While casual-dining restaurants continue to languish in the midst of the nation’s slow-motion economic recovery, quick-service chains have rebounded to pre-downturn levels, according to Goldman Sachs securities analysts.
According to a new report from Michael Kelter and Chris Cerrone, the gap in same-store sales performance between quick-service and casual-dining chains — with the exception of Darden Restaurants — has widened over the past few quarters.
“QSRs have recovered their pre-recession trajectory, while casual diners are hovering around 0-percent to 1-percent growth,” they wrote. “We do not see any catalysts that would change recent trends, as most economists expect the U.S. economy to continue to grow at a very modest rate in 2012, and casual dining is highly macrosensitive.”
Goldman Sachs does and seeks to do business with companies covered in its research reports. The comments from analysts do not necessarily reflect the views of Nation's Restaurant News, nor should any statement be construed as a recommendation to buy or sell any security.
Chipotle, Dunkin’ poised for growth in near term
Kelter and Cerrone wrote they expect 1,200-unit Chipotle Mexican Grill to be the best-performing restaurant stock of 2012, saying they are bullish because the brand is very early in its growth lifecycle, with plenty of upside still possible for same-store sales and profit margins.
“We estimate the total potential units for Chipotle to be around 3,500, which means the company is only at around 30 percent of potential penetration today,” they wrote. “Based on the company’s current growth rate, Chipotle would not reach saturation until 2020 or beyond. Success internationally or with [its new brand] ShopHouse as a second concept would further extend the growth horizon.”
The analysts see “clear evidence of the concept’s appeal” in the fact that Chipotle has increased its market share within the fast-casual sector from 3 percent in 2000 to 16 percent in 2010, a period during which that industry segment tripled its annual sales from $4 billion to $12 billion.
They are projecting a 9-percent same-store sales increase for Chipotle in 2012, based on the impact of newer restaurants entering the comparable-sales base, a projected 4-percent gain in traffic, and the effect of about 5 percent in price increases taken in late 2011.
“There are no indications of a growth slowdown [for Chipotle,” they said, noting that average unit volumes and return on invested capital continue to rise, and food cost inflation is expected to ease in the second half of the year — especially for avocados.
The analysts also projected high upside for earnings this year for Dunkin’ Donuts, driven mostly by higher same-store sales, which they project to be between 6 percent and 7 percent over the next three quarters. In large part, they wrote, Dunkin’s same-store sales are benefitting from the rollout of coffee sold in Keurig “K-cups” for individual brewing.
“We see Dunkin’ Donuts as a solid regional QSR, with the potential for national and international expansion,” the analysts wrote.
They cautioned, however, that while the potential to expand margins on the strength of high same-store sales is inherent to Dunkin’s 99-percent-franchised business model, consensus estimates on Wall Street for Dunkin’s profitability growth may be “stretched.”
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McDonald’s, Darden, Tim Hortons look good long-term
Kelter and Cerrone noted opportunities for “best-in-class” companies McDonald’s, Tim Hortons and Darden Restaurants to boost earnings in 2012.
For example, they judged McDonald’s to be “firmly in a positive feedback loop, continuously taking share from competitors such as Burger King, Wendy’s, Taco Bell and KFC.”
“In addition,” they wrote, “the company has recently started to ramp up its emerging-market growth rate. We see the potential for the company to compound growth at around 15 percent per year for the next several years.”
Goldman’s researchers projected McDonald’s long-term annual unit growth to be 2 percent to 3 percent, in addition to same-store sales growth between 4 percent and 5 percent. Their projection of 5.3-percent same-store sales growth in 2012 includes 3 percent of menu price increases taken last year and traffic growth of 2 percent to 3 percent.
Kelter and Cerrone see similar potential for 15-percent annual earnings growth in Tim Hortons because it resembles McDonald’s in many ways and “dominates its home Canadian market.” Aside from advantages to Tim Hortons’ business model — such as being mostly franchised and receiving a greater portion of franchisees’ sales because the company owns the restaurants’ real estate — the analysts also point to the brand’s potential to grow in the United States as a reason to be bullish on its stock.
“Tim Hortons is up to 600 U.S. units, on the way to 1,000 by roughly 2015,” they wrote. “Its U.S. earnings before interest, taxes, depreciation and amortization recently turned positive after an extended ‘invest mode,’ and we think profitability could meaningfully accelerate in the coming years.”
They also projected annual earnings growth for Darden Restaurants over the next few years, based on the potential for a sales turnaround at Olive Garden by 2013 and meaningful benefits from remodeling Olive Garden and Red Lobster locations. Efforts to modernize restaurants and improve value positioning at its two major chains could drive annual unit growth of 4 percent to 5 percent and same-store sales growth of 2 percent to 3 percent for Darden, the analysts wrote.
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“We think management will be able to stabilize Olive Garden in 2012 by focusing on value promotions and reclaiming its prior value-based brand positioning,” they wrote. “A true turnaround is not likely until the second half of the year or some time in 2013 when remodels and a new advertising campaign kick in.”
Till then, Red Lobster could carry Darden’s performance and stock price, they noted.
“[Red Lobster’s] robust results in recent quarters were clearly driven by value-oriented promotions,” Kelter and Cerrone wrote. “However, we believe it is likely that consumer receptivity of these promotions has been driven in party by an improved brand perception.”
Challenges loom for others
While other restaurant companies expect to grow earnings in 2012 and beyond, Goldman’s researchers cited impediments to sales or earnings growth that could slow momentum even for fast-moving companies.
Yum! Brands Inc., for example, will steadily grow earnings over the long term, they wrote, but it will have to overcome the drag its struggling performance in mature markets is putting on the rapid development in emerging markets. The analysts did not expect meaningful improvement in the United States for Yum in 2012, as expected improvement at Taco Bell probably could not offset further contraction at KFC and the comparison against a 53rd operating week in 2011.
Even Yum’s China division could moderate, holding back earnings growth, they noted. “We are forecasting a decline in Yum’s China comps from 17 percent in 2011 to 8 percent in 2012,” they wrote, “and see potential downside to this estimate if China experiences anything other than a soft landing.”
They also speculated that The Wendy’s Company’s earnings and stock price could fail to meet expectations in 2012 due to a loss in advertising share of voice, sporadic remodeling efforts and inconsistent unit growth. The analysts noted that unit growth at Wendy’s is stagnant, same-store sales have not grown more than 1 percent in a year since 2004, and international development has yet to get started.
“We believe the primary cause of the subpar domestic results is that, over time, the brand has lost its primary positioning: higher-quality fast food that McDonald’s and Burger King,” Kelter and Cerrone wrote.
As for The Cheesecake Factory, the analysts described the casual-dining chain as “a solid, well-loved concept, but [we] believe the company’s best days of growth are behind it.” The analysts noted that declining return on invested capital, a pivot toward focusing on smaller locations and continued traffic declines indicate that the upscale-casual brand may have reached saturation in the United States.
The analysts forecast same-store sales growth of just 1 percent for The Cheesecake Factory in 2012, including no traffic gains and a 1-percent price increase.
“We are concerned that Cheesecake could suffer as most of its primary competitors increase their promotional intensity, while it does not,” Kelter and Cerrone wrote.
Contact Mark Brandau at [email protected].
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