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Restaurant executives have to decide whether they want to be a tortoise or a hare. In the age-old fable, the tortoise moves ploddingly down the race course — slow and steady — eventually surpassing the hare, whose off-the-blocks speed can’t make up for his overconfident blundering.

In Aesop, the choice is easy: be the tortoise. In business, it’s much more complicated.

Operators must balance long-term initiatives against shareholders’ desire for short-term returns. Restaurants’ capital expenditure investments in technology, unit remodels, and new units boost revenue and create substantial value over the long-term, but, over the past two decades, many publicly traded foodservice companies in the U.S. have used their extra capital on share buybacks, dividend payouts, and acquisitions.

While the market is rewarding this hare-like thinking, a number of companies have taken a slower approach — and seen incredible increases in profit margins, stock price, and enterprise value.

Buybacks and Dividends Eating Into Restaurant Capital Expenditure

CAPEX spending can have a negative effect on short-term profits, which motivates some investors to sell shares. Other shareholders might move their capital to companies that use their non-operating cash flow to generate immediate gains, like dividends and stock buybacks.

Most publicly traded foodservice companies in the U.S. are listening to their investors and using the record amounts of cash on hand to generate short-term returns rather than long-term results.

Though the amount of restaurant capital expenditure hasn’t changed significantly since 2001, the share of capital going to CAPEX has decreased by 42 percentage points.

The focus on dividends and buybacks seems to be having a negative effect on enterprise value: as CAPEX spending has decreased, EV growth has as well.

Ten companies went against the grain during this period and increased their CAPEX spend, and each claimed both stock price and EV gains. Further, nine of ten saw profit margins and revenue increase with CAPEX spends.

Here are three good reason to increase CAPEX investments — with one big warning.

1
Investing CAPEX in Technology Offers Restaurants Competitive Advantage

All ten of the companies listed above have focused on technology: integrating smart systems into the supply chain, developing mobile ordering capability, and rolling out automated kiosks and state-of-the-art point-of-sale (POS) systems.

For instance, Domino’s has invested approximately $214.2m (2.8% of 2015–17 revenue) in capital expenditures since 2015. Most of that capital went to supply chain centers, a proprietary POS system (Domino’s PULSE), a digital ordering platform, and internal enterprise systems.

Domino’s saw a surge of 184% in stock returns and a boost of 110% in enterprise value since 2013 thanks to its impressive — and immersive — digital experience. Now, Domino’s likes to think of itself as “an e-commerce company that sells pizza.”

Other chains, including Sonic, Cracker Barrel, Del Taco, and Dave & Buster’s, have also invested in proprietary POS platforms, mobile ordering systems, and self-service kiosks. During peak rush hours, line-busting digital ordering allows patrons to order and cash out on the spot. CEO Cliff Hudson promised that Sonic’s Integrated Customer Engagement platform, or ICE, will become “the most personalized customer experience in QSR.” These tech investments allow chains to increase their store’s performance while enhancing the customer experience.

Finally, smart use of tech and digital delivers massive amounts of data, which restaurants can use to understand what’s driving revenue and profit. This has allowed them to become more adaptive and responsive, allocating extra funding to areas and initiatives that are working and changing course on projects that haven’t delivered.  

2
New & Remodeled Locations Create Foundation for Sustainable Success

All ten restaurants in the group allocated significant CAPEX to new-store openings. In 2017, Flanigan’s purchased property and equipment for $7.2m and spent $2.4m on construction.

Ruth’s CAPEX investments went mostly to acquiring six franchisee-owned restaurants, and, in 2016, Cracker Barrel launched Holler & Dash, a fresh fast-casual concept serving a Southern-style menu to a younger segment.

Cracker Barrel’s risk has paid off, and Holler & Dash has rapidly opened new units across Georgia, Tennessee, and Florida. In 2017, Good Times Restaurants spent $9.1m to develop Bad Daddy’s locations in Colorado and North Carolina.

3
Investing in Remodeling Initiatives Boosts Traffic and Drives Sales

Besides openings, many restaurants allocated funds to improve or renovate existing restaurants. Ark Restaurants has spent big on renovating Sequoia, and Del Taco launched Ambiance Shake-Up, a remodeling initiative that cost an average $45,000 per store.

The program has helped accelerate same-store sales by aligning the unit design with the brand image. Del Taco witnessed a 243% increase in enterprise value and 117% increase in profit margin from 2013 to 2017. The big boost in profit margin came from menu engineering and supply chain optimization.

Warning: Markets Not Rewarding CAPEX Post-Financial Crisis

While these ten companies have landed on successful strategies for translating CAPEX investments into revenue and enterprise value boosts, there’s good reason to tread carefully. Before the 2008 crisis, higher-than-median CAPEX restaurants outperformed low-CAPEX companies in most years, likely owing to their growth prospects and general economic optimism. However, the financial crisis hit these organizations harder, and they incurred greater losses compared to their low-CAPEX peers.

Since 2008, the markets have rewarded low-CAPEX companies — many of which include highly franchised systems — for their conservative behavior, and many operations have remained cautious, investing only in carefully examined opportunities that are anticipated to create value.

Since 2015, the median stock return for high-CAPEX restaurants has been negative­ (-10% in 2015, -8% in 2016, and -3% in 2017). These companies are hindered by high operating and interest expenses arising from the debt often used to finance CAPEX.

Not all CAPEX spending is created equal. Naturally, a restaurant chain that spends heavily on opening new locations before the industry begins contracting will have a very different fate than one that expands as the market is booming. Inventing a new inventory system that doesn’t actually improve efficiency costs the same amount of money as developing one that increases margins. The secret is making strategic capital investments because these are proven to increase revenue and boost value.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post 3 Reasons to Invest in CAPEX — Plus 1 Reason to Be Cautious appeared first on .

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Q2-2018 restaurant mergers and acquisitions remained fast and furious. The deals announced align with many of the trends we’ve been tracking, from casual dining’s decline to the heat in restaurant investments — especially among middle-market companies.

Mergers and Acquisitions Consolidating Casual-Dining Sector

The four deals in casual dining in the second quarter of 2018 show that some operators are responding to the segment’s ongoing challenges by consolidating. Bertucci’s and Tilted Kilt were purchased by other restaurant groups (Earl Enterprises and Arc Group, respectfully), and Del Frisco’s, itself struggling, picked up the more stable Barteca Restaurant Group.

The strategies that back up these deals look promising: Earl Enterprises will return Bertucci’s to its scratch cooking roots, and Del Frisco’s purchase of Barteca gives it Bartaco, a more casual concept that will complement its higher-priced eateries without sacrificing service or quality. These initiatives highlight casual dining’s unique place in the restaurant landscape rather than trying to imitate the success of faster and cheaper options.

The fall-out from the casual-dining bubble bursting is far from over, and we can expect to see more consolidation as time goes on. But executives should be careful: multi-brand portfolios often struggle to maintain growth and per-brand enterprise value.

High Bluff Capital Partners & JAB Holdings Taking Over

With valuations, measured by EV/Revenue, in the restaurant industry growing at a 7.6% CAGR between 2010 and 2017 — the highest growth when compared to other industries — it’s no surprise to see so many private equity firms hunting in the market.

Almost exactly a month after High Bluff Capital Partners announced its purchase of Quiznos’ parent company QCE LLC, it acquired Taco Del Mar: more evidence that the middle market is steaming. While Quiznos has been struggling for years, and High Bluff hopes to stage a turnaround, the investment in Taco Del Mar is designed to fuel the fast-casual chain’s expansion efforts.

JAB Holdings is continuing its quest to own the world’s supply of coffee, spending $2b to acquire British Pret A Manger, which also has locations in the U.S. Its portfolio already includes Keurig, Green Mountain, Peets Coffee & Tea, and Caribou Coffee.

But the Luxembourg-based investment powerhouse won’t get its hands on international retail rights for Starbucks beans, capsules, and other products, which Nestlé purchased in May for $7.2b, a ten-figure sum that’s larger than the GDP for 60 countries, including Monaco, Fiji, and Somalia.

Traditional Foodservice Operations Acquiring Delivery & Meal-Kit Organizations

The two delivery and meal-kit deals announced this quarter show the deep interpenetration between these companies and more traditional foodservice operations.

Kroger bought Home Chef for $700m and plans to offer its meal kits in its vast empire of supermarkets. Landcadia, which owns and operates Landry’s Seafood, Bubba Gump Shrimp, Morton’s The Steakhouse, and over three dozen more restaurant and hotel brands, purchased Waitr, a delivery platform that services more than 5,000 restaurants in markets all over the Southeast.

Consolidation in the delivery segment won’t just happen between competing platforms — though there’s plenty of that. Now foodservice operators of all kinds are recognizing these services’ incredible value-add and either acquiring them or developing their own.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We help restaurant operators and investors make informed decisions, minimize risk, and maximize sustainable value. With experience on both the buy- and sell-sides of transactions, we have a robust understanding of trends and factors impacting restaurant chains and private equity funds around the world. We help protect, enhance, and unlock value throughout every phase of the investment lifecycle. Collectively, our clients post more than $100 billion in annual sales, span all 6 inhabited continents and 100+ countries, with tens of thousands of locations.

The post Q2-2018 Restaurant Mergers and Acquisitions’ Theme: Consolidation appeared first on .

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Since 2011 employment in foodservice & drinking places (FS&D) has grown faster than in the economy in general, but there has been a relative deceleration in the last year — a trend that shows up clearly in the June 2018 U.S. jobs report.

In 2016, the industry was creating jobs 1.9x as fast as the economy (3.4% average for FS&D versus 1.8% for the non-farm private sector), this dropped to 1.6x in 2017, and it’s at 1.3x year to date (FS&D growing 30% faster than non-farm private sector). The last time the FS&D sector decelerated to a lower job creation rate than the rest of the economy was in 2010.

Below, we take a further look at where employment and wages stand as of June 2018, along with how they’ll shape the industry and impact restaurant companies, investors, and operators in the months ahead.

JUNE 2018 US RESTAURANT LABOR DATA: EMPLOYMENT

Some 213,000 jobs were created in the U.S. in June, marking seven years and nine months of uninterrupted growth. Average monthly job creation is 214,500 year to date, 18% higher than 2017.

These numbers are largely influenced by the positive figures in the restaurant industry: foodservice & drinking places saw an increase of 16,400 employed persons, 24% lower than the previous month. Year to date, however, there’s a deceleration of 31%.

As of June, the leisure & hospitality sector (including arts, entertainment & recreation in combination with accommodation & food services) employed 16.3m people in the country, making it the third largest non-government employer, behind education & health services (23.6m jobs) and professional & business services (21.0m positions).

Leisure & hospitality ranked fourth in job creation in June. A full 25,000 jobs were created in the industry, behind the job creation figures for education & health services, professional & business services, and manufacturing. Year to date, the leisure & hospitality industry has created 8% of the new jobs, amounting to 102,000 positions.

JUNE 2018 US RESTAURANT LABOR DATA: WAGES

Meanwhile, wage growth continues to be moderate, though it surged in the leisure & hospitality sector.

Average hourly earnings for the private sector increased 2.7% (compared to last June), reaching $26.98. Hourly wages in the leisure & hospitality sector increased faster than the average, growing 3.4% in June year over year. Overall, wages in leisure & hospitality are close to 40% lower than the overall average in the private sector.

ABOUT AARON ALLEN & ASSOCIATES:

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We have helped helped restaurant companies around the world drive revenues, increase profits, and enhance the guest experience through improved marketing, messaging, and menu engineering. Collectively, our clients post more than $100 billion in annual sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post June 2018 U.S. Restaurant Labor Data: Wages Rebounding? appeared first on .

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It’s no secret that the operating margin is thinner in foodservice than almost anywhere else, owing to the fierce competition in the industry. However, some chains have achieved impressive results.

Companies with a defined focus that differentiates them from other operations have better operating margins than those organizations that try to do too much. Franchising also helps strengthen operating margins, as it spreads costs out among non-company-owned units.

A Clear Focus Plus Low SG&A Costs Boost Operating Margins

Among publicly traded foodservice operations in the U.S., the top quartile has operating margins of at least 13.3%, 2.3x the industry median.

As it does in gross and net profit margins, Dunkin’ Brands leads the pack, making $0.52 in operating profit for every dollar of revenue — 9.0x the industry’s median of 5.7%.

Franchising Likely to Improve Gross Margin

We can once again explain Dunkin’s high margins by pointing to its 100% franchise rate — the company doesn’t own a single location. Comparing the chain’s 84% gross margin to its 52% operating margin shows how much SG&A costs can impact profitability.

In fact, the lowest performer — Dine Brands, with a -60.9% margin — had large SG&A expenses, mostly from hefty non-recurring cash severance and equity compensation charges related to the separation of the previous CEO, Applebee’s stabilization initiatives, and the parent company’s rebranding strategy.

Operating margin growth parallels increased franchise rates. Chains with two-thirds or more franchised locations enjoy the highest operating margins in the foodservice industry, with a median of 17.5% — 5.5x the lightly franchised (less than one-third franchise operated) chains’ median of 3.2%. 

Heavily franchised chains such as Dunkin’ Brands, Wingstop, and McDonald’s are shielded from food and labor inflation concerns at the corporate level as the majority of these costs are shouldered by franchisees. Other operating expenses, such as advertising and marketing campaigns, are often shared between the franchisors and their franchisees, offering substantial relief to parent companies.

As rivalry intensifies among restaurants, many operations are looking for ways to boost sales, reduce costs, and improve these margins. While some chains are betting on a more focused value proposition, others are relying heavily on their franchise model to achieve those goals.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands

The post Refined Focus & Franchising Help Build Operating Margins appeared first on .

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Gross margins consider the relationship between how much money a restaurant makes and how much money it took to generate that revenue in direct costs. High ratios indicate a lower cost of goods sold (COGS); a low gross margin indicates that the organization isn’t benefiting from high markups on its products.

Among top publicly traded players in the U.S. foodservice industry, operations with simplified menus and lean labor strategies have higher gross margins.

High Labor Costs Cut Into Gross Margin

Top-quartile U.S. foodservice chains generate a gross profit margin at least 1.8x the industry median (22.1%), earning at least $0.40 in gross profit for every dollar of revenue.

Dunkin’ Brands leads the pack, but its $0.84 in gross profit on each $1 in revenue is a little misleading. The coffee-and-donut chain is 100% franchised, meaning the parent company doesn’t cover any labor or food costs, which greatly reduces its COGS.

On the other end of the spectrum sits Good Times Restaurants. With a gross margin of only 9.6%, the QSR chain’s revenues barely cover the costs of goods sold. This low margin indicates that it will likely struggle to cover its operating and non-operating expenses, producing negative operating and net profit margins.

The low gross margin owes to high food and packaging costs. In 2017, beef and bacon prices surged at the same time that the company introduced improvements to its core menu, inflating the COGS line item. Further, because Good Times operates only in Colorado, where the labor market is pushing wages up, payroll costs have cut into profits.

Lean Labor Helped Coffee/Breakfast Companies’ Gross Margins

While increases in the price of bacon and beef hurt Good Times, the 8% decline in coffee prices over the same period handed companies in the coffee/breakfast segment COGS savings. Segment leaders Starbucks and Dunkin’ coupled this bonus with a lean labor strategy, which works to optimally staff each location based on expected traffic.

These companies have further expanded their reach by focusing on digital and off-premise sales, offering virtually infinite opportunities for growth.

High gross margins imply a robust restaurant operation, but this ratio is just one piece of the puzzle when assessing an organization’s financial health. Reviewing both operating and profit margin, which take more than COGS into account, provides a more comprehensive understanding into how well a company is running.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post Lean Labor Can Boost Gross Margins appeared first on .

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Unlike gross and operating margins, a restaurant’s profit margin considers every cost that affects the organization’s bottom line, including line items — like tax, depreciation, and debt payments — that aren’t directly related to operations.

A company with a lower profit margin compared to its peers may be unable to absorb unexpected macroeconomic shocks and negative surprises. Keeping SG&A costs low and maintaining streamlined operations are key to high net profit performance.

Substantial SG&A Expenses Can Push Companies into the Red

All the companies in the bottom quartile of this rank have negative profit margins, which means they spent more than they earned, losing at least $0.03 on every dollar generated in revenue.

Suffering from the poorest profit margins in the industry, Empire Resorts is losing $0.70 on each dollar of revenue due to substantial increases in SG&A expenses. In 2017, these payments increased by approximately 56% compared to the prior year, in large part for legal, accounting, and consulting fees related to the company’s efforts to finance casinos and other development projects. Empire Resorts’ marketing and advertising expenses also rose, and the new executive chairman position contributed heavily to the increase in the costs of payroll and benefits.

Simplified Menus Are the Secret Sauce for Extraordinary Profit Margins

Just as it did in gross and operating margins, Dunkin’ Brands leads the pack in net profit, pocketing $0.41 on each dollar of revenue. Coming second, Wingstop’s net profit margin is 25.9% thanks to its simple yet efficient operating model.

Wingstop earns over 90% of its revenue on chicken wings, French fries, and other sides. Fewer menu items translates into fewer ingredients, which also makes prep smoother. Streamlining the operational process has helped both Wingstop and Dunkin’ cut labor costs while still achieving high same-store sales growth.

Higher Food, Labor, and Debt Expenses Hurt Upscale Restaurant’s Bottom Line

Public restaurant companies in the upscale segment have a median net profit margin of -3.2%, implying a net loss of $0.03 on each dollar of revenue. This comes from higher food, labor, and debt expenses than other segments.

Upscale restaurants have higher food costs not only because they offer premium ingredients but also because their smaller footprints limit access to supplier rebates. Further, they often experience higher food waste since orders are regularly customized and require more fresh ingredients.

These operations also allocate a significant portion of their budget to payroll and training to ensure their employees have the skills to offer guests the fine dining experience they expect.

That said, the higher COGS at upscale restaurants are covered by charging premium prices: compare McDonald’s $1-$2-$3 menu to the $15 cheeseburger and fries on Del Frisco’s bar menu.

Upscale concepts require a large capital commitment to build out, remodel, and maintain their locations, which is often funded through debt, resulting in high interest payments which negatively impact the companies’ bottom lines. 

On the other end of the spectrum, quick-service restaurants achieve a median of 10.6% net profit margin, three times the industry median. Many of these companies, such as McDonald’s, Yum! Brands, and Wendy’s, are heavily franchised, which provides steady and stable income and positively impacts earnings.

These companies can also take advantage of their noteworthy real estate portfolio to collect rent and royalty income. Finally, the franchise model protects against variability in food and labor costs.

For non-franchised companies, the secret to keeping profit margins high seems to be developing a focused menu that is easy for employees to consistently produce while working to keep SG&A expenses and debt payments as low as possible.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post Strong Operational Models & Low Debt Help Increase Profit Margin appeared first on .

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How profitable are the most successful restaurant operations? The answer to that question will change based on the margins used to measure the organization’s performance. In this series, we examine three metrics that investors and managers use to gauge a foodservice operation’s profitability: gross margin, operating margin, and profit margin.

How to Calculate Restaurant Profitability Margins

Each margin calculates the relationship between a company’s revenue and its liabilities, from labor and food costs to administrative expenses and debt payments.

Gross margin reflects what percentage of revenue a restaurant operation keeps after paying for the costs of the products or services it sells. The higher ratio, the better, indicating a lower cost of goods sold (COGS), which includes any expenditure directly necessary for producing the items on a restaurant’s menu.

The ratio is calculated using the following expression:

Operating profit margin indicates what percentage of revenue remains after all operating costs have been deducted, including COGS, selling, general, and administrative (SG&A) expenses, and others. That is, operating profit includes more costs than gross profit, because it takes into account line items like marketing, managerial salaries, and other expenses not directly related to production.

The net profit margin ratio includes every expense an organization pays out before calculating the percentage of each revenue dollar it gets to keep. It also considers other sources of revenue besides sales, like interest income.

While gross and operating margins are entirely under the company’s control, net profit considers line items including taxes, depreciation, debt payments, and extraordinary items.

It is calculated as follows:

These equations give management teams and potential investors different ways of slicing through the operation’s performance to help discover where costs may be excessive relative to performance.

Simple Menus and Streamlined Operations Key to High Margins

From a comparison of public companies, Dunkin’ Brands came in first for all three margins, owing not only to the recent decision to simplify its menu and refocus on the breakfast segment, but also to the coffee-and-donut giant’s 100% franchise rate, which stabilizes costs for the parent company.

Across margin calculations and segments, concepts with focused menus performed better than those that offered a lot of options. Highly franchised chains have operating margins about 5.5x the industry median.

Though these margins are by no means definitive, they are useful metrics for comparison, helping executives and investors see how other operations in their space perform.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post 3 Key Figures to Assess Restaurant Performance appeared first on .

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A public restaurant company’s current stock price can tell you a lot about its past and current performance, but it doesn’t offer much insight into the future. Chipotle’s investors would have probably loved some warning signs before the food safety scandal that cut the chain’s value in half. Though they aren’t perfect crystal balls, an organization’s earnings per share (EPS) and dividends per share (DPS) say a lot about the executive team’s priorities, helping investors make educated decisions about where to put their money.

Before we get into the numbers, some quick definitions. EPS is calculated by subtracting dividends distributed from net profit and then dividing that figure by the average number of shares outstanding. As result, the lower the number of outstanding shares, the higher EPS — which explains why buybacks can increase EPS.

DPS measures the portion of a restaurant company’s earnings that it distributes to shareholders. While some investors see consistent payouts as a signal of the company’s strong performance, a high DPS might indicate that the firm is not reinvesting capital, possibly due to few positive NPV projects or growth investment opportunities. Companies with expected low growth rates often pay out high DPS rates.

Looking at the difference rates of EPS and DPS, not to mention the ratio between the two figures, tells us quite a bit not only about individual foodservice companies but also about the industry landscape as a whole.

Restaurants Show a Large Swing in EPS

Public restaurant companies in the top quartile have an EPS of at least $2.49, 2.5 times the industry median.

The gap between the highest EPS in the industry and the second highest value is striking. Biglari Holdings had an EPS of $40.80 in 2017, 41 times the industry median. Second-place Cracker Barrel earned $8.40 for each outstanding share of stock outstanding.

Bilgari Holding’s high EPS can be explained by its small number of outstanding­ shares. As of December 31, 2017, Sardar Biglari held approximately 52.6% of the company’s stocks leaving only 2.1m shares outstanding, the lowest among peer companies. In comparison, Cracker Barrel has 24.3m shares, and McDonald’s allocates its earnings to 807.4m outstanding shares.

On the other side, Dine Brands reported an EPS of -$18.28, attributable to -$330.54m earnings in 2017, with a total revenue of $804.8m. The decline was primarily due to lower revenue from Applebee’s, which cut into the gross profit from franchise operations. An increase in bad debt expenses and growing G&A expenses due to labor-related costs also contributed to the loss.

Interestingly, both Biglari Holdings and Dine Brands are casual-dining restaurants, implying a swing of $59.08 not only in the industry as a whole but specifically within the casual dining segment.

Compared to other industries, foodservice has a moderate swing. Finance & insurance has the highest, at $259.06/share. Many industries, such as healthcare, education services, and oil & energy have a negative median EPS. Foodservice ranks third in median EPS, only surpassed by construction and finance & insurance.

Fast Casuals Not Distributing Dividends

More than half of U.S. publicly traded foodservice companies don’t pay dividends to shareholders. The top quartile for all operations is $0.81 or greater. While the ratio of casual-dining and quick-service companies paying dividends is similar to the distribution across the industry, fast-casual restaurants are under-represented. The share of fast casuals paying dividends is 5%, but this segment accounts for about a fifth of the foodservice companies on the stock exchange. Only 34% of fast casuals have positive EPS, and, of those, only Wingstop paid dividends in 2017.

Likewise, no upscale restaurants appear in this group, likely because their 0% franchise rate means they have more substantial CAPEX requirements than QSR or CDR chains. Most restaurants in this category prioritize reinvestment into new store openings, maintenance, and remodeling.

Foodservice has a low median DPS when compared to other industries. Finance & insurance once again has the highest swing, at $50/share — 10.75 times foodservice’s $4.65 swing. The utilities industry has the highest DPS median ($1.26). This is more evidence that  companies with lower growth prospects distribute higher dividends: stocks in utility companies are relatively stable and have fewer opportunities for earnings growth beyond inflation.

Dividend Cuts Can Spook Markets

It’s quite surprising that Dine Brands continued to pay dividends despite a negative EPS, but some organizations maintain their payouts no matter what because markets can react negatively to reduced or eliminated dividends, leading to a drop in the company’s share price.

Even some established chains may prefer to reinvest their earnings rather than issue dividends. These retained earnings are used for CAPEX investments, concept acquisitions, and as a cushion to protect the operation from future losses or extraordinary events.

An executive team’s decisions about whether to distribute or reinvest their earnings will come down to their overall strategy, but operators should consider the signals these decisions are sending to investors. It’s true that regular, high dividends will attract investors, as long the payouts do not compromise long-term growth and success. The stock market runs on perceptions — and everything from a restaurant’s interior design and logo to its EPS and DPS figures contribute to current and potential investors’ opinion of the operation.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post These Two Numbers Can Tell You a Lot about a Restaurant Operation’s Priorities appeared first on .

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Americans celebrate the Fourth of July with backyard BBQs and massive fireworks displays. In Indonesia, communities compete in a number of friendly matches, from rope pulls and gunny sack races to the pinang pole climb, when men race to the top of greased-up palm trees in hopes of claiming prizes. India celebrates by flying kites, Peru with bullfights, and Mexico by reading the Grito de Dolores.  

With such a wide variety of ways of celebrating, it’s no surprise that we found so many examples of compelling hotel and restaurants experiences that honor their countries’ histories and traditions — as well as drive traffic and sales.

1
Give Back

Outback Steakhouse is offering guests the opportunity to add a $1 donation to their bills to support Operation Homefront, a nonprofit that helps military families in need. In 2017, the Bombay Canteen in Mumbai donated all its proceeds from a special menu to the Miracle Foundation, which support orphaned children. These promotions are great ways to highlight an organization’s strong ties to the community and can create excellent earned media. 

2
Make the Most of Your Location

Mexico City’s Gran Hotel is located on Plaza de la Constitución, better known as Zócalo, the large downtown square that’s ground zero for the start of the nation’s independence celebration at 11PM on September 15. The hotel’s gourmet, fifth-floor restaurant overlooks the square, where 500,000 people gather each year to kick off the festivities.

3
Honor Your Neighborhood

There’s no reason to limit yourself to celebrating only one national holiday a year. For example, Chicago hosts parades and street festivals for a number of global celebrations, including Mexican Independence Day (September 16), Polish Constitution Day (May 3), and Ukrainian Independence Day (August 26). Food vendors set up around the parade route, giving smaller shops a chance to get their authentic recipes into hungry revelers’ hands.

4
Play with Your Food

Tom Colicchio’s Riverpark, a New American restaurant right on the East River in Manhattan, is celebrating July 4 with an all-you-can eat BBQ buffet. While not eating, guests are invited to play lawn games, like bocce ball and cornhole. As an added bonus, the location is the perfect place to view Macy’s fireworks.

5
Wear Your Colors

L’Opéra, a high-end bakery chain in India, creates its signature tricolor cake, flavored with litchi, blood orange, and coconut, to match its nation’s flag and to honor its Independence Day (August 15).

6
Drink Up the Patriotism

RA Sushi Bar, which has locations in nine U.S. states, mixes up the bombpop: a red, white, and blue shot with vodka, Blue Curacao, and grenadine.

7
Stuff Your Patrons

Nathan’s Hot Dog Eating Contest at New York’s Coney Island has been an annual event since the 1970s, though the original promoter claimed the contest dated back to 1916, when four immigrants challenged each other to prove their patriotism by eating as many hot dogs as they could. No matter when it started, the contest does a great job of reminding people about the iconic brand.

8
Celebrate National Cuisine

On a less gluttonous note, the Marriot Hotels in Jakarta, Indonesia have held three Indonesia Culinary Journey festivals around their nation’s Independence Day (August 17) to highlight the traditional foods of the region.

9
Give It Away

To celebrate its 35th anniversary in 2014, Canadian chain Mandarin gave away trips to its legendary Chinese buffet on Canada Day (July 1). Lines stretched around the block, giving the business priceless earned media as reporters flocked to the crowds and interviewed those waiting to get in.

10
Celebrate Your History

The Oyster Box, a luxury hotel in Umhlanga, South Africa, celebrates Freedom Day (April 27) with a special high tea that includes traditional South African cuisine, honoring the country’s history as both a British colony and an independent nation.

11
Contribute to the BBQ

For July 4, Marie Callender’s gives away a discounted second pie to folks who buy two, making it extra easy for guests to bring something delicious to their family celebration.

12
Bring Your Culture to Your New Home

In July 2018, acclaimed Peruvian chef Gastón Acurio instructed his three U.S. locations (La Mar by Gastón in Miami, La Mar in San Francisco, and Tanta Chicago) to launch a month-long celebration of Peruvian cuisine in honor his home country’s independence (celebrated in Peru on July 28). The special menu introduced new guests to the highlights of Peruvian cuisine and offered two lucky winners round-trip tickets to Lima, where they could experience the food and culture first hand.

13
Make Your Specials Patriotic

In 2017 — the 52nd anniversary of Singapore’s independence from Malaysia — Lawry’s Prime Rib Singapore offered lunch menus for S$52.

14
Hold a Cooking Class

At the Four Seasons Riyadh in 2017, Chef Ali Al Yousuf held small cooking lessons to teach guests how to make Saudi classics in their own homes.

15
Make it Easy for People to Celebrate

The Fiesta Royale Hotel in Accra offers discounted rooms on March 6. Its restaurant, Mansonia, puts on a lavish brunch with local classics and offers all guests complimentary local drinks. Combining food, drink, and accommodations is a great, all-inclusive way to help guests celebrate.

Commemorating independence days gives restaurants and hotels the opportunity to connect more deeply with their communities and guests, building lasting brand recognition and loyalty. Of course, these events work best when they align with the organizations’ guiding brand values, so operators should find their own way of marking these important celebrations — one that reflects everything that sets them apart from the competition.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion in sales, span all six inhabited continents and 100+ countries, with locations totaling tens of thousands.

The post 15 Patriotic Independence Day Restaurant Promotions from All over the World appeared first on .

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Buy-side investment teams look closely at a restaurant target’s balance sheets, also known as statements of financial position, to get a quick snapshot of the organization’s financial health.

The largest players’ balance sheets contain some important lessons for operators of all sizes. Intangible assets and goodwill make up about 15% of assets — no small sum for organizations with millions of dollars in assets — so it’s worth paying attention to intellectual property and reputation. Many big chains are taking on debt to buy back stock or increase dividend payments, which could threaten long-term stability. High franchising ratios seem to correlate with lower shareholder equity ratios. The decisions that the balance sheet documents can have profound effects on a restaurant chain’s present and future performance.   

Restaurants Often Have Lower Accounts Receivable and Higher Cash & Cash Equivalents Than Other Industries

The accounting equation at the heart of the balance sheet shows the relationship between assets (what economic resources the company controls), liabilities (what the company owes), and equity (what the shareholders collectively own), as follows:

Assets = Liabilities + Equity

The ratios between line items in each category provide important information about the business and industry: manufacturers have high levels of plant and equipment assets; retailers have high inventories; service companies keep almost no inventory on hand.

Restaurants tend to have low-to-moderate inventory levels, though this will depend on the type of operation. For example, a company marketing fresh juice or salads will keep lower levels of par inventory than an establishment that serves wine or liquor, which have longer shelf lives.

The amount of plant and equipment will vary based on a foodservice operation’s ownership system. Lightly franchised foodservice operations — those with two-thirds or more company-owned units — often allocate a significant portion of their capital to property, plants, and equipment. But heavily franchised chains, like McDonald’s, which is aiming to hit 90% franchised in 2018, require their franchisees to make major capital investments, alleviating the corporate CAPEX burden.

Heavily franchised systems also often have higher levels of intangible assets than lightly franchised operations, since they expand by selling rights to franchisees for use in specific locales.

Restaurants usually have high levels of cash and cash equivalents, since payments are made at the time of service. But they also tend to have high levels of current liabilities, implying limited working capital.

Intangible Assets and Goodwill Account for Up to 92% of Total Assets

Foodservice companies’ intangible assets typically include their trade name, trademarks, franchise relationships, and reacquired franchise rights. Goodwill represents the premium over the market value of net assets required to acquire the company.

These items on a restaurant’s balance sheet have an indefinite life and are not amortized, but they are tested for impairment annually — or more often in the event of a crisis that might impair their value (say, for example, a protracted foodborne illness outbreak).

Companies in the S&P 500 have a high rate of intangibles-to-total assets, reaching 84% of total value in 2015, mostly from intellectual property. Only two restaurant companies surpass that percentage: Bojangles’ (85.5%) and Papa Murphy’s, with 92% (worth $226.4m in 2017) of its total assets being intangible assets and goodwill.

The majority of Papa Murphy’s goodwill was generated in May 2010 when affiliates of Lee Equity Partners acquired all of PMI Holdings’ equity interests in the pizza chain, though the company has also recognized goodwill after acquiring stores from franchise owners.

Only five companies don’t report any intangible assets or goodwill on their balance sheets. Three of those — Cracker Barrel, Kona Grill and The ONE Group — are lightly franchised, with 0%–6% franchise locations.

Domino’s Liabilities Are 4.3 Times the Value of Its Assets

Foodservice companies tend to have high liabilities-to-assets ratios, with a median 63.5%. The top quartile, however, consists entirely of companies with more liabilities than assets, making this set highly leveraged.

Domino’s Pizza’s has primarily used its snowballing leverage to support a substantial stock repurchase program, spending $1.06b on this initiative in 2017, one of the largest in the industry relative to market cap. This leverage ratio greatly increases the company’s risk of default in economic downturns.

Several other top-quartile companies, such as Yum! Brands, McDonald’s, Jack in the Box, and Brinker International, have also used their access to low-interest debt to fund share repurchase programs or support growing dividend payments.

These companies may fall into the trap of pleasing their investors at the expense of their long-term financial health. A quick boost in share prices thanks to dividend distributions or share buybacks could easily be offset by deteriorating financial health and poor reported results down the road if the companies fail to service this debt. 

While most companies in the top quartile of liabilities-to-assets ratios are heavily franchised, the majority of operations in the bottom quartile have majority company-owned locations. These lightly franchised systems don’t have access to a stable flow of cash from franchisees, which makes them more hesitant to take on liabilities.

More than Half of Public Companies Use Debt — Not Equity — for Financing

As a median, U.S. publicly traded restaurants have 42.5% of assets financed by equity. For the top quartile, equity reaches 62.1% of assets or more, indicating that they are more often locked up with debt than equity.

But 25% of public companies are in a riskier position, with negative shareholder equity, which indicates that a company owes more than it owns. Domino’s shareholder equity ratio sits at ‑326%, and Yum! Brands has a -119.3% ratio.

The number of companies with negative shareholder equity ratio goes down as the percentage of franchised locations decreases: the majority (69%) of heavily franchised systems have a negative shareholder equity ratio, whereas only 20% of moderately franchised operations and just 4% of lightly franchised public restaurants have negative ratios.

McDonald’s and other heavily franchised chains are relying on the relatively stable cash flow from their franchisees to meet their debt obligations. These systems also have relatively minimal capital requirements and open fewer company-operated stores, implying that cash flow will likely be used to cover interest expenses, dividend distributions, and share buybacks.

Starbucks Claims Highest Net Worth; Yum! Brands Has the Lowest

Starbucks’ $5.5b net worth, calculated by subtracting all liabilities from a company’s assets, is 47x the foodservice industry’s $113.9m median. The company’s giant nest egg indicates that its executive team prefers to pay for expenses with equity rather than debt financing.

Further, in 2015, the company had a 2-to-1 stock split, making shares more affordable for smaller investors. Reducing stock price usually sparks investor interest, consequently driving up prices per share and enriching existing equity holders.

Though balance sheets for all companies will include the same line items, understanding what a restaurant’s balance sheet says about the company requires in-depth knowledge of how the foodservice business works, what forces are shaping the industry, and what motivates executives to pursue certain reinvestment, payout, and buyback strategies.

With that kind of knowledge, a balance sheet will not only give buy-side investment teams a clear picture of the organization’s present financial health but important insights into its past and potential future performance.

ABOUT AARON ALLEN & ASSOCIATES

Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketingbranding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We help restaurant operators and investors make informed decisions, minimize risk, and maximize sustainable value. With experience on both the buy- and sell-sides of transactions, we have a robust understanding of trends and factors impacting restaurant chains and private equity funds around the world. We help protect, enhance, and unlock value throughout every phase of the investment lifecycle. Collectively, our clients post more than $100 billion in annual sales, span all 6 inhabited continents and 100+ countries, with tens of thousands of locations.

The post Most Restaurant Chains are Highly Leveraged and Other Lessons from Top Players’ Balance Sheets appeared first on .

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