The past winter put a damper on sales growth across the restaurant industry leading into this year, but several brands presenting at the 2014 Baird Growth Stock Conference nonetheless gave bullish projections for the rest of this year to investors.
Executives from Buffalo Wild Wings Inc., Chuy’s Holdings Inc., Ignite Restaurant Group Inc., Noodles & Company, Potbelly Corp., Texas Roadhouse Inc. and Zoe’s Kitchen Inc. detailed their plans for resuming sales and margin growth by managing through commodity inflation and beating their competition to the best real estate sites in new markets.
Presentations to investors at the Baird Growth Stock Conference touched on three common themes:
Though negative impacts from severe winter weather persisted into January and February, many of the executives presenting at the conference nonetheless were upbeat that their restaurant chains could achieve their modest targets for revenue growth in 2014.
“The overall tone from restaurant management teams in attendance was reassuringly upbeat regarding current demand trends and the general outlook for upcoming periods,” David Tarantino, the restaurant analyst for Robert W. Baird & Co. who led the companies’ presentations, wrote in a research note summarizing the conference.
Potbelly Corp., for example, had a difficult winter, chief executive Aylwin Lewis told attendees. The government shutdown in October cut the chain’s business in Washington, D.C., in half, and then 37 out of the 91 days in the first quarter had severe weather affect traffic, he said. But the fast-casual sandwich chain is bullish about its chances to grow sales and expand into new markets, including its next “hub city,” Denver.
“I believe if we run our playbook, we’re kind of impervious to competition,” Lewis said. “It’s our people, product and place. … We don’t find ourselves acquiring customers. Our customers come, and we keep them.”
Potbelly is targeting long-term annual unit growth of at least 10 percent, based on annual same-store sales growth in the low single digits and restaurant-level margins around 20 percent, he said.
Commodity pressure bites in short term
(Continued from page 1)
Inflation in the commodities markets remained a top concern for restaurant investors, but the brands presenting at the conference noted an ability to manage through its effects in 2014.
“Despite short-term price volatility for some commodity items, most restaurant companies are not assuming a meaningful lasting impact from temporary spikes because of individual companies’ contracting status for key items,” Tarantino wrote. He also noted that restaurant executives don’t expect the sharp inflation for some items, such as limes, to sustain over the long term.
Steve Hislop, chief executive of Chuy’s Holdings Inc., got the biggest laugh from the conference crowd when he said he would have brought margaritas for the attendees were it not for the skyrocketing price of limes.
Presenters from Buffalo Wild Wings also had a lighthearted take on commodity costs this year, as prices for its principle protein, traditional chicken wings, had eased significantly from a year and a half ago.
“I think I like wing costs now,” chief financial officer Mary Twinem joked, noting that the chain hoped favorable food costs would contribute greatly to the goal of hitting 20-percent profit margins in 2014.
“Most people think it will be a pretty moderate year for wing prices,” Twinem said. “When you look at protein prices overall, with pork prices being high and beef prices being high, many believe that consumers will turn to chicken. If that’s the case, the hope is chicken producers produce more, and there will be more wings, which would bode well for us.”
One concept highly exposed to swings in beef prices, Texas Roadhouse, shared with investors its outlook that beef costs likely would not moderate until 2016. Chief financial officer Price Cooper said the casual-dining chain was able to secure total food cost inflation in only the low-single-digit range in 2014 due to favorable contracting with beef suppliers, but if demand for beef fluctuates wildly the next few years, so would Texas Roadhouse’s input costs.
“We all hear the same things you all hear, and the fact is that supply is going to continue to be tight for the next couple years,” Cooper said. “It will really be a question of demand. … If chicken and pork were to stay low, then that would create a bigger gap in terms of pricing [for beef].”
Chains plan for robust unit growth
(Continued from page 2)
Many of the restaurant brands presenting at the Baird Growth Stock Conference expressed optimism not only for hitting unit growth targets in 2014 but also for finding key real estate sites for planned openings in 2015 and 2016.
“Some concepts have noted signs of slightly increasing costs and greater competition for new sites,” Tarantino wrote, “although there doesn’t appear to be broad-based pressures at this point that would meaningfully impact new-unit returns or the ability to source enough real estate to support planned expansion.”
Managers for Noodles & Company said the fast-casual chain would achieve unit expansion near the higher end of its guidance of 42 to 50 openings this year, or 13 percent to 16 percent growth. They added that initial sales results in new markets like San Francisco and Orlando, Fla., have been encouraging.
Jason Morgan, chief financial officer of newly public Zoe’s Kitchen Inc., told attendees that the company would open between 28 and 30 Zoës Kitchen restaurants in 2014. The company aims to grow the fast-casual brand from 114 restaurants currently to about 1,600 domestic locations over the long term.
“We’ve built an in-house tool that allows us to do site selection … and we’ve looked at over 4,000 points of interest across the U.S.,” Morgan said. “We scored each one and got it down to 1,600 mutually exclusive locations where we believe we can build a Zoe’s Kitchen.”
Two other presenting companies, Ignite Restaurant Group and Chuy’s Holdings, gave similarly optimistic outlooks for growth prospects based on their agile methods for fitting their brands to real estate they already own or could procure through converting old restaurant sites.
Ray Blanchette, chief executive of Ignite, said much of the company’s focus would be on turning around Romano’s Macaroni Grill, which it acquired in 2013, while continuing to grow its other casual-dining concepts, Joe’s Crab Shack and Brick House Tavern + Tap.
But for Macaroni Grill locations that need to be shuttered, Ignite has an opportunity to convert many of those restaurants to the Brick House concept, which has several advantages, like a 43-percent sales mix for alcohol and a daypart mix that includes one-fourth of sales derived from the afternoon period between lunch and dinner.
Three locations have been converted to Brick House to date, he said.
“When you have the real estate under your control, the speed to market really is dramatically impacted,” he said.
Chuy’s chief executive Hislop said the casual-dining chain is targeting 20-percent unit growth over the next several years to eventually grow from more than 50 locations now to 500 units in the United States. The brand’s “unchained” approach allows Chuy’s to put common design elements to remodeled end-cap or freestanding sites converted from other restaurants.
“We love ‘hermit crabs,’ but the site will always win, so we have a few different prototypes,” Hislop said.
Chuy’s has accelerated its growth to 44 restaurants opened in the past six years, after building eight restaurants in its first two decades in existence.
This story has been revised to reflect the following correction:
Correction: May 21, 2014 An earlier version of this story misstated Jason Morgan of Zoe’s Kitchen's title. He is the company’s chief financial officer.
Contact Mark Brandau at email@example.com.
Follow him on Twitter: @Mark_from_NRN