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Last week I attended the ICRXchange Investment Conference, where thirty restaurant chains presented. The following is some franchisor chain specific news.
Almost all of the sell side analysts were of the mindset of a “weak 2013 first half, better second half.” This is driven by the comps cliff, the bulge of customer traffic generated last winter that will show up in the store comparables. If they bounce off (compared to) their five year compound comps, the industry will see great times and a great year to come.
YUM didn’t show. Despite being on the ICRX presentation list just two weeks ago, Yum ducked out. It was timed with their China sales and earnings problems and their apology on missing corporate communications. They must have felt if you don’t talk about it, it will go away. On a side note, interesting that David Novak was the only restraurant CEO to show up in the HBR 100 best CEOs (#37/100). None of the sell side analysts had YUM as the 2013 top pick.
Burger King (BKW) got many questions at its breakout sessions of a doubtful tone from its promises of international growth, particularly on whether store economics would work. BKW responded the strength of the local franchisee partners was the key and would they find the strongest partners. Only its CFO showed, no senior operations management, a bit odd since the conference was held in the city of Burger King's world headquarters.
Dunkin Brands (DNKN) said its 2011 Dunkin Donuts US cohort (presumed to mean vintage) of units was at $858K AUV, $461K buildout, 13.4% store cash flow, 25% cash on cash return and that US traditional DD stores have a AUV of $1M. Their story is the westward US expansion, with not much international talk. Domino’s (DPZ) on the other hand, talked mostly about international and little talk about the US and franchisee economics. I’d note in both cases, the franchisor is talking store level EBITDA, which has to cover debt service, franchisee overhead and future CAPEX. Dominos did not, at ICRX or at their investor day afterwards, once mention the cost of cheese, a key store cost input.
Wendy’s (WEN) and BKW both were talking big about reimaging but the magnitude of the same store sales lift and investment level differed materially: WEN’s $750K remodel target is said to generate a 20% lift, Burger King with a cheaper, $350K remodel, a sales lift of 10-12%. My experience is big remodels yields big lifts and we wonder about both companies assumptions. WEN did not announce any remodel loan pool was available, and BKW did not note more availability was added to the Rabo Bank remodel pool.
WEN of course noted breakfast was on the back burner; a franchisee noted they couldn’t reach the $700/day breakfast “breakeven” and while the breakfast products were high quality, both the premium price and slower speed of delivery were problems.
Affordable Health is increasingly seen as a 2014 or 2015 problem, with the lower 2013 phase in expense and the uncertainty of state exchanges and participation rates. But more chains are now saying that the sky is not falling, that operators won’t cut hours but will eat the cost increases.
Refranchising and defranchising (acquiring franchisee units) is defined by the unit profitability. Texas Roadhouse (TXRH) is defranchising, as is Qdoba (JACK), Wendy’s will selectively reacquire. Burger King is refranchising. The key issue in the franchising world is who can pay for remodels, and when.