Speaker 1: Welcome to Chopping it Up. I'm your host, Mike Halon,
Speaker 1: the senior restaurant and food service analyst at Bloomberg Intelligence.
Speaker 1: We got a go one today. We're joined by Howard Penny.
Speaker 1: Howard's the managing director, consumables analysts and overall restaurant guru
Speaker 1: at hedge Eye Risk Management. For those of you who
Speaker 1: aren't familiar with Hedge Eye, the firm does a great
Speaker 1: job helping its clients, including institutional investors, retail investors, and corporations,
Speaker 1: navigate the markets and the economy. Thanks for doing this, Howard.
Speaker 2: Hey, thank you. Michael. Glad to be here.
Speaker 1: Yeah, man, this is this is cool. I've been looking
Speaker 1: forward to this one. Why don't you just start us
Speaker 1: off by telling the listeners a bit about Hedge Eye
Speaker 1: and how your research differs from the traditional cell side
Speaker 1: research that's out there.
Speaker 2: Sure. So, HEDGEI has been around for about fifteen years now.
Speaker 2: We started with four of us, basically in Keith Softas
Speaker 2: Keith McCullough's my boss, founder of PEDGI as a consumer analyst. Right,
Speaker 2: so we've had four consumer analysts that got together. It's
Speaker 2: an independent research firm, so we don't manage money We
Speaker 2: don't trade stocks. We literally get paid by providing money
Speaker 2: making ideas to clients and if you know, they can
Speaker 2: fire us every four every three months if they don't
Speaker 2: like us, which is why what I really like about
Speaker 2: it is because we are literally focused on picking stocks
Speaker 2: and making money and that's you know, that's the name
Speaker 2: of the game, frankly. And so we've got as I said,
Speaker 2: we've been in business for fifteen years. We now have
Speaker 2: what I'm a sector head that I cover as you said,
Speaker 2: I cover consumer wolves. There are twelve of us now
Speaker 2: there's seventy employee East total. H and Keith does my
Speaker 2: boss does commodities, countries' currencies, and manages the overall business.
Speaker 1: Yeah, it's a great product. And I really like what
Speaker 1: you said about there about picking stocks and helping your
Speaker 1: clients make money. I feel like on the cell side
Speaker 1: sometimes that gets put to the back burner.
Speaker 2: You know, Well, it makes me independent, right, Elements of
Speaker 2: it more important because there's a lot of times when
Speaker 2: you you can talk to management teams and they'll tell
Speaker 2: you one thing, and if you're trying to do a
Speaker 2: raise the Flag tour and take them on some promotional
Speaker 2: tour to visit clients you're going to you know, buy
Speaker 2: into what they're saying, right and uh and not have
Speaker 2: you know, some independent thinking which allow you to come
Speaker 2: to sometimes different conclusions than the traditional seal side analysts
Speaker 2: at for sure.
Speaker 1: So what you know, Onyce, you kick us off too
Speaker 1: about you know about talking about the macro outlook at
Speaker 1: a hedgehie.
Speaker 2: So, so we're pretty bearish right now on the consumer,
Speaker 2: and I think that's probably not I mean, I don't
Speaker 2: know if that's out of consensus right now, but we're
Speaker 2: pretty barissed about where the consumer's heading, especially into the
Speaker 2: fourth quarter, in terms of you know, we're we're what
Speaker 2: I guess September one, people are starting to accrue interest
Speaker 2: on their student loans again. October first, people are gonna
Speaker 2: have to start making paying student loans again. I don't
Speaker 2: know if you saw this, Michael, but McDonald's traffic mismeasured
Speaker 2: by placer has gone through a I think a five
Speaker 2: week sequential deceleration and is now negative for the first
Speaker 2: time in two years, which is remarkable. And then if
Speaker 2: you put that together with dollar general and you know
Speaker 2: a few other things, what Momart's saying the low end consumer,
Speaker 2: I think is really struggling, and I think it's getting worse, frankly,
Speaker 2: So we're we're pretty bearish in terms of, you know,
Speaker 2: where the consumers headed headed, sorry for the next for
Speaker 2: the next three months and into the first quarter. And
Speaker 2: then when you think about the restaurant industry in particular,
Speaker 2: you know, we had the industry had a difficult period
Speaker 2: in July and August last year because of gas prices
Speaker 2: and what that been, the pressure that put on sales,
Speaker 2: and we're now heading into a period where comparisons get
Speaker 2: really difficult for the industry. So we see a lot
Speaker 2: of challenges ahead, especially for the consumer, and that's being
Speaker 2: echoed with what I think companies are saying. And you know,
Speaker 2: Dollar General I think is probably the stock as you
Speaker 2: are right in terms of talking about what the low
Speaker 2: end consumer's doing. But then you have companies like Chipotle,
Speaker 2: which completely you know, they're not seeing any of that,
Speaker 2: and they're talking about a strengthening of the consumer, which
Speaker 2: is a little counterintuitive to you know, what most of
Speaker 2: the macro data is showing. But we're pretty embarrasses to,
Speaker 2: you know, pretty as to what things are going to
Speaker 2: look like heading into the end of the year.
Speaker 1: Yeah, I hadn't seen them Donald's data yet, but that's cure.
Speaker 1: That's interesting because in the second quarter they were one
Speaker 1: of the few restaurant chains that didn't see a deceleration
Speaker 1: in their four years seem star sales trend. So and
Speaker 1: you know, with fourteen thousand stores in the United States,
Speaker 1: I think that's a pretty good indicator maybe of where
Speaker 1: things are going. And you know, in Chipotle, you know,
Speaker 1: that one's interesting because people give them a pass because
Speaker 1: they've done so well over the last few years, but
Speaker 1: their their trends and Starbucks as well, slowed pretty significantly
Speaker 1: in the second quarter, but they kind of got a
Speaker 1: pass by the street.
Speaker 2: Yeah, and you know, understandably. So, I mean, David Nicol
Speaker 2: has done a tremendous job fixing Chipotle since he's been
Speaker 2: in the business, or since he's been running the business,
Speaker 2: and coming out of the pandemic, they were the best
Speaker 2: performing chain in terms of margin improvement EBIT margin improvement.
Speaker 2: I think their EBIT margins relative to twenty nineteen or
Speaker 2: up some eight hundred basis points for something ridiculous like that.
Speaker 2: So they've done a great job running the business. So
Speaker 2: he deserves the accolades that he's had, but it feels
Speaker 2: like that story is in evidence, not just feels like,
Speaker 2: but there's evidence that's that story is getting a little
Speaker 2: long in the tooth.
Speaker 1: Yeah, yeah, and the evaluations rich to be sure, they
Speaker 1: finally fixed one of the issues I had with it,
Speaker 1: which was they were didn't want to franchise internationally forever
Speaker 1: and growth just it was non existent. So signing up
Speaker 1: with All Shai in the Middle East, I think is
Speaker 1: a good start. Obviously, it's going to take some time
Speaker 1: for that part of the business to move the needle though.
Speaker 2: Yeah. They well so interestingly enough, right, So, yes, they're
Speaker 2: going to franchise parts of the you know, the international component,
Speaker 2: but they're also beginning to invest in you know, they
Speaker 2: do run fifty stores outside the United States and Canada,
Speaker 2: so they're going to be investing in infrastructure to be
Speaker 2: able to grow the store base. Because that's how I mean,
Speaker 2: if they're going to keep that you know, sort of
Speaker 2: mid single high single digit unit growth story going, right
Speaker 2: in two years, they're going to need an international component
Speaker 2: to it. So spending is going up to support the
Speaker 2: infrastructure needed to keep that. There were two accelerate international
Speaker 2: unit openings.
Speaker 1: Yeah, for sure, so I think they're planning on ten
Speaker 1: new company owned stores in Canada, but i'd like to
Speaker 1: see them ref you know, maybe if Canada, if they
Speaker 1: have an opportunity to build stores there, that makes sense.
Speaker 1: But I don't like to see them refranchise the UK
Speaker 1: and Germany and try to accelerate that that that growth overseas.
Speaker 1: But you know, who knows, we'll see still such a
Speaker 1: small piece of that business. But it's interesting, you know,
Speaker 1: and you talked a lot about the restaurant traffic slowing
Speaker 1: here in the US. What are some of the trends
Speaker 1: that are causing that?
Speaker 2: So I think there's a couple of things. Consumer I'll
Speaker 2: say consumer normalization is one. So the return to full
Speaker 2: service restaurants. Right, You're no longer spending much as much
Speaker 2: on large group meals through drive throughs, right, so the
Speaker 2: average check, So that drove average check much higher into
Speaker 2: the pandemic. So as that's coming back, you're seeing a
Speaker 2: slowing in sort of people buying singular entrees instead of
Speaker 2: you know, four people that are going with your family
Speaker 2: for through a drive through. Independence are also coming back,
Speaker 2: So I think there is a you know, not a
Speaker 2: new popularity, but maybe independence are becoming more popular again.
Speaker 2: They were very popular heading into the pandemic, but obviously
Speaker 2: struggled into the pandemic and coming out of the pandemic.
Speaker 2: So and you're seeing that in the case volumes for
Speaker 2: the distributors. So you know, Cisco and some of the
Speaker 2: other companies are showing pretty good case volume growth, you know,
Speaker 2: low single day to case volume growth, but not like
Speaker 2: the decline to three percent decline in traffic that you're
Speaker 2: seeing for you know, the whether it's black Box or
Speaker 2: an Aptrac, which are the two big companies that measure
Speaker 2: sales for the industry. Price is also coming in, So traffic,
Speaker 2: as I said, has been negative, but you're seeing menu
Speaker 2: prices come down significantly, so which is also helping or
Speaker 2: hurting depending on how you want to look at it.
Speaker 2: And then you know, Walmart on their most recent conference
Speaker 2: called sort of mentioned specifically the consumers are stretching their
Speaker 2: dollars further and seeking better value across more categories, right,
Speaker 2: and they said specifically grocery staples and in home meal
Speaker 2: options were being purchased more often. So you've got that
Speaker 2: element to it, So, which kind of gets back to
Speaker 2: what we were talking before about you know McDonald's right,
Speaker 2: and McDonald's seeing a deceleration. I mean if if people
Speaker 2: are buying you know, in home meals at Walmart, right,
Speaker 2: which their grocery business is doing really well, that's that's
Speaker 2: not an insignificant competitor for the restaurant industry. So and
Speaker 2: all this is going to have you know, an impact
Speaker 2: into the fourth quarter and into twenty twenty four for
Speaker 2: Morgi dollars and margin dollar growth for how that's going
Speaker 2: to look into especially into the fourth quarter. So if
Speaker 2: you've got you know, independence coming back, price coming down,
Speaker 2: supermarkets are more competitive, Labor inflation is still around, right,
Speaker 2: that's not going away. Well, there is some you know,
Speaker 2: food costs are coming down. There could be some margin
Speaker 2: pressure heading into the fourth quarter and certainly into twenty
Speaker 2: twenty four for a lot of these restaurant companies.
Speaker 1: Yeah, for sure. I guess there was two pieces of
Speaker 1: that that I you know, find interesting. You know, one
Speaker 1: thing is how bad traffic's been, even though a lot
Speaker 1: of these group orders are breaking into individual orders, and
Speaker 1: I know some chains try to do their best to
Speaker 1: count entrees on a large order, but you know, how
Speaker 1: much how bad is traffic really if they're getting some
Speaker 1: sort of a benefit there with orders fracturing, right, So.
Speaker 2: The biggest culprit is shake check. Like they're like to me,
Speaker 2: they're they're they're a perfect example of what you're saying, right,
Speaker 2: because you know, I don't remember the exact numbers off
Speaker 2: the top of my head, but they're they're saying their
Speaker 2: traffic was down like one to two percent, right. But
Speaker 2: you know, if you look at the difference between menu
Speaker 2: price and mix and what their traffic is, that the
Speaker 2: traffic suggests that it's down four or five percent, not
Speaker 2: down one to two percent. But that totally can be
Speaker 2: accounted for the way they count for entrees, right, So
Speaker 2: if you're one person coming in and ordering for four
Speaker 2: four entrees, right, that's you know, one, that's just one person, right,
Speaker 2: But but really entrees are down four percent or four
Speaker 2: or three or four it's kind of depending on what
Speaker 2: the number is. So they're kind of like, for me,
Speaker 2: the poster child for what you're talking about and the
Speaker 2: way people really count on trees. And there's something to
Speaker 2: do it, right, But I think and I like to
Speaker 2: pick on Shakeshack.
Speaker 1: I know you do. We've been picking on Shakeshack since
Speaker 1: the IPO together. But yeah, we'll get back into shakeshack
Speaker 1: because I asked you questions. I want to know what
Speaker 1: you think about, uh, the activists and stuff like that.
Speaker 1: But so we'll return to that. The other thing that
Speaker 1: I found interesting, you know that that really resonated with
Speaker 1: me with your land last answer was, uh, you know
Speaker 1: about the food at home versus food away from home,
Speaker 1: and restaurants are trying to catch up with the pricing
Speaker 1: this year, and so there's a massive delta right now
Speaker 1: in terms of inflation at eating you know, in a
Speaker 1: restaurant versus what we're seeing at the grocery store.
Speaker 2: Right Yeah, And I you know, I have I struggle
Speaker 2: with that metric because a lot of people like to,
Speaker 2: you know, sort of look at the absolute levels in
Speaker 2: place and say, okay, restaurant prices are going up more
Speaker 2: than you know, supermarket prices the other way around, and
Speaker 2: this is going to impact consumption when the reality of
Speaker 2: it is, it is always significantly cheaper to go to
Speaker 2: a supermarket and buy your food and bring it home
Speaker 2: and cooking, right because you are doing the cooking, you're
Speaker 2: doing the dishes, and you're doing the cooking. So no
Speaker 2: matter what that stat says it's always cheaper to go
Speaker 2: buy you can buy a dozen eggs for six bucks
Speaker 2: and you know, and have four meals, right if you
Speaker 2: want to eat eggs for two days. Right. So I
Speaker 2: just don't like, I understand how people want to look
Speaker 2: at it that way, but the fact of the matter
Speaker 2: is it will always be and has always been cheaper
Speaker 2: to go to a supermarket and buy a meal and
Speaker 2: bring it home. Now.
Speaker 1: Yeah, And it was such a big talking point in
Speaker 1: twenty twenty two for all these companies like, yeah, well
Speaker 1: we're raising our prices, but they're not up as much
Speaker 1: as the grocery stores. And it was like it was
Speaker 1: like Equity Capital markets guys all over the street. We're
Speaker 1: just like telling it, you know, parading this to all
Speaker 1: the management teams, and then the management teams will get
Speaker 1: on the call and all say the same thing, and
Speaker 1: you're one hundred percent right, it's always cheaper to eat
Speaker 1: us myself. Yeah, okay, cool. So you think the second
Speaker 1: half of the year is going to be difficult transition,
Speaker 1: and you talked about some of the things that are
Speaker 1: going on with the macro, some of the things that
Speaker 1: are going on with inflation. You know, is there anything
Speaker 1: else you think that we should should should mention. You know,
Speaker 1: labor inflation continues to be pretty high for the industry.
Speaker 2: Right, I mean, I think that's the you know, the big,
Speaker 2: the big wild card sort of into the fourth quarter,
Speaker 2: because you don't, you know, depending on what your menu
Speaker 2: looks like, whether you're a bee centric, chicken centric, or
Speaker 2: seafood centric, right, you're gonna have different levels of food inflation. Right.
Speaker 2: You're seeing red meat prices are still very inflationary. So
Speaker 2: if I was to pick a group a menu, right
Speaker 2: or not to pick on shakescheck again. But just think
Speaker 2: of a ret meat centric menu that has food inflation
Speaker 2: and labor inflation and pricing coming in. Those groups of
Speaker 2: names are going to have the most trouble in the
Speaker 2: fourth quarter, right because you're still seeing four to five
Speaker 2: percent labor inflation, and that's probably not going to go lower.
Speaker 2: It's not nine percent anymore, it's not eight percent anymore,
Speaker 2: but there is still going to be labor inflation and
Speaker 2: there will never be deflation right way in a wage
Speaker 2: is always going to go up, and you're always going
Speaker 2: to find you one concept competing and get another concept
Speaker 2: for a restaurant manager or you know, having to pay
Speaker 2: bonuses to lure people to come to your concept, whatever
Speaker 2: the structure may be. But labor inflation will always be there.
Speaker 2: So the wild card really is going to be food
Speaker 2: inflation for some concepts into the fourth quarter, so you
Speaker 2: got slowing sales for a number of reasons. We got
Speaker 2: Manu prices coming in. So then the determining factor is,
Speaker 2: you know, what what the labor inflations look like and
Speaker 2: what the margin structure is for a lot of these companies.
Speaker 2: And then into the first quarter of next year when
Speaker 2: the when we're up against just insane comparisons. It just
Speaker 2: it's really going to be a difficult time for a
Speaker 2: lot of these names. And across the board. I don't
Speaker 2: know anybody that's not gonna that's going to do well. Frankly,
Speaker 2: even even the mighty Chipotle is going to struggle into
Speaker 2: the first quarter.
Speaker 1: Yeah, well, we know they've raised prices a lot over
Speaker 1: the last you know, three years, but yeah, yeah, this
Speaker 1: inflation thing is interesting. Man. So I'm a fan of
Speaker 1: Jim Rodgers and his book Cut Hot Commodities. I don't
Speaker 1: know if you've ever read it.
Speaker 2: No, I have not.
Speaker 1: You have to, you have to. He talks about the
Speaker 1: history of commodity cycles and on average they last seventeen years,
Speaker 1: and he goes into all the details of why they last.
Speaker 1: And it's just such a great, clearly written book. And
Speaker 1: you know, throughout history, you know, we've seen it repeat
Speaker 1: over and over, and the last cycle was shortened. I
Speaker 1: don't know why. Maybe I haven't he hasn't written a
Speaker 1: follow up book to it. Maybe because of you know,
Speaker 1: technological advances in drilling and fracking and all these different things.
Speaker 1: But if he's right, you know, about these cycles, and
Speaker 1: if we're at the beginning of another commodity cycle, which
Speaker 1: could last anywhere from ten to twenty years, you know,
Speaker 1: that could be troublesome for restaurants. I mean, the industry
Speaker 1: has definitely benefited from very modest inflation for a very
Speaker 1: long time. So that's always something I just kind of
Speaker 1: keep in the back of my head. But you should
Speaker 1: check that book out. I think you'd really like it.
Speaker 1: I will, okay, So, based on all the things that
Speaker 1: you mentioned, all the difficulties, and you know, you know me,
Speaker 1: i'mbarished with you. I couldn't agree more. Who do you
Speaker 1: think is going to win? And who do you think
Speaker 1: is going to lose in this environment that we're entering.
Speaker 2: Yeah, so I just add one more thing to what
Speaker 2: you were saying before. You know, it's surprising to see
Speaker 2: in the second quarter the number of companies that missed
Speaker 2: revenue estimates. Right, So they missed revenue but beat earnings, yep. Right. So,
Speaker 2: but when you're running six, seven, eight, nine, ten, whatever price,
Speaker 2: it's easy because that flows through at ninety nine percent
Speaker 2: gross margin. Right, you can beat earnings, but sales are slowing.
Speaker 2: That's going to get worse into the second quarter, right, Yet,
Speaker 2: roll off prices are rolling off, you know, and traffic
Speaker 2: is slowing, and the and the sell side analysts don't
Speaker 2: it's not real time like they'll wait to hear from
Speaker 2: the management team to lower their estimates or raisor estimates
Speaker 2: or whatever it may be. So I was surprised to
Speaker 2: see the number of even Chipotle missed revenue estimates for
Speaker 2: the second quarter, right, And that's only going to get
Speaker 2: worse because we're still seeing sales slowing, right and and
Speaker 2: as estimates are not coming down. So it's just one
Speaker 2: of those things that I just wanted to add to
Speaker 2: that because I was just thinking about the issues that
Speaker 2: we're going to be facing into the third and fourth quarter,
Speaker 2: and certainly into the third quarter because sales continues. So
Speaker 2: now you can ask that question again.
Speaker 1: Who's going to win and who's winners?
Speaker 2: Yeah, so we're pretty pretty bearish. We don't have many
Speaker 2: winners right now.
Speaker 1: Well, everything's gone straight up for six months.
Speaker 2: Yeah, we do, like we do like Dominoes. Frankly, young
Speaker 2: young Dominoes in the big franchise companies are pretty much,
Speaker 2: you know, sort of the top of the list. I
Speaker 2: guess you could say, but let me just check who
Speaker 2: else do I have here? So we've got restaurant I'm
Speaker 2: a big fan of what's going on at restaurant brands, Dominoes, uh,
Speaker 2: you and then and then we're there's a couple of
Speaker 2: names that we want to buy into the downturn, uh,
Speaker 2: that we're going to see coming into the fourth quarter,
Speaker 2: like Darden. Taste has been on the long list for
Speaker 2: us as well. First Watch. I think First Watch is
Speaker 2: a really cool little company. Frankly, it's a you know,
Speaker 2: a breakfast, brunch and lunch concept.
Speaker 1: But those are one shift model.
Speaker 2: Yeah, I love it, but those are the ones that
Speaker 2: sort of stick out to me as as the winners,
Speaker 2: and I actually have a brinker as along as well.
Speaker 2: I think there's some interesting things that are going on there,
Speaker 2: but you know that's a longer tail turnaround. Mm hmm.
Speaker 1: All right, cool, so let's go, I guess for the
Speaker 1: Winter Winners. Yeah, you know, I think we're on the
Speaker 1: side seams side on most of these. Russell Wiener I'm
Speaker 1: a fan of, and I'm a fan of his former mentor,
Speaker 1: Patrick Doyle. I think restaurant bands is I think it
Speaker 1: sounds like he's changing the culture over there and changing
Speaker 1: the focus and and and kind of got management focused
Speaker 1: on the right things. So yeah, it's interesting. What are
Speaker 1: your thoughts on on the turnaround at restaurant brands and
Speaker 1: what they're doing at BK and Popeyes right now?
Speaker 2: Yeah, so I think it's it's the focus on what matters,
Speaker 2: right and well, frankly three G destroyed the business, right,
Speaker 2: so it was you know, like craft Tiants and a
Speaker 2: couple of the other buglisers, Craft Tients and restaurant brands
Speaker 2: are the three sort of three G companies that have
Speaker 2: been destroyed by their you know, way of running their businesses.
Speaker 1: So with an iron fist, with.
Speaker 2: An iron fist right, And they didn't care about franchise
Speaker 2: profitability right. All they cared about was you know, sitting
Speaker 2: on you making sure you know, the people at Burger
Speaker 2: King were sitting on pickle buckets in Miami because they
Speaker 2: just cut G and A to the you know, to
Speaker 2: the bottom. So read undoing what was what was done
Speaker 2: in the last you know, ten years is important and
Speaker 2: you know, Patrick Doyle coming in and focusing on franchise
Speaker 2: profitability will be you know why that stock wins. And
Speaker 2: that can happen a couple of ways. Most importantly, sales
Speaker 2: go up. But before that happens, you're seeing them force
Speaker 2: franchise's out of the system. I don't know, that's maybe
Speaker 2: not a good way to put it, but the reality
Speaker 2: of the matter is when you look at you know,
Speaker 2: McDonald's or Wendy's or Young you know, Taco Bell, KFC,
Speaker 2: Pizza Hunt, any one of these big brands that have
Speaker 2: been successful in the turnaround, it's all because they have
Speaker 2: fixed the franchise system right, and they take the old franchisees,
Speaker 2: they force them out. You know, whether it's a generational
Speaker 2: thing or you know, a forced sale or closures or however,
Speaker 2: you fix the system but that calling of the system
Speaker 2: will immediately have an impact on what the street cares about,
Speaker 2: and that's an improvement in franchise profitability. And as soon
Speaker 2: as you begin to see that improvement in franchise profitability,
Speaker 2: Sorry about that if you can't hear that background on,
Speaker 2: but that's what will really drive the the you know,
Speaker 2: the stock hire is that improvement in in franchise profitability.
Speaker 2: And that's Patrick Doyle coming in, right, And that's how
Speaker 2: you that that's that's what will ultimately be you know,
Speaker 2: why this stock wins. And then and then you can
Speaker 2: get to the you know, the burger King turnaround, right,
Speaker 2: the Burger King. They sort of played lip service to
Speaker 2: the success that Burger King has experienced here so far,
Speaker 2: but the reality of it is traffic's still negative, right,
Speaker 2: So there is no turnaround at Burger King yet. But
Speaker 2: that's fine. You've got to you've got to fix the
Speaker 2: franchise system first. And once you fix the franchise system first,
Speaker 2: you close those doors. You get this door base looking better,
Speaker 2: you get healthy franchisees in there who want to be
Speaker 2: in there and want to run the business, and then
Speaker 2: you'll see the traffic improved. Yep. For sure.
Speaker 1: And then also, you know, the unit unit economics look better,
Speaker 1: fdds improve, you get a little buzz around the system,
Speaker 1: and then people want to start opening stores again.
Speaker 2: Right Yeah, yeah, yeah, yeah, that's that's you know, two
Speaker 2: or three years down the road.
Speaker 1: Yeah, but they already have strong internationals, so you know,
Speaker 1: there's there's other pieces of that business that that's kind
Speaker 1: of going to push.
Speaker 2: It along a little bit. This is a little inside
Speaker 2: baseball with respect to QSR. But Patrick Doyle, who was
Speaker 2: the ex CEO Dominoes who turned around that company. There
Speaker 2: are I think eight or nine different master franchisees for
Speaker 2: Burger King that are also Dominos franchisees. So there's an
Speaker 2: element to this story that has Dominoes all over it, right,
Speaker 2: because you've got really healthy, strong franchisees globally, right, not
Speaker 2: not in the US, but globally. That will allow this
Speaker 2: company to a creep value to shareholders over an extended
Speaker 2: period of time because they do have that international unit
Speaker 2: growth from strong, healthy franchisees.
Speaker 1: Great, you mentioned Brinker. You know, we we linked up
Speaker 1: a couple months ago at the at their investor day.
Speaker 1: You mentioned that's one of the names that you like
Speaker 1: in casual dining, which is obviously not a place we
Speaker 1: think is mostly safety play. What are your thoughts on that?
Speaker 2: Cool? I'm maybe I'm coming back to the world too
Speaker 2: many times, but I'm a fan of the Chili's brand. Right,
Speaker 2: Applebee's is a disaster, so their biggest competitor is failing
Speaker 2: and is a melting ice cube. So you have a
Speaker 2: new CEO coming in. He shrinks the menu, focuses on
Speaker 2: a few items, right, he gets better advertising, you know. There,
Speaker 2: It's just if you look at turnaround across the restaurant
Speaker 2: space over the years, right, this is a classic turnaround
Speaker 2: or there's classic signposts, signed posts of a successful turnaround,
Speaker 2: and and he's got it all. It will take time, right,
Speaker 2: because it's casual dining and whatnot. But I do think
Speaker 2: Kevin is making all the right moves, and you will
Speaker 2: once we get past this period of self inflicted wounds,
Speaker 2: which we've got another quarter. We do have difficult comparisons coming,
Speaker 2: but this is the name that the street loves to hate,
Speaker 2: and you know, I just it feels like there's enough
Speaker 2: going on. You can see enough going on that will ultimately,
Speaker 2: you know, be successful. And it will take time. But
Speaker 2: this This is one where you know, if you buy
Speaker 2: Darden today, you might make twenty percent upside, right, But
Speaker 2: if you're buying Brinker today and the turnaround does work,
Speaker 2: it's a double right. This is not just you know,
Speaker 2: it's not just ten to fifteen percent upside. This is
Speaker 2: literally a company that you could go up you know,
Speaker 2: fifty one hundred percent over the next two years if
Speaker 2: this works. And there's no reason why it shouldn't work, frankly,
Speaker 2: other than the macro, because it is a tried and
Speaker 2: true turnaround in the restaurant space that we've seen executed
Speaker 2: over and over again.
Speaker 1: Yeah, it should be interesting. And we talked about it
Speaker 1: when I did hedge I TV with you, and one
Speaker 1: of the things that I forgot to mention is that
Speaker 1: they have not done really anything with strategic pricing.
Speaker 2: And so.
Speaker 1: From what I hear is that that they've gone out
Speaker 1: and they're trying to find someone to help them do that,
Speaker 1: and that could provide some some upside here to the
Speaker 1: numbers man, because you know, that's that's process has become
Speaker 1: a lot more scientific over the last few years, and
Speaker 1: it's allowed some of these chains like Popeyes to Popeyes,
Speaker 1: I'm sorry I'm mentropol to increase their prices so much
Speaker 1: over the last couple of years while minimizing the traffic laws.
Speaker 2: You know, this is a subject for another podcast, but
Speaker 2: I spoke with a private company that helps install dynamic
Speaker 2: pricing for the restaurant industry and it is hugely successful
Speaker 2: and there's an element to you know, I know it's
Speaker 2: you don't see any of the big change doing dynamic
Speaker 2: pricing yet, but I do after talking to this person yesterday,
Speaker 2: I think that's coming for the restaurant industry. Like this,
Speaker 2: you know, peak times, why not raise price? Right? It
Speaker 2: just it makes a ton of sense. Now, I think
Speaker 2: uning is is going to be interesting. But that is
Speaker 2: the future of the restaurant industry, dynamic pricing, and it's coming.
Speaker 2: I just I believe it's coming. Young Brands is actually
Speaker 2: working with the company to do it, so a few
Speaker 2: of the big guys are looking at it. But I
Speaker 2: think that this is a subject that we can go
Speaker 2: on another time with. But dynamic pricing will hit the
Speaker 2: restaurant industry at some point.
Speaker 1: Yeah, for sure. It's made such a you know, impact
Speaker 1: on the travel industry and the hotel industry and things
Speaker 1: of that nature. Yeah, I don't think there's anything stopping it.
Speaker 1: I'm curious about your thoughts on Kava.
Speaker 2: Oh man, I you know, God blessed Ron shake Right.
Speaker 2: He buys Zoe's for three hundred million dollars, combines it
Speaker 2: with Kava, and then all of a sudden has a
Speaker 2: five billion dollar company. Like, there is no better CEO
Speaker 2: in the restaurant space than Ron shake right. I just
Speaker 2: think the guy has got the magic touch. So it is.
Speaker 2: It's stupid, leap riced. The evaluation is just stupid, but
Speaker 2: the performance is unreal. Yeah, and they've got you know,
Speaker 2: they've got some really strong numbers in terms of you know,
Speaker 2: not only just what they've posted in the past quarter,
Speaker 2: but when you when you compare Kaba to the other
Speaker 2: change in the space. Right, I'll just pick Sweet Greens
Speaker 2: just because I like to pick on screen Greens and
Speaker 2: Chase ex But you know, two point five million averaging
Speaker 2: the volume right in twenty twenty three with twenty three
Speaker 2: percent restaurant level margin. That's like Chipoli's at two point
Speaker 2: nine million, you buy with twenty six Right. So the Kava,
Speaker 2: the numbers that Kaba are putting up are exceptional and
Speaker 2: just to put it in perspective to Sweet Greens, which
Speaker 2: I think is you know, A zero has two point
Speaker 2: eight million in averaging the voyants and a's seventeen percent
Speaker 2: re level margins. So slee Greens has significant issues. But
Speaker 2: Kava is just and now if you you know, Tava's
Speaker 2: got nine to you know, six seven whatever percentage same
Speaker 2: store sales growth and twenty five thirty percent unit growth
Speaker 2: and you're putting up you have that kind of square
Speaker 2: foot is growth with those kinds of full wall economics,
Speaker 2: you get a one hundred times eed. Even now it
Speaker 2: won't always trade there, but I love to you know,
Speaker 2: I love to find great shorts in the restaurant space.
Speaker 2: But this is, you know, other than valuation, which is
Speaker 2: never a reason to short the stock. You know, this
Speaker 2: is a really, really strong company that has you know,
Speaker 2: a huge future ahead of it in terms of being
Speaker 2: the growth and potential now it you know, will it
Speaker 2: you find a few bumps in the road over time, yeah, absolutely,
Speaker 2: but for the time being, it is you know, it
Speaker 2: is built to succeed. Yeah.
Speaker 1: Yeah, It's very impressive at the store level for sure.
Speaker 1: And we'll see how quickly they can leverage DNA, you know,
Speaker 1: hopefully it don't end up like Shakeshack, where you're like
Speaker 1: eight years later still waiting for them to leverage GNA.
Speaker 1: So you know, to that point, can you talk a
Speaker 1: little bit about the activist investor and what's going on
Speaker 1: there and if that's changed your opinion about Shakeshack at all.
Speaker 2: No, it actually reinforced my opinion. Frankly, we were short Shakeshack,
Speaker 2: and we're short Shakeshack because it is a poorly run
Speaker 2: coporate company and it's poorly run because the management team
Speaker 2: is incentive. The long term incentive comp is structured around
Speaker 2: growing revenues and epidoc so revenue growth and EBIDC growth,
Speaker 2: so they can just all they have to do is
Speaker 2: just you know, take the balance sheet, open up stores,
Speaker 2: right to grow their revenues and grow the ebadah and
Speaker 2: not caring about averaging the volumes, not caring about margins,
Speaker 2: and the CEO can get paid.
Speaker 1: And that is that and not operating income and operating
Speaker 1: income margin inst crazy to me, insane, but that that
Speaker 1: structure has led to significant inefficiencies.
Speaker 2: So this is not a typical QSR model, right, So
Speaker 2: you know, if you think about you know, McDonald's, it's
Speaker 2: got those it's got, you know, the same four walls
Speaker 2: that it opens up. You know, across the country. Shakeshack
Speaker 2: has a different box in Orlando than it does in Texas,
Speaker 2: that it does in California, that it does in you know,
Speaker 2: all these different cities. And that has led to significant inefficiencies.
Speaker 2: And that's obvious in their margin structure of the company.
Speaker 2: And now you have an activist coming in and they
Speaker 2: see all these inefficiencies, right, and they're going to try
Speaker 2: to fix it. I just don't know how they can, frankly.
Speaker 2: I mean there are some some small things they can do, right,
Speaker 2: But if you think about you know, go back to that.
Speaker 2: You know the number that I was with the fash
Speaker 2: casual average un and volumes and mart restaurant level margins.
Speaker 2: They've got three point seven million in averaging and volume
Speaker 2: and then nineteen percent restaurant level margin, which is crazy, right.
Speaker 2: Tavas got two point five million and twenty three percent
Speaker 2: restaurant level margins. How come Shakeshack is low? Well, it's
Speaker 2: so low with that averaging volume because of the inefficiencies,
Speaker 2: because of the food costs, because of the labor costs,
Speaker 2: and the inefficiencies that are built in the system, so
Speaker 2: they have to begin to try to fix that, and
Speaker 2: I just don't know how they could do that right now.
Speaker 1: Yeah, and the amount of money they were spending on
Speaker 1: the store builds and oh my.
Speaker 2: God, yeah, so much waste.
Speaker 1: Yeah. So who do you like in the fast casual
Speaker 1: space and are there any other ones that you have
Speaker 1: concerns about?
Speaker 2: So I really don't the answer your question is, I
Speaker 2: really don't like a lot in fast casual, right. I
Speaker 2: just the valuation. Chipotle is twenty four times NTM e
Speaker 2: v ed badah, right, Shake Check's price right on top
Speaker 2: of that. That's those Those are just ridiculously egregious multiples
Speaker 2: for all these businesses, and it's heading into a slowdown, right,
Speaker 2: So I'm not a big fan, I think, you know.
Speaker 2: I mean, the only one that I positively disposed to
Speaker 2: what we're talking about it is Cava, and I still
Speaker 2: wouldn't buy it. And Sweet Greens is a zero at
Speaker 2: some point like the store. The big the biggest joke
Speaker 2: in fast casual today, right, is that Sweet Greens is
Speaker 2: going to have robotics stores in five years? Like are
Speaker 2: you kidding me? That is not going to happen? And
Speaker 2: I don't know, if you've seen the store in Naperville,
Speaker 2: Illinois that they open, but it's two stores, two stories,
Speaker 2: and they claim that they're going to convert every one
Speaker 2: of their existing restaurants into a robotics store. Well, you know,
Speaker 2: robots breakdown, right, you know what about depreciation? Right? Yes,
Speaker 2: you might be substituting labor costs you know for robots, right,
Speaker 2: but you still have DNA. Right, So the restaurant level
Speaker 2: margin is not going to twenty six percent. And just
Speaker 2: to come back to what we've been talking about with
Speaker 2: fast casual, the strength and those margins, right, Sweet Greens
Speaker 2: is at sixteen percent or seventeen percent level margins. They're
Speaker 2: magically saying that a robotics store after one month of
Speaker 2: testing is going to twenty six percent. It's not going
Speaker 2: to happen. Yeah, and even if you plug in twenty
Speaker 2: six percent on the second quarter numbers, they're still losing money.
Speaker 2: Are you kidding me? And you've got these self side
Speaker 2: analysts that are buying into this nonsense that they're going
Speaker 2: to have robotics like it is it literally is. It's
Speaker 2: it's hilarious to watch that's unfold in the stocks, you know,
Speaker 2: the stocks, the stock has spiked on that well whatever reason,
Speaker 2: you know, well we know why, because people are buying
Speaker 2: into this management team thinks that they're going to have
Speaker 2: robots serving salads.
Speaker 1: It's I mean, you know, even at iPod I you
Speaker 1: know what I wrote. My note was like, you know,
Speaker 1: I hesitate to use a a price of sales mallable
Speaker 1: to ever you know, value a restaurant stock, but since
Speaker 1: they can't generate E but I have no the choice,
Speaker 1: you know, And like, call me old school, but it's
Speaker 1: like I feel like you're supposed to figure out the
Speaker 1: store level economics on the first unit before you build
Speaker 1: the second and the third and the fourth, as opposed
Speaker 1: to still trying to figure out the unit economics when
Speaker 1: you're building one hundred and twenty or whatever number.
Speaker 2: You know.
Speaker 1: So we talked a lot about the low and middle
Speaker 1: income consumers and quick service and fast casual. Obviously our
Speaker 1: companies don't have a lot of exposure to find dining.
Speaker 1: But the same store sales have been in decline since
Speaker 1: March according to black Box, and now luxury retail seems
Speaker 1: to be slowing. You know, I just find that interesting
Speaker 1: because we've had this k shape recovery where the high
Speaker 1: end has done well post pandemic, and the low income
Speaker 1: not so much. So what are you hearing about the
Speaker 1: higher income consumering.
Speaker 2: Yeah, so same idea, right, and it's it actually slowed
Speaker 2: faster than so if you go, I look at the
Speaker 2: nap Steakhouse data, and it really started slowing in March,
Speaker 2: so it's slowed earlier. And there's an element to that
Speaker 2: that's hard to know because it's a little different than
Speaker 2: high end retail, right, because this is more T and
Speaker 2: E based, Right, it's you know, you're not you know,
Speaker 2: I'm not taking a client out to dinner this week
Speaker 2: because whatever reason, you know, business is soft or whatever.
Speaker 2: So it has a little bit more to do with
Speaker 2: business spending than it does with you know, sort of consumers,
Speaker 2: you know, whether they have a job and feeling like
Speaker 2: they can buy a Gucci purse or whatever. So to me,
Speaker 2: that's a little bit more discretionary and that that's a sign.
Speaker 2: That was one of the first signs back in March
Speaker 2: that things were slowing. And you know, not the reason
Speaker 2: why we're going to embarrassed in the industry, but one
Speaker 2: of the reasons, like okay, this is you know, this
Speaker 2: is this is not good, right, you know, the high
Speaker 2: end stakehounsils have been slowing for a while and have
Speaker 2: slowed and continue to slow, like it's not getting better.
Speaker 2: So it just it's it's an indicator to me that
Speaker 2: you know, businesses are getting a little bit more cautious. Yeah,
Speaker 2: because they're not, you know, people aren't taking their clients
Speaker 2: out to dinner as much. Cool.
Speaker 1: Well, listen, Thanks again, Howard, that was a lot of fun.
Speaker 2: Man.
Speaker 1: Where where can people find you on social media?
Speaker 2: Had Howard Penny on Twitter? Howard W. Penny. I should
Speaker 2: say so, but thank you Michael. This has been awesome.
Speaker 2: Love having you on Hedge TV and thank you for
Speaker 2: having me on your podcast. Really love it for sure.
Speaker 1: Thing man, it was great and thanks to the audience
Speaker 1: for tuning in. If you liked the episode, please subscribe
Speaker 1: and leave a review and tune in again later this
Speaker 1: month for a discussion with bet Oaklahom though, CEO of
Speaker 1: Plays Pizza. Have a good day, everybody.
Speaker 2: H