Larry Miller larry@millerpulse.com 404-661-6363 Robert Sanders robert@millerpulse.com 404-849-6717 February 2014 Restaurant Business Conditions Report Is The Other Shoe Finally Dropping? QSR same store sales have held up quite well over the past three years, while casual dining has been in free-fall. QSR outperformed casual dining again this month. But QSR sales are slowing as evidenced by the weakest 2-year sales trend (+2.2%) since Jul-11. Wintry weather clearly played a part in the sales weakness in QSR and the restaurant industry in general in January; and can be seen in the depressed sales in the Northeast and Midwest (pg. 3). But what makes us think the other shoe may be dropping is industry same store sales in January even after adjusting for weather which we estimate hurt sales by 1.5% based on operator commentary were still among the weakest in nearly three years on a 2-year basis (Exhibit 1). That and the fact that weather is neutralizing the easiest comparisons of the year doesn t bode well for sales for 2014. One bright spot is consumer spending plans remained stable both month over month and year over year according to the Feb-14 survey (2150 consumers) by our partner ChangeWave Research. Operators See Industry Sales Growing 6.5% In 2014 Our operator group plans to open new stores at an average rate of 3.1% in 2014. Combine this unit development with their same store sales growth forecast of 3.4%, and the operators project 6.5% top-line growth for the industry in 2014. Top-line growth is expected to be higher in fast casual at 14.1% and more modest in fast food (+5.7%) and casual dining (+5.0%). This forecast might be on the high-side as industry sales have grown a compound rate of 4.2% over the last five years. Nonetheless, if the operator forecast is accurate, industry sales would approximate $511 billion in 2014 up from $480 billion, comprised of $261 billion in QSR and $250 billion in FSR. Exhibit 1. Jan-14 2-Year Same Store Sales Worst In Nearly 3 Years, Even Weather-Adjusted February 10, 2014 All values in U.S. dollars unless otherwise noted.. @millerpulse
Monthly Snapshot Industry Fast Food Fast Casual Casual Dining Current Month Same Store Sales Prior Month Same Store Sales 2-Year Sales Current Month 2-Year Sales Prior Month (0.0%) 1.6% (0.9%) (0.9%) (0.2%) 1.1% 0.0% (1.7%) 0.3% 2.8% 2.0% (2.8%) 2.2% 3.8% 2.0% (0.5%) Guest Traffic (2.2%) (0.5%) (2.8%) (3.4%) Average Check 2.2% 2.1% 2.0% 2.5% Strongest Region West West West West Weakest Region N East N East N East N East Same Store Sales Outlook (6 Mo) Better Better Better Better Food Costs 30.0% 31.1% 31.2% 27.9% Labor Costs 30.9% 29.0% 31.0% 34.0% Operating Costs 25.2% 25.5% 28.0% 22.5% Restaurant Operating Margin Restaurant Margin Outlook (6 Mo) Food Inflation Outlook (6 Mo) Pricing Outlook (6 Mo) Best Commodity (6 Mo) Worst Commodity (6 Mo) 13.8% 14.4% 9.8% 15.6% Better Better Better Better 1.9% 1.6% 2.0% 2.6% 2.1% 2.2% 1.9% 2.1% Chicken Chicken Chicken Seafood Ground Beef Ground Beef Steak Pork February - 2014 Page 2
Exhibit 1: January 2014 Same Store Sales And Operator Profile WEST: 3.7% Fast Food: 4.0% Fast Casual: 0.0% Casual Dining: 5.2% NATIONAL: (0.0%) Fast Food: 1.6% Fast Casual: (0.9%) Casual Dining: (0.9%) MIDWEST: (5.4%) Fast Food: (3.5%) Fast Casual: (9.0%) Casual Dining: (4.5%) NORTHEAST: (7.1%) Fast Food: (6.4%) Fast Casual: (9.0%) Casual Dining: (5.8%) OPERATORS N = 51 Total Units: 26,284 Casual Dining 34% Fine Dining 2% Fast Food 38% Fast Casual 26% CA: 4.3% Fast Food: 8.0% Casual Dining: 2.5% SOUTH: (0.1%) Fast Food: 0.4% Fast Casual: (2.3%) Casual Dining: 3.0% REGIONS Northeast 24% Midwest 24% TX: 1.6% Fast Food: 2.6% Fast Casual: 0.7% FL: 1.6% Fast Food: 4.8% West 24% South 29% February - 2014 Page 3
Same store sales slow in January even after adjusting for weather Industry same store sales were flat in January on an unweighted basis and fell 50 bps to -2.1% on a sales-weighted basis. Unweighted sales slipped 190 bps to 0.3% on a 2-year basis and 300 bps to -1.9% on a weighted basis. Even after adjusting for weather (~1.5%) the 2-year trend moderated in January. The +2.7% spread between unweighted and weighted sales shows smaller chains posted better results than larger ones in January. Exhibit 2: Same Store Sales Weakened In January But Weather Played A Role Select Operator Comments On January Performance And General Tone Positive Off to a strong start. Rolling over some weakness in January 2013 from weather and payroll tax changes. If weather slows down, we re in good shape. Weather has been great in CA. Negative Weather. (x10) Weather hurt 100-200 basis points. Weather hurt system by ~1.2%. Bad New Year s Holiday shift. CA minimum wage increase. Very poor start to February due to weather. If we do not catch a break, results are going to mirror January. February - 2014 Page 4
Sales outlook for February improves, as Operators expect more normal weather Overall, restaurant operators see better sales in February as 52% of operators expect better sales and 13% worse. Exhibit 3: January Weekly Results Impacted Heavily By Weather Exhibit 4: Guest Traffic Was Less Negative In January Restaurant industry guest traffic remained negative in January, but both QSR and casual dining saw a slight uptick Restaurant industry traffic was -2.2% in January versus -2.6% in December. Traffic was flat on a 2-year basis. In January, no segment had positive traffic. Fast food performed the best at -0.5% followed by fast casual at -2.8% and casual dining at -3.4%. February - 2014 Page 5
Exhibit 5: 6 Months Sales Outlook Remains Optimistic Especially For QSR February - 2014 Page 6
January was a soft month for QSR as sales weakened on both a sales-weighted and 2- year basis Unweighted sales in January were flat with December at +0.6%. But sales dropped 100 bps to -2.6% on a sales-weighted basis and 90 bps to +2.2% on a 2-year basis. 47% of QSR operators had better sales in January and 41% worse. Traffic was -0.5% at fast food and -2.8% at fast casual. For detailed breakout of QSR trends see below (Exhibit 7). Exhibit 6: Quick-Service Restaurants (QSR) Same Store Sales Disappoint In Jan Exhibit 7: QSR Same Store Sales Trends By Segment And Region Unweighted Unweighted Weighted Weighted Strongest Weakest Restaurant Same-Store Sales Same-Store Sales Same-Store Sales Same-Store Sales Region Region Segment Jan-14 Dec-13 Jan-14 Dec-13 Jan-14 Jan-14 Fast Food (All) 1.6% 1.1% (3.4%) (2.6%) CA 8.0% N East (6.4%) Fast Casual (All) (0.9%) 0.0% 4.6% 6.4% TX 0.7% N East (9.0%) QSR Burger 1.4% 0.7% (4.3%) (3.4%) West 7.5% N East (2.5%) QSR Sandwich (1.7%) (0.5%) (2.9%) (1.3%) West 0.3% M West (8.7%) QSR Chicken 4.3% 4.7% 4.1% 3.6% TX 4.3% QSR Other* 0.4% (0.3%) (2.2%) (0.0%) *Other includes Asian, Coffee, Dessert, Mexican, Pizza, Varied Menu and other unclassified. February - 2014 Page 7
FSR same store sales improve in January but remain weak FSR sales rose 50 bps in January. However, sales remained negative at -1.2% and slowed on a 2-year basis to -3.1% (worse by 360 bps). Weighted sales improved to +0.7%, but the 2-year fell 320 bps to -2.0%. 44% of FSR operators had better sales in January and 44% saw sales slow. For detailed breakout of FSR trends see below (Exhibit 9). Exhibit 8: Full-Service Restaurant (FSR) Same Store Sales Rebound Modestly Exhibit 9: FSR Same Store Sales Trends By Segment And Region Unweighted Unweighted Weighted Weighted Strongest Weakest Restaurant Same-Store Sales Same-Store Sales Same-Store Sales Same-Store Sales Region Region Segment Jan-14 Dec-13 Jan-14 Dec-13 Jan-14 Jan-14 Casual Dining (All) (0.9%) (1.7%) 0.8% (1.1%) West 5.2% N East (5.8%) FSR Varied Menu/Grill & Bar (0.9%) (2.1%) 1.0% (0.5%) West 3.4% N East (6.2%) FSR Other* (1.8%) (0.8%) (3.2%) (5.2%) *Other includes Asian, Mexican, Seafood, Steak and other unclassified. February - 2014 Page 8
Exhibit 10: Average Check Indicators Rise; Traffic Metrics Decline Average Check Indicators Traffic Indicators February - 2014 Page 9
Operators remain upbeat on the outlook for restaurant margins, despite continued sales challenges A net 26% of operators expect margins to be better over the next 6 months (Net 26% equals 47% better less 21% worse). Exhibit 11: Restaurant Margin Outlook Remains Positive The outlook is slightly more favorable among FSR operators (+30%) than QSR operators (+25%). Restaurant margin was 13.8% for the industry in January, down 130 bps compared to last month, as declines in QSR offset gains in FSR The three components are as follows: Food 30% Labor 31% Operating 25% Exhibit 12: QSR Restaurant Margins Put Downward Pressure On Industry February - 2014 Page 10
Operators expecting more commodity inflation Operators expect inflation of +1.9% over the next 6 months vs +1.6% last month. QSR expects 1.7% inflation over the next 6 months. FSR expects 2.5% inflation over the next 6 months. Exhibit 13: Commodity Inflation Outlook Rises For Second Consecutive Month Operators see the most inflation in beef over the next 6 months Key commodities by segment: Fast food sees the most inflation in ground beef and the least in chicken. Fast casual sees the most inflation in steak and the least in chicken. Casual dining sees the most inflation in seafood and the least in pork. Exhibit 14: 6 Month Inflation Outlook Beef Is The Biggest Concern February - 2014 Page 11
Exhibit 15. Commodity Price Charts MillerPulse Commodity Index Weekly Steer Pricing ($/cwt) Weekly Beef Pricing ($/lb) Our overall commodity index rose 10.0% during January (primarily due to higher beef prices), which is an acceleration over the prior 3 months and marks an all-time high. Weekly Chicken Breast Pricing ($/lb) Weekly Chicken Wing Pricing ($/lb) Weekly 40 Lb Block Cheese Pricing ($/lb), GA Dock, USDA, EIA. February - 2014 Page 12
Exhibit 15. Commodity Price Charts (Continued) Weekly Corn Pricing ($/bu) Weekly Pork Cutout Pricing ($/lb) Monthly Class I Milk Pricing ($/cwt) Monthly Natural Gas Pricing ($/MMBtu), GA Dock, USDA, EIA. February - 2014 Page 13
Exhibit 16: Industry Pricing Jumps To Twelve Month High Pricing plans for the next 6 months leap to 12 month high, as operators fight higher than expected commodity pressure and pending minimum wage hikes Quick Service companies expect to run 2.1% price. Full Service companies expect to take 2.2% of price. February - 2014 Page 14
Exhibit 17: Weather Clouding US Job Growth Picture Over Last Two Months Non Farm Payrolls 62% correlated with restaurant same store sales: The US labor market continues to add jobs 89% of the jobs lost during the recession have been replaced. The US economy added 113k jobs in January, well below the average gain over the past year (187k). January numbers followed a weak December report, begging the question: is weather to blame or is hiring slowing? Job growth of 250k per month adds 1% to industry same store sales by our estimates. and BLS.gov Consumer confidence 45% correlated with same store sales: January confidence slipped modestly from December, but remains near post recession highs. The rebound bodes well for spending, but continued strength is most important. Exhibit 18: Consumer Confidence Dips Slightly In January and University of Michigan Consumer Sentiment Index February - 2014 Page 15
Gas prices are 14% correlated with restaurant same store sales: Gas prices are 10% lower than last year and remain at the low end of their 12 month range; providing some relief to consumers. While the correlation between gas prices and restaurant sales is low, we have found some short-term sales impacts from spikes in gas prices. Exhibit 19: Gas Prices Are Below Last Year s Levels and EIA National Association of Home Builder (NAHB) index is 47% correlated with food service sales: In January, the NAHB index fell 1 point to 56, but is 19% above last year and was above the 50 threshold for the eighth consecutive month signifying more builders view conditions as good than poor. Exhibit 20: Housing Market Remains Strong, National Association of Home Builders, and census.gov February - 2014 Page 16