that that really resonated with
me with your land last answer was, uh, you know
(12:35):
about the food at home versus food away from home,
and restaurants are trying to catch up with the pricing
this year, and so there's a massive delta right now
in terms of inflation at eating you know, in a
restaurant versus what we're seeing at the grocery store.
Speaker 2 (12:51):
Right Yeah, And I you know, I have I struggle
with that metric because a lot of people like to,
you know, sort of look at the absolute levels in
place and say, okay, restaurant prices are going up more
than you know, supermarket prices the other way around, and
this is going to impact consumption when the reality of
it is, it is always significantly cheaper to go to
(13:13):
a supermarket and buy your food and bring it home
and cooking, right because you are doing the cooking, you're
doing the dishes, and you're doing the cooking. So no
matter what that stat says it's always cheaper to go
buy you can buy a dozen eggs for six bucks
and you know, and have four meals, right if you
want to eat eggs for two days. Right. So I
(13:33):
just don't like, I understand how people want to look
at it that way, but the fact of the matter
is it will always be and has always been cheaper
to go to a supermarket and buy a meal and
bring it home. Now.
Speaker 1 (13:46):
Yeah, And it was such a big talking point in
twenty twenty two for all these companies like, yeah, well
we're raising our prices, but they're not up as much
as the grocery stores. And it was like it was
like Equity Capital markets guys all over the street. We're
just like telling it, you know, parading this to all
the management teams, and then the management teams will get
on the call and all say the same thing, and
you're one hundred percent right, it's always cheaper to eat
(14:08):
us myself. Yeah, okay, cool. So you think the second
half of the year is going to be difficult transition,
and you talked about some of the things that are
going on with the macro, some of the things that
are going on with inflation. You know, is there anything
(14:29):
else you think that we should should should mention. You know,
labor inflation continues to be pretty high for the industry.
Speaker 2 (14:34):
Right, I mean, I think that's the you know, the big,
the big wild card sort of into the fourth quarter,
because you don't, you know, depending on what your menu
looks like, whether you're a bee centric, chicken centric, or
seafood centric, right, you're gonna have different levels of food inflation. Right.
You're seeing red meat prices are still very inflationary. So
if I was to pick a group a menu, right
(14:57):
or not to pick on shakescheck again. But just think
of a ret meat centric menu that has food inflation
and labor inflation and pricing coming in. Those groups of
names are going to have the most trouble in the
fourth quarter, right because you're still seeing four to five
(15:17):
percent labor inflation, and that's probably not going to go lower.
It's not nine percent anymore, it's not eight percent anymore,
but there is still going to be labor inflation and
there will never be deflation right way in a wage
is always going to go up, and you're always going
to find you one concept competing and get another concept
(15:37):
for a restaurant manager or you know, having to pay
bonuses to lure people to come to your concept, whatever
the structure may be. But labor inflation will always be there.
So the wild card really is going to be food
inflation for some concepts into the fourth quarter, so you
got slowing sales for a number of reasons. We got
Manu prices coming in. So then the determining factor is,
(15:59):
you know, what what the labor inflations look like and
what the margin structure is for a lot of these companies.
And then into the first quarter of next year when
the when we're up against just insane comparisons. It just
it's really going to be a difficult time for a
lot of these names. And across the board. I don't
(16:20):
know anybody that's not gonna that's going to do well. Frankly,
even even the mighty Chipotle is going to struggle into
the first quarter.
Speaker 1 (16:28):
Yeah, well, we know they've raised prices a lot over
the last you know, three years, but yeah, yeah, this
inflation thing is interesting. Man. So I'm a fan of
Jim Rodgers and his book Cut Hot Commodities. I don't
know if you've ever read it.
Speaker 2 (16:42):
No, I have not.
Speaker 1 (16:44):
You have to, you have to. He talks about the
history of commodity cycles and on average they last seventeen years,
and he goes into all the details of why they last.
And it's just such a great, clearly written book. And
you know, throughout history, you know, we've seen it repeat
over and over, and the last cycle was shortened. I
(17:05):
don't know why. Maybe I haven't he hasn't written a
follow up book to it. Maybe because of you know,
technological advances in drilling and fracking and all these different things.
But if he's right, you know, about these cycles, and
if we're at the beginning of another commodity cycle, which
(17:25):
could last anywhere from ten to twenty years, you know,
that could be troublesome for restaurants. I mean, the industry
has definitely benefited from very modest inflation for a very
long time. So that's always something I just kind of
keep in the back of my head. But you should
check that book out. I think you'd really like it.
(17:46):
I will, okay, So, based on all the things that
you mentioned, all the difficulties, and you know, you know me,
i'mbarished with you. I couldn't agree more. Who do you
think is going to win? And who do you think
is going to lose in this environment that we're entering.
Speaker 2 (18:00):
Yeah, so I just add one more thing to what
you were saying before. You know, it's surprising to see
in the second quarter the number of companies that missed
revenue estimates. Right, So they missed revenue but beat earnings, yep. Right. So,
but when you're running six, seven, eight, nine, ten, whatever price,
(18:21):
it's easy because that flows through at ninety nine percent
gross margin. Right, you can beat earnings, but sales are slowing.
That's going to get worse into the second quarter, right, Yet,
roll off prices are rolling off, you know, and traffic
is slowing, and the and the sell side analysts don't
(18:41):
it's not real time like they'll wait to hear from
the management team to lower their estimates or raisor estimates
or whatever it may be. So I was surprised to
see the number of even Chipotle missed revenue estimates for
the second quarter, right, And that's only going to get
worse because we're still seeing sales slowing, right and and
(19:01):
as estimates are not coming down. So it's just one
of those things that I just wanted to add to
that because I was just thinking about the issues that
we're going to be facing into the third and fourth quarter,
and certainly into the third quarter because sales continues. So
now you can ask that question again.
Speaker 1 (19:19):
Who's going to win and who's winners?
Speaker 2 (19:21):
Yeah, so we're pretty pretty bearish. We don't have many
winners right now.
Speaker 1 (19:29):
Well, everything's gone straight up for six months.
Speaker 2 (19:31):
Yeah, we do, like we do like Dominoes. Frankly, young
young Dominoes in the big franchise companies are pretty much,
you know, sort of the top of the list. I
guess you could say, but let me just check who
else do I have here? So we've got restaurant I'm
(19:52):
a big fan of what's going on at restaurant brands, Dominoes, uh,
you and then and then we're there's a couple of
names that we want to buy into the downturn, uh,
that we're going to see coming into the fourth quarter,
like Darden. Taste has been on the long list for
us as well. First Watch. I think First Watch is
(20:13):
a really cool little company. Frankly, it's a you know,
a breakfast, brunch and lunch concept.
Speaker 1 (20:19):
But those are one shift model.
Speaker 2 (20:21):
Yeah, I love it, but those are the ones that
sort of stick out to me as as the winners,
and I actually have a brinker as along as well.
I think there's some interesting things that are going on there,
but you know that's a longer tail turnaround. Mm hmm.
Speaker 1 (20:40):
All right, cool, so let's go, I guess for the
Winter Winners. Yeah, you know, I think we're on the
side seams side on most of these. Russell Wiener I'm
a fan of, and I'm a fan of his former mentor,
Patrick Doyle. I think restaurant bands is I think it
sounds like he's changing the culture over there and changing
the focus and and and kind of got management focused
(21:00):
on the right things. So yeah, it's interesting. What are
your thoughts on on the turnaround at restaurant brands and
what they're doing at BK and Popeyes right now?
Speaker 2 (21:13):
Yeah, so I think it's it's the focus on what matters,
right and well, frankly three G destroyed the business, right,
so it was you know, like craft Tiants and a
couple of the other buglisers, Craft Tients and restaurant brands
are the three sort of three G companies that have
(21:35):
been destroyed by their you know, way of running their businesses.
Speaker 1 (21:40):
So with an iron fist, with.
Speaker 2 (21:41):
An iron fist right, And they didn't care about franchise
profitability right. All they cared about was you know, sitting
on you making sure you know, the people at Burger
King were sitting on pickle buckets in Miami because they
just cut G and A to the you know, to
the bottom. So read undoing what was what was done
(22:04):
in the last you know, ten years is important and
you know, Patrick Doyle coming in and focusing on franchise
profitability will be you know why that stock wins. And
that can happen a couple of ways. Most importantly, sales
go up. But before that happens, you're seeing them force
(22:25):
franchise's out of the system. I don't know, that's maybe
not a good way to put it, but the reality
of the matter is when you look at you know,
McDonald's or Wendy's or Young you know, Taco Bell, KFC,
Pizza Hunt, any one of these big brands that have
been successful in the turnaround, it's all because they have
(22:45):
fixed the franchise system right, and they take the old franchisees,
they force them out. You know, whether it's a generational
thing or you know, a forced sale or closures or however,
you fix the system but that calling of the system
will immediately have an impact on what the street cares about,
and that's an improvement in franchise profitability. And as soon
(23:07):
as you begin to see that improvement in franchise profitability,
Sorry about that if you can't hear that background on,
but that's what will really drive the the you know,
the stock hire is that improvement in in franchise profitability.
And that's Patrick Doyle coming in, right, And that's how
you that that's that's what will ultimately be you know,
(23:31):
why this stock wins. And then and then you can
get to the you know, the burger King turnaround, right,
the Burger King. They sort of played lip service to
the success that Burger King has experienced here so far,
but the reality of it is traffic's still negative, right,
So there is no turnaround at Burger King yet. But
(23:52):
that's fine. You've got to you've got to fix the
franchise system first. And once you fix the franchise system first,
you close those doors. You get this door base looking better,
you get healthy franchisees in there who want to be
in there and want to run the business, and then
you'll see the traffic improved. Yep. For sure.
Speaker 1 (24:08):
And then also, you know, the unit unit economics look better,
fdds improve, you get a little buzz around the system,
and then people want to start opening stores again.
Speaker 2 (24:17):
Right Yeah, yeah, yeah, yeah, that's that's you know, two
or three years down the road.
Speaker 1 (24:23):
Yeah, but they already have strong internationals, so you know,
there's there's other pieces of that business that that's kind
of going to push.
Speaker 2 (24:31):
It along a little bit. This is a little inside
baseball with respect to QSR. But Patrick Doyle, who was
the ex CEO Dominoes who turned around that company. There
are I think eight or nine different master franchisees for
Burger King that are also Dominos franchisees. So there's an
(24:54):
element to this story that has Dominoes all over it, right,
because you've got really healthy, strong franchisees globally, right, not
not in the US, but globally. That will allow this
company to a creep value to shareholders over an extended
period of time because they do have that international unit
growth from strong, healthy franchisees.
Speaker 1 (25:16):
Great, you mentioned Brinker. You know, we we linked up
a couple months ago at the at their investor day.
You mentioned that's one of the names that you like
in casual dining, which is obviously not a place we
think is mostly safety play. What are your thoughts on that?
Speaker 2 (25:32):
Cool? I'm maybe I'm coming back to the world too
many times, but I'm a fan of the Chili's brand. Right,
Applebee's is a disaster, so their biggest competitor is failing
and is a melting ice cube. So you have a
new CEO coming in. He shrinks the menu, focuses on
a few items, right, he gets better advertising, you know. There,
(25:57):
It's just if you look at turnaround across the restaurant
space over the years, right, this is a classic turnaround
or there's classic signposts, signed posts of a successful turnaround,
and and he's got it all. It will take time, right,
because it's casual dining and whatnot. But I do think
(26:19):
Kevin is making all the right moves, and you will
once we get past this period of self inflicted wounds,
which we've got another quarter. We do have difficult comparisons coming,
but this is the name that the street loves to hate,
and you know, I just it feels like there's enough
going on. You can see enough going on that will ultimately,
(26:43):
you know, be successful. And it will take time. But
this This is one where you know, if you buy
Darden today, you might make twenty percent upside, right, But
if you're buying Brinker today and the turnaround does work,
it's a double right. This is not just you know,
it's not just ten to fifteen percent upside. This is
literally a company that you could go up you know,
(27:06):
fifty one hundred percent over the next two years if
this works. And there's no reason why it shouldn't work, frankly,
other than the macro, because it is a tried and
true turnaround in the restaurant space that we've seen executed
over and over again.
Speaker 1 (27:23):
Yeah, it should be interesting. And we talked about it
when I did hedge I TV with you, and one
of the things that I forgot to mention is that
they have not done really anything with strategic pricing.
Speaker 2 (27:35):
And so.
Speaker 1 (27:37):
From what I hear is that that they've gone out
and they're trying to find someone to help them do that,
and that could provide some some upside here to the
numbers man, because you know, that's that's process has become
a lot more scientific over the last few years, and
it's allowed some of these chains like Popeyes to Popeyes,
(27:58):
I'm sorry I'm mentropol to increase their prices so much
over the last couple of years while minimizing the traffic laws.
Speaker 2 (28:08):
You know, this is a subject for another podcast, but
I spoke with a private company that helps install dynamic
pricing for the restaurant industry and it is hugely successful
and there's an element to you know, I know it's
(28:29):
you don't see any of the big change doing dynamic
pricing yet, but I do after talking to this person yesterday,
I think that's coming for the restaurant industry. Like this,
you know, peak times, why not raise price? Right? It
just it makes a ton of sense. Now, I think
uning is is going to be interesting. But that is
(28:49):
the future of the restaurant industry, dynamic pricing, and it's coming.
I just I believe it's coming. Young Brands is actually
working with the company to do it, so a few
of the big guys are looking at it. But I
think that this is a subject that we can go
on another time with. But dynamic pricing will hit the
restaurant industry at some point.
Speaker 1 (29:09):
Yeah, for sure. It's made such a you know, impact
on the travel industry and the hotel industry and things
of that nature. Yeah, I don't think there's anything stopping it.
I'm curious about your thoughts on Kava.
Speaker 2 (29:22):
Oh man, I you know, God blessed Ron shake Right.
He buys Zoe's for three hundred million dollars, combines it
with Kava, and then all of a sudden has a
five billion dollar company. Like, there is no better CEO
in the restaurant space than Ron shake right. I just
think the guy has got the magic touch. So it is.
(29:44):
It's stupid, leap riced. The evaluation is just stupid, but
the performance is unreal. Yeah, and they've got you know,
they've got some really strong numbers in terms of you know,
not only just what they've posted in the past quarter,
(30:05):
but when you when you compare Kaba to the other
change in the space. Right, I'll just pick Sweet Greens
just because I like to pick on screen Greens and
Chase ex But you know, two point five million averaging
the volume right in twenty twenty three with twenty three
percent restaurant level margin. That's like Chipoli's at two point
nine million, you buy with twenty six Right. So the Kava,
(30:28):
the numbers that Kaba are putting up are exceptional and
just to put it in perspective to Sweet Greens, which
I think is you know, A zero has two point
eight million in averaging the voyants and a's seventeen percent
re level margins. So slee Greens has significant issues. But
Kava is just and now if you you know, Tava's
(30:50):
got nine to you know, six seven whatever percentage same
store sales growth and twenty five thirty percent unit growth
and you're putting up you have that kind of square
foot is growth with those kinds of full wall economics,
you get a one hundred times eed. Even now it
won't always trade there, but I love to you know,
(31:14):
I love to find great shorts in the restaurant space.
But this is, you know, other than valuation, which is
never a reason to short the stock. You know, this
is a really, really strong company that has you know,
a huge future ahead of it in terms of being
the growth and potential now it you know, will it
you find a few bumps in the road over time, yeah, absolutely,
(31:36):
but for the time being, it is you know, it
is built to succeed. Yeah.
Speaker 1 (31:42):
Yeah, It's very impressive at the store level for sure.
And we'll see how quickly they can leverage DNA, you know,
hopefully it don't end up like Shakeshack, where you're like
eight years later still waiting for them to leverage GNA.
So you know, to that point, can you talk a
little bit about the activist investor and what's going on
there and if that's changed your opinion about Shakeshack at all.
Speaker 2 (32:04):
No, it actually reinforced my opinion. Frankly, we were short Shakeshack,
and we're short Shakeshack because it is a poorly run
coporate company and it's poorly run because the management team
is incentive. The long term incentive comp is structured around
growing revenues and epidoc so revenue growth and EBIDC growth,
(32:25):
so they can just all they have to do is
just you know, take the balance sheet, open up stores,
right to grow their revenues and grow the ebadah and
not caring about averaging the volumes, not caring about margins,
and the CEO can get paid.
Speaker 1 (32:39):
And that is that and not operating income and operating
income margin inst crazy to me, insane, but that that
structure has led to significant inefficiencies.
Speaker 2 (32:51):
So this is not a typical QSR model, right, So
you know, if you think about you know, McDonald's, it's
got those it's got, you know, the same four walls
that it opens up. You know, across the country. Shakeshack
has a different box in Orlando than it does in Texas,
(33:11):
that it does in California, that it does in you know,
all these different cities. And that has led to significant inefficiencies.
And that's obvious in their margin structure of the company.
And now you have an activist coming in and they
see all these inefficiencies, right, and they're going to try
to fix it. I just don't know how they can, frankly.
(33:33):
I mean there are some some small things they can do, right,
But if you think about you know, go back to that.
You know the number that I was with the fash
casual average un and volumes and mart restaurant level margins.
They've got three point seven million in averaging and volume
and then nineteen percent restaurant level margin, which is crazy, right.
(33:53):
Tavas got two point five million and twenty three percent
restaurant level margins. How come Shakeshack is low? Well, it's
so low with that averaging volume because of the inefficiencies,
because of the food costs, because of the labor costs,
and the inefficiencies that are built in the system, so
they have to begin to try to fix that, and
I just don't know how they could do that right now.
Speaker 1 (34:16):
Yeah, and the amount of money they were spending on
the store builds and oh my.
Speaker 2 (34:20):
God, yeah, so much waste.
Speaker 1 (34:23):
Yeah. So who do you like in the fast casual
space and are there any other ones that you have
concerns about?
Speaker 2 (34:29):
So I really don't the answer your question is, I
really don't like a lot in fast casual, right. I
just the valuation. Chipotle is twenty four times NTM e
v ed badah, right, Shake Check's price right on top
of that. That's those Those are just ridiculously egregious multiples
(34:50):
for all these businesses, and it's heading into a slowdown, right,
So I'm not a big fan, I think, you know.
I mean, the only one that I positively disposed to
what we're talking about it is Cava, and I still
wouldn't buy it. And Sweet Greens is a zero at
some point like the store. The big the biggest joke
(35:12):
in fast casual today, right, is that Sweet Greens is
going to have robotics stores in five years? Like are
you kidding me? That is not going to happen? And
I don't know, if you've seen the store in Naperville,
Illinois that they open, but it's two stores, two stories,
(35:32):
and they claim that they're going to convert every one
of their existing restaurants into a robotics store. Well, you know,
robots breakdown, right, you know what about depreciation? Right? Yes,
you might be substituting labor costs you know for robots, right,
(35:54):
but you still have DNA. Right, So the restaurant level
margin is not going to twenty six percent. And just
to come back to what we've been talking about with
fast casual, the strength and those margins, right, Sweet Greens
is at sixteen percent or seventeen percent level margins. They're
magically saying that a robotics store after one month of
testing is going to twenty six percent. It's not going
(36:15):
to happen. Yeah, and even if you plug in twenty
six percent on the second quarter numbers, they're still losing money.
Are you kidding me? And you've got these self side
analysts that are buying into this nonsense that they're going
to have robotics like it is it literally is. It's
it's hilarious to watch that's unfold in the stocks, you know,
(36:39):
the stocks, the stock has spiked on that well whatever reason,
you know, well we know why, because people are buying
into this management team thinks that they're going to have
robots serving salads.
Speaker 1 (36:51):
It's I mean, you know, even at iPod I you
know what I wrote. My note was like, you know,
I hesitate to use a a price of sales mallable
to ever you know, value a restaurant stock, but since
they can't generate E but I have no the choice,
you know, And like, call me old school, but it's
like I feel like you're supposed to figure out the
store level economics on the first unit before you build
(37:15):
the second and the third and the fourth, as opposed
to still trying to figure out the unit economics when
you're building one hundred and twenty or whatever number.
Speaker 2 (37:22):
You know.
Speaker 1 (37:24):
So we talked a lot about the low and middle
income consumers and quick service and fast casual. Obviously our
companies don't have a lot of exposure to find dining.
But the same store sales have been in decline since
March according to black Box, and now luxury retail seems
to be slowing. You know, I just find that interesting
(37:46):
because we've had this k shape recovery where the high
end has done well post pandemic, and the low income
not so much. So what are you hearing about the
higher income consumering.
Speaker 2 (37:55):
Yeah, so same idea, right, and it's it actually slowed
faster than so if you go, I look at the
nap Steakhouse data, and it really started slowing in March,
so it's slowed earlier. And there's an element to that
(38:17):
that's hard to know because it's a little different than
high end retail, right, because this is more T and
E based, Right, it's you know, you're not you know,
I'm not taking a client out to dinner this week
because whatever reason, you know, business is soft or whatever.
So it has a little bit more to do with
(38:37):
business spending than it does with you know, sort of consumers,
you know, whether they have a job and feeling like
they can buy a Gucci purse or whatever. So to me,
that's a little bit more discretionary and that that's a sign.
That was one of the first signs back in March
that things were slowing. And you know, not the reason
(38:59):
why we're going to embarrassed in the industry, but one
of the reasons, like okay, this is you know, this
is this is not good, right, you know, the high
end stakehounsils have been slowing for a while and have
slowed and continue to slow, like it's not getting better.
So it just it's it's an indicator to me that
you know, businesses are getting a little bit more cautious. Yeah,
(39:20):
because they're not, you know, people aren't taking their clients
out to dinner as much. Cool.
Speaker 1 (39:27):
Well, listen, Thanks again, Howard, that was a lot of fun.
Speaker 2 (39:30):
Man.
Speaker 1 (39:30):
Where where can people find you on social media?
Speaker 2 (39:33):
Had Howard Penny on Twitter? Howard W. Penny. I should
say so, but thank you Michael. This has been awesome.
Love having you on Hedge TV and thank you for
having me on your podcast. Really love it for sure.
Speaker 1 (39:48):
Thing man, it was great and thanks to the audience
for tuning in. If you liked the episode, please subscribe
and leave a review and tune in again later this
month for a discussion with bet Oaklahom though, CEO of
Plays Pizza. Have a good day, everybody.
Speaker 2 (40:04):
H
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