WEBVTT - Franchisors Outperform as Restaurant Sales Slow 0:00:20.840 --> 0:00:23.760 Welcome to Chopping it Up. I'm your host, Mike Halon, 0:00:23.800 --> 0:00:26.960 the senior restaurant and food service analyst at Bloomberg Intelligence. 0:00:27.960 --> 0:00:30.800 We got a go one today. We're joined by Howard Penny. 0:00:30.880 --> 0:00:36.000 Howard's the managing director, consumables analysts and overall restaurant guru 0:00:36.200 --> 0:00:39.199 at hedge Eye Risk Management. For those of you who 0:00:39.320 --> 0:00:42.000 aren't familiar with Hedge Eye, the firm does a great 0:00:42.040 --> 0:00:46.320 job helping its clients, including institutional investors, retail investors, and corporations, 0:00:46.800 --> 0:00:50.120 navigate the markets and the economy. Thanks for doing this, Howard. 0:00:50.240 --> 0:00:52.200 Hey, thank you. Michael. Glad to be here. 0:00:53.120 --> 0:00:54.880 Yeah, man, this is this is cool. I've been looking 0:00:54.920 --> 0:00:57.080 forward to this one. Why don't you just start us 0:00:57.120 --> 0:01:00.480 off by telling the listeners a bit about Hedge Eye 0:01:00.560 --> 0:01:03.360 and how your research differs from the traditional cell side 0:01:03.400 --> 0:01:04.440 research that's out there. 0:01:04.760 --> 0:01:08.360 Sure. So, HEDGEI has been around for about fifteen years now. 0:01:09.080 --> 0:01:12.760 We started with four of us, basically in Keith Softas 0:01:12.840 --> 0:01:18.679 Keith McCullough's my boss, founder of PEDGI as a consumer analyst. Right, 0:01:18.720 --> 0:01:21.360 so we've had four consumer analysts that got together. It's 0:01:21.360 --> 0:01:25.080 an independent research firm, so we don't manage money We 0:01:25.080 --> 0:01:29.600 don't trade stocks. We literally get paid by providing money 0:01:29.600 --> 0:01:32.800 making ideas to clients and if you know, they can 0:01:32.840 --> 0:01:35.360 fire us every four every three months if they don't 0:01:35.440 --> 0:01:39.240 like us, which is why what I really like about 0:01:39.240 --> 0:01:41.920 it is because we are literally focused on picking stocks 0:01:41.920 --> 0:01:44.240 and making money and that's you know, that's the name 0:01:44.240 --> 0:01:49.040 of the game, frankly. And so we've got as I said, 0:01:49.040 --> 0:01:52.200 we've been in business for fifteen years. We now have 0:01:53.120 --> 0:01:55.440 what I'm a sector head that I cover as you said, 0:01:55.440 --> 0:01:58.880 I cover consumer wolves. There are twelve of us now 0:01:58.960 --> 0:02:02.440 there's seventy employee East total. H and Keith does my 0:02:02.520 --> 0:02:08.720 boss does commodities, countries' currencies, and manages the overall business. 0:02:10.880 --> 0:02:13.320 Yeah, it's a great product. And I really like what 0:02:13.360 --> 0:02:16.280 you said about there about picking stocks and helping your 0:02:16.280 --> 0:02:18.480 clients make money. I feel like on the cell side 0:02:18.520 --> 0:02:20.640 sometimes that gets put to the back burner. 0:02:21.120 --> 0:02:25.720 You know, Well, it makes me independent, right, Elements of 0:02:25.760 --> 0:02:29.440 it more important because there's a lot of times when 0:02:29.600 --> 0:02:34.359 you you can talk to management teams and they'll tell 0:02:34.360 --> 0:02:36.919 you one thing, and if you're trying to do a 0:02:37.040 --> 0:02:39.320 raise the Flag tour and take them on some promotional 0:02:39.400 --> 0:02:42.040 tour to visit clients you're going to you know, buy 0:02:42.080 --> 0:02:45.639 into what they're saying, right and uh and not have 0:02:45.880 --> 0:02:49.320 you know, some independent thinking which allow you to come 0:02:49.360 --> 0:02:53.040 to sometimes different conclusions than the traditional seal side analysts 0:02:53.040 --> 0:02:54.560 at for sure. 0:02:55.880 --> 0:02:58.120 So what you know, Onyce, you kick us off too 0:02:58.160 --> 0:03:00.680 about you know about talking about the macro outlook at 0:03:00.680 --> 0:03:01.160 a hedgehie. 0:03:02.919 --> 0:03:07.440 So, so we're pretty bearish right now on the consumer, 0:03:07.480 --> 0:03:10.680 and I think that's probably not I mean, I don't 0:03:10.720 --> 0:03:12.840 know if that's out of consensus right now, but we're 0:03:13.440 --> 0:03:17.120 pretty barissed about where the consumer's heading, especially into the 0:03:17.120 --> 0:03:21.440 fourth quarter, in terms of you know, we're we're what 0:03:21.560 --> 0:03:24.160 I guess September one, people are starting to accrue interest 0:03:24.240 --> 0:03:27.320 on their student loans again. October first, people are gonna 0:03:27.320 --> 0:03:30.600 have to start making paying student loans again. I don't 0:03:30.600 --> 0:03:36.120 know if you saw this, Michael, but McDonald's traffic mismeasured 0:03:36.120 --> 0:03:39.240 by placer has gone through a I think a five 0:03:39.360 --> 0:03:43.720 week sequential deceleration and is now negative for the first 0:03:43.720 --> 0:03:47.520 time in two years, which is remarkable. And then if 0:03:47.560 --> 0:03:49.920 you put that together with dollar general and you know 0:03:49.960 --> 0:03:52.960 a few other things, what Momart's saying the low end consumer, 0:03:53.000 --> 0:03:56.280 I think is really struggling, and I think it's getting worse, frankly, 0:03:56.720 --> 0:04:00.240 So we're we're pretty bearish in terms of, you know, 0:04:00.280 --> 0:04:03.960 where the consumers headed headed, sorry for the next for 0:04:04.040 --> 0:04:06.040 the next three months and into the first quarter. And 0:04:06.040 --> 0:04:09.160 then when you think about the restaurant industry in particular, 0:04:09.720 --> 0:04:12.760 you know, we had the industry had a difficult period 0:04:12.880 --> 0:04:15.720 in July and August last year because of gas prices 0:04:16.160 --> 0:04:18.360 and what that been, the pressure that put on sales, 0:04:18.760 --> 0:04:21.680 and we're now heading into a period where comparisons get 0:04:21.800 --> 0:04:24.920 really difficult for the industry. So we see a lot 0:04:24.960 --> 0:04:28.799 of challenges ahead, especially for the consumer, and that's being 0:04:28.839 --> 0:04:31.839 echoed with what I think companies are saying. And you know, 0:04:31.920 --> 0:04:35.040 Dollar General I think is probably the stock as you 0:04:35.080 --> 0:04:37.640 are right in terms of talking about what the low 0:04:37.760 --> 0:04:40.839 end consumer's doing. But then you have companies like Chipotle, 0:04:41.279 --> 0:04:44.800 which completely you know, they're not seeing any of that, 0:04:45.200 --> 0:04:47.720 and they're talking about a strengthening of the consumer, which 0:04:47.760 --> 0:04:51.160 is a little counterintuitive to you know, what most of 0:04:51.200 --> 0:04:53.960 the macro data is showing. But we're pretty embarrasses to, 0:04:54.240 --> 0:04:56.200 you know, pretty as to what things are going to 0:04:56.279 --> 0:04:57.880 look like heading into the end of the year. 0:04:58.680 --> 0:05:02.520 Yeah, I hadn't seen them Donald's data yet, but that's cure. 0:05:02.640 --> 0:05:05.240 That's interesting because in the second quarter they were one 0:05:05.279 --> 0:05:07.720 of the few restaurant chains that didn't see a deceleration 0:05:07.800 --> 0:05:10.360 in their four years seem star sales trend. So and 0:05:10.400 --> 0:05:13.120 you know, with fourteen thousand stores in the United States, 0:05:13.160 --> 0:05:16.480 I think that's a pretty good indicator maybe of where 0:05:16.520 --> 0:05:19.719 things are going. And you know, in Chipotle, you know, 0:05:20.440 --> 0:05:23.440 that one's interesting because people give them a pass because 0:05:23.839 --> 0:05:26.000 they've done so well over the last few years, but 0:05:26.160 --> 0:05:30.160 their their trends and Starbucks as well, slowed pretty significantly 0:05:30.920 --> 0:05:32.640 in the second quarter, but they kind of got a 0:05:32.720 --> 0:05:33.560 pass by the street. 0:05:34.120 --> 0:05:38.039 Yeah, and you know, understandably. So, I mean, David Nicol 0:05:38.080 --> 0:05:43.640 has done a tremendous job fixing Chipotle since he's been 0:05:43.680 --> 0:05:45.960 in the business, or since he's been running the business, 0:05:46.200 --> 0:05:48.640 and coming out of the pandemic, they were the best 0:05:48.680 --> 0:05:53.560 performing chain in terms of margin improvement EBIT margin improvement. 0:05:53.880 --> 0:05:56.840 I think their EBIT margins relative to twenty nineteen or 0:05:56.920 --> 0:06:01.920 up some eight hundred basis points for something ridiculous like that. 0:06:02.040 --> 0:06:05.159 So they've done a great job running the business. So 0:06:05.200 --> 0:06:09.159 he deserves the accolades that he's had, but it feels 0:06:09.240 --> 0:06:12.680 like that story is in evidence, not just feels like, 0:06:12.760 --> 0:06:15.440 but there's evidence that's that story is getting a little 0:06:15.480 --> 0:06:16.279 long in the tooth. 0:06:17.279 --> 0:06:22.120 Yeah, yeah, and the evaluations rich to be sure, they 0:06:22.200 --> 0:06:25.280 finally fixed one of the issues I had with it, 0:06:25.320 --> 0:06:29.600 which was they were didn't want to franchise internationally forever 0:06:30.279 --> 0:06:34.240 and growth just it was non existent. So signing up 0:06:34.240 --> 0:06:36.480 with All Shai in the Middle East, I think is 0:06:36.520 --> 0:06:39.080 a good start. Obviously, it's going to take some time 0:06:39.160 --> 0:06:41.640 for that part of the business to move the needle though. 0:06:42.279 --> 0:06:46.760 Yeah. They well so interestingly enough, right, So, yes, they're 0:06:46.800 --> 0:06:51.440 going to franchise parts of the you know, the international component, 0:06:51.480 --> 0:06:54.960 but they're also beginning to invest in you know, they 0:06:54.960 --> 0:06:58.240 do run fifty stores outside the United States and Canada, 0:06:58.520 --> 0:07:02.320 so they're going to be investing in infrastructure to be 0:07:02.360 --> 0:07:05.280 able to grow the store base. Because that's how I mean, 0:07:05.279 --> 0:07:07.159 if they're going to keep that you know, sort of 0:07:07.320 --> 0:07:11.040 mid single high single digit unit growth story going, right 0:07:11.320 --> 0:07:14.120 in two years, they're going to need an international component 0:07:14.320 --> 0:07:17.440 to it. So spending is going up to support the 0:07:17.440 --> 0:07:22.160 infrastructure needed to keep that. There were two accelerate international 0:07:22.240 --> 0:07:23.160 unit openings. 0:07:23.680 --> 0:07:26.000 Yeah, for sure, so I think they're planning on ten 0:07:26.120 --> 0:07:30.160 new company owned stores in Canada, but i'd like to 0:07:30.160 --> 0:07:32.240 see them ref you know, maybe if Canada, if they 0:07:32.280 --> 0:07:34.800 have an opportunity to build stores there, that makes sense. 0:07:34.880 --> 0:07:38.200 But I don't like to see them refranchise the UK 0:07:38.360 --> 0:07:43.680 and Germany and try to accelerate that that that growth overseas. 0:07:43.720 --> 0:07:46.280 But you know, who knows, we'll see still such a 0:07:46.280 --> 0:07:49.600 small piece of that business. But it's interesting, you know, 0:07:49.640 --> 0:07:52.200 and you talked a lot about the restaurant traffic slowing 0:07:52.280 --> 0:07:54.160 here in the US. What are some of the trends 0:07:54.160 --> 0:07:54.840 that are causing that? 0:07:55.360 --> 0:07:59.040 So I think there's a couple of things. Consumer I'll 0:07:59.080 --> 0:08:04.239 say consumer normalization is one. So the return to full 0:08:04.360 --> 0:08:09.360 service restaurants. Right, You're no longer spending much as much 0:08:09.400 --> 0:08:13.000 on large group meals through drive throughs, right, so the 0:08:13.120 --> 0:08:17.400 average check, So that drove average check much higher into 0:08:17.440 --> 0:08:20.400 the pandemic. So as that's coming back, you're seeing a 0:08:20.520 --> 0:08:25.640 slowing in sort of people buying singular entrees instead of 0:08:25.720 --> 0:08:27.880 you know, four people that are going with your family 0:08:27.960 --> 0:08:31.360 for through a drive through. Independence are also coming back, 0:08:31.720 --> 0:08:35.640 So I think there is a you know, not a 0:08:35.679 --> 0:08:39.520 new popularity, but maybe independence are becoming more popular again. 0:08:40.480 --> 0:08:43.960 They were very popular heading into the pandemic, but obviously 0:08:44.000 --> 0:08:46.560 struggled into the pandemic and coming out of the pandemic. 0:08:46.640 --> 0:08:49.640 So and you're seeing that in the case volumes for 0:08:49.760 --> 0:08:52.600 the distributors. So you know, Cisco and some of the 0:08:52.640 --> 0:08:56.280 other companies are showing pretty good case volume growth, you know, 0:08:56.360 --> 0:08:58.720 low single day to case volume growth, but not like 0:08:58.800 --> 0:09:01.920 the decline to three percent decline in traffic that you're 0:09:01.920 --> 0:09:06.240 seeing for you know, the whether it's black Box or 0:09:06.240 --> 0:09:10.080 an Aptrac, which are the two big companies that measure 0:09:10.800 --> 0:09:16.600 sales for the industry. Price is also coming in, So traffic, 0:09:16.600 --> 0:09:18.960 as I said, has been negative, but you're seeing menu 0:09:19.040 --> 0:09:23.960 prices come down significantly, so which is also helping or 0:09:24.160 --> 0:09:26.679 hurting depending on how you want to look at it. 0:09:26.920 --> 0:09:29.560 And then you know, Walmart on their most recent conference 0:09:29.600 --> 0:09:35.600 called sort of mentioned specifically the consumers are stretching their 0:09:35.640 --> 0:09:39.400 dollars further and seeking better value across more categories, right, 0:09:40.240 --> 0:09:44.800 and they said specifically grocery staples and in home meal 0:09:44.880 --> 0:09:48.839 options were being purchased more often. So you've got that 0:09:49.000 --> 0:09:51.520 element to it, So, which kind of gets back to 0:09:51.559 --> 0:09:54.080 what we were talking before about you know McDonald's right, 0:09:54.080 --> 0:09:57.000 and McDonald's seeing a deceleration. I mean if if people 0:09:57.040 --> 0:10:01.280 are buying you know, in home meals at Walmart, right, 0:10:01.360 --> 0:10:04.320 which their grocery business is doing really well, that's that's 0:10:04.440 --> 0:10:09.480 not an insignificant competitor for the restaurant industry. So and 0:10:09.720 --> 0:10:12.320 all this is going to have you know, an impact 0:10:12.400 --> 0:10:15.800 into the fourth quarter and into twenty twenty four for 0:10:16.040 --> 0:10:19.000 Morgi dollars and margin dollar growth for how that's going 0:10:19.120 --> 0:10:22.079 to look into especially into the fourth quarter. So if 0:10:22.080 --> 0:10:25.959 you've got you know, independence coming back, price coming down, 0:10:26.080 --> 0:10:30.760 supermarkets are more competitive, Labor inflation is still around, right, 0:10:30.840 --> 0:10:33.120 that's not going away. Well, there is some you know, 0:10:33.200 --> 0:10:35.640 food costs are coming down. There could be some margin 0:10:35.679 --> 0:10:38.120 pressure heading into the fourth quarter and certainly into twenty 0:10:38.200 --> 0:10:40.200 twenty four for a lot of these restaurant companies. 0:10:40.880 --> 0:10:42.720 Yeah, for sure. I guess there was two pieces of 0:10:42.760 --> 0:10:46.800 that that I you know, find interesting. You know, one 0:10:46.800 --> 0:10:49.240 thing is how bad traffic's been, even though a lot 0:10:49.320 --> 0:10:52.320 of these group orders are breaking into individual orders, and 0:10:52.360 --> 0:10:54.280 I know some chains try to do their best to 0:10:55.000 --> 0:10:59.640 count entrees on a large order, but you know, how 0:10:59.720 --> 0:11:03.240 much how bad is traffic really if they're getting some 0:11:03.280 --> 0:11:08.079 sort of a benefit there with orders fracturing, right, So. 0:11:08.320 --> 0:11:12.600 The biggest culprit is shake check. Like they're like to me, 0:11:12.760 --> 0:11:16.280 they're they're they're a perfect example of what you're saying, right, 0:11:16.360 --> 0:11:20.720 because you know, I don't remember the exact numbers off 0:11:20.760 --> 0:11:22.600 the top of my head, but they're they're saying their 0:11:23.040 --> 0:11:25.920 traffic was down like one to two percent, right. But 0:11:26.320 --> 0:11:28.199 you know, if you look at the difference between menu 0:11:28.280 --> 0:11:32.240 price and mix and what their traffic is, that the 0:11:32.320 --> 0:11:35.000 traffic suggests that it's down four or five percent, not 0:11:35.080 --> 0:11:38.960 down one to two percent. But that totally can be 0:11:39.000 --> 0:11:42.120 accounted for the way they count for entrees, right, So 0:11:42.280 --> 0:11:45.640 if you're one person coming in and ordering for four 0:11:46.520 --> 0:11:51.800 four entrees, right, that's you know, one, that's just one person, right, 0:11:52.280 --> 0:11:56.160 But but really entrees are down four percent or four 0:11:56.320 --> 0:11:57.880 or three or four it's kind of depending on what 0:11:57.960 --> 0:12:00.720 the number is. So they're kind of like, for me, 0:12:00.920 --> 0:12:05.120 the poster child for what you're talking about and the 0:12:05.160 --> 0:12:07.840 way people really count on trees. And there's something to 0:12:07.880 --> 0:12:10.520 do it, right, But I think and I like to 0:12:10.559 --> 0:12:11.400 pick on Shakeshack. 0:12:14.440 --> 0:12:16.600 I know you do. We've been picking on Shakeshack since 0:12:16.600 --> 0:12:22.320 the IPO together. But yeah, we'll get back into shakeshack 0:12:22.360 --> 0:12:24.360 because I asked you questions. I want to know what 0:12:24.360 --> 0:12:26.880 you think about, uh, the activists and stuff like that. 0:12:26.880 --> 0:12:29.400 But so we'll return to that. The other thing that 0:12:29.440 --> 0:12:32.160 I found interesting, you know that that really resonated with 0:12:32.240 --> 0:12:35.680 me with your land last answer was, uh, you know 0:12:35.760 --> 0:12:38.240 about the food at home versus food away from home, 0:12:38.280 --> 0:12:40.960 and restaurants are trying to catch up with the pricing 0:12:41.400 --> 0:12:44.160 this year, and so there's a massive delta right now 0:12:44.200 --> 0:12:48.120 in terms of inflation at eating you know, in a 0:12:48.160 --> 0:12:51.200 restaurant versus what we're seeing at the grocery store. 0:12:51.280 --> 0:12:54.560 Right Yeah, And I you know, I have I struggle 0:12:54.640 --> 0:12:57.320 with that metric because a lot of people like to, 0:12:57.600 --> 0:12:59.640 you know, sort of look at the absolute levels in 0:12:59.679 --> 0:13:03.360 place and say, okay, restaurant prices are going up more 0:13:03.480 --> 0:13:06.120 than you know, supermarket prices the other way around, and 0:13:06.240 --> 0:13:08.920 this is going to impact consumption when the reality of 0:13:08.920 --> 0:13:13.120 it is, it is always significantly cheaper to go to 0:13:13.160 --> 0:13:15.800 a supermarket and buy your food and bring it home 0:13:15.800 --> 0:13:18.520 and cooking, right because you are doing the cooking, you're 0:13:18.520 --> 0:13:21.040 doing the dishes, and you're doing the cooking. So no 0:13:21.080 --> 0:13:24.720 matter what that stat says it's always cheaper to go 0:13:24.760 --> 0:13:27.720 buy you can buy a dozen eggs for six bucks 0:13:27.760 --> 0:13:30.800 and you know, and have four meals, right if you 0:13:30.840 --> 0:13:33.720 want to eat eggs for two days. Right. So I 0:13:33.840 --> 0:13:36.839 just don't like, I understand how people want to look 0:13:36.840 --> 0:13:38.880 at it that way, but the fact of the matter 0:13:39.000 --> 0:13:42.199 is it will always be and has always been cheaper 0:13:42.520 --> 0:13:45.320 to go to a supermarket and buy a meal and 0:13:45.400 --> 0:13:46.280 bring it home. Now. 0:13:46.360 --> 0:13:48.760 Yeah, And it was such a big talking point in 0:13:48.800 --> 0:13:50.920 twenty twenty two for all these companies like, yeah, well 0:13:51.080 --> 0:13:52.960 we're raising our prices, but they're not up as much 0:13:53.000 --> 0:13:54.960 as the grocery stores. And it was like it was 0:13:55.080 --> 0:13:58.920 like Equity Capital markets guys all over the street. We're 0:13:59.040 --> 0:14:01.640 just like telling it, you know, parading this to all 0:14:01.640 --> 0:14:03.679 the management teams, and then the management teams will get 0:14:03.720 --> 0:14:05.200 on the call and all say the same thing, and 0:14:05.240 --> 0:14:07.760 you're one hundred percent right, it's always cheaper to eat 0:14:08.040 --> 0:14:15.600 us myself. Yeah, okay, cool. So you think the second 0:14:15.640 --> 0:14:19.480 half of the year is going to be difficult transition, 0:14:19.640 --> 0:14:22.000 and you talked about some of the things that are 0:14:22.000 --> 0:14:24.440 going on with the macro, some of the things that 0:14:24.480 --> 0:14:29.000 are going on with inflation. You know, is there anything 0:14:29.000 --> 0:14:31.520 else you think that we should should should mention. You know, 0:14:31.640 --> 0:14:34.880 labor inflation continues to be pretty high for the industry. 0:14:34.520 --> 0:14:37.200 Right, I mean, I think that's the you know, the big, 0:14:37.360 --> 0:14:39.880 the big wild card sort of into the fourth quarter, 0:14:40.480 --> 0:14:43.400 because you don't, you know, depending on what your menu 0:14:43.480 --> 0:14:45.800 looks like, whether you're a bee centric, chicken centric, or 0:14:45.840 --> 0:14:50.240 seafood centric, right, you're gonna have different levels of food inflation. Right. 0:14:50.320 --> 0:14:53.840 You're seeing red meat prices are still very inflationary. So 0:14:54.240 --> 0:14:57.280 if I was to pick a group a menu, right 0:14:57.480 --> 0:15:01.960 or not to pick on shakescheck again. But just think 0:15:02.040 --> 0:15:05.920 of a ret meat centric menu that has food inflation 0:15:06.040 --> 0:15:10.400 and labor inflation and pricing coming in. Those groups of 0:15:10.960 --> 0:15:13.800 names are going to have the most trouble in the 0:15:13.840 --> 0:15:17.640 fourth quarter, right because you're still seeing four to five 0:15:17.680 --> 0:15:20.880 percent labor inflation, and that's probably not going to go lower. 0:15:20.960 --> 0:15:23.920 It's not nine percent anymore, it's not eight percent anymore, 0:15:24.320 --> 0:15:27.160 but there is still going to be labor inflation and 0:15:27.200 --> 0:15:30.320 there will never be deflation right way in a wage 0:15:30.440 --> 0:15:34.120 is always going to go up, and you're always going 0:15:34.200 --> 0:15:37.880 to find you one concept competing and get another concept 0:15:37.960 --> 0:15:40.520 for a restaurant manager or you know, having to pay 0:15:40.520 --> 0:15:43.120 bonuses to lure people to come to your concept, whatever 0:15:43.200 --> 0:15:46.760 the structure may be. But labor inflation will always be there. 0:15:46.760 --> 0:15:49.400 So the wild card really is going to be food 0:15:49.440 --> 0:15:52.600 inflation for some concepts into the fourth quarter, so you 0:15:52.720 --> 0:15:56.200 got slowing sales for a number of reasons. We got 0:15:56.200 --> 0:15:59.640 Manu prices coming in. So then the determining factor is, 0:15:59.800 --> 0:16:03.120 you know, what what the labor inflations look like and 0:16:03.160 --> 0:16:05.400 what the margin structure is for a lot of these companies. 0:16:05.640 --> 0:16:08.040 And then into the first quarter of next year when 0:16:08.080 --> 0:16:14.000 the when we're up against just insane comparisons. It just 0:16:14.480 --> 0:16:16.640 it's really going to be a difficult time for a 0:16:16.680 --> 0:16:20.240 lot of these names. And across the board. I don't 0:16:20.240 --> 0:16:24.040 know anybody that's not gonna that's going to do well. Frankly, 0:16:24.240 --> 0:16:27.440 even even the mighty Chipotle is going to struggle into 0:16:27.440 --> 0:16:28.080 the first quarter. 0:16:28.680 --> 0:16:31.280 Yeah, well, we know they've raised prices a lot over 0:16:31.280 --> 0:16:34.560 the last you know, three years, but yeah, yeah, this 0:16:34.640 --> 0:16:38.600 inflation thing is interesting. Man. So I'm a fan of 0:16:38.880 --> 0:16:41.480 Jim Rodgers and his book Cut Hot Commodities. I don't 0:16:41.480 --> 0:16:42.480 know if you've ever read it. 0:16:42.680 --> 0:16:43.320 No, I have not. 0:16:44.080 --> 0:16:47.080 You have to, you have to. He talks about the 0:16:47.120 --> 0:16:50.920 history of commodity cycles and on average they last seventeen years, 0:16:50.960 --> 0:16:53.680 and he goes into all the details of why they last. 0:16:53.720 --> 0:16:57.040 And it's just such a great, clearly written book. And 0:16:57.800 --> 0:17:00.960 you know, throughout history, you know, we've seen it repeat 0:17:00.960 --> 0:17:05.119 over and over, and the last cycle was shortened. I 0:17:05.119 --> 0:17:07.520 don't know why. Maybe I haven't he hasn't written a 0:17:07.600 --> 0:17:10.080 follow up book to it. Maybe because of you know, 0:17:10.160 --> 0:17:15.680 technological advances in drilling and fracking and all these different things. 0:17:16.040 --> 0:17:20.800 But if he's right, you know, about these cycles, and 0:17:21.080 --> 0:17:25.280 if we're at the beginning of another commodity cycle, which 0:17:25.320 --> 0:17:29.679 could last anywhere from ten to twenty years, you know, 0:17:30.080 --> 0:17:34.240 that could be troublesome for restaurants. I mean, the industry 0:17:34.240 --> 0:17:38.240 has definitely benefited from very modest inflation for a very 0:17:38.280 --> 0:17:41.119 long time. So that's always something I just kind of 0:17:41.200 --> 0:17:42.760 keep in the back of my head. But you should 0:17:42.800 --> 0:17:44.359 check that book out. I think you'd really like it. 0:17:46.240 --> 0:17:49.080 I will, okay, So, based on all the things that 0:17:49.119 --> 0:17:51.919 you mentioned, all the difficulties, and you know, you know me, 0:17:52.000 --> 0:17:55.840 i'mbarished with you. I couldn't agree more. Who do you 0:17:55.880 --> 0:17:57.400 think is going to win? And who do you think 0:17:57.480 --> 0:17:59.760 is going to lose in this environment that we're entering. 0:18:00.119 --> 0:18:02.159 Yeah, so I just add one more thing to what 0:18:02.200 --> 0:18:06.400 you were saying before. You know, it's surprising to see 0:18:06.520 --> 0:18:10.280 in the second quarter the number of companies that missed 0:18:10.520 --> 0:18:16.359 revenue estimates. Right, So they missed revenue but beat earnings, yep. Right. So, 0:18:17.119 --> 0:18:20.760 but when you're running six, seven, eight, nine, ten, whatever price, 0:18:21.080 --> 0:18:24.960 it's easy because that flows through at ninety nine percent 0:18:25.119 --> 0:18:28.520 gross margin. Right, you can beat earnings, but sales are slowing. 0:18:28.800 --> 0:18:31.960 That's going to get worse into the second quarter, right, Yet, 0:18:32.840 --> 0:18:36.840 roll off prices are rolling off, you know, and traffic 0:18:36.920 --> 0:18:40.920 is slowing, and the and the sell side analysts don't 0:18:41.359 --> 0:18:44.200 it's not real time like they'll wait to hear from 0:18:44.280 --> 0:18:47.240 the management team to lower their estimates or raisor estimates 0:18:47.320 --> 0:18:50.080 or whatever it may be. So I was surprised to 0:18:50.119 --> 0:18:54.520 see the number of even Chipotle missed revenue estimates for 0:18:54.680 --> 0:18:57.280 the second quarter, right, And that's only going to get 0:18:57.320 --> 0:19:01.720 worse because we're still seeing sales slowing, right and and 0:19:01.880 --> 0:19:06.280 as estimates are not coming down. So it's just one 0:19:06.320 --> 0:19:08.159 of those things that I just wanted to add to 0:19:08.200 --> 0:19:11.119 that because I was just thinking about the issues that 0:19:11.160 --> 0:19:13.440 we're going to be facing into the third and fourth quarter, 0:19:13.520 --> 0:19:15.840 and certainly into the third quarter because sales continues. So 0:19:16.359 --> 0:19:18.000 now you can ask that question again. 0:19:19.840 --> 0:19:21.440 Who's going to win and who's winners? 0:19:21.920 --> 0:19:26.680 Yeah, so we're pretty pretty bearish. We don't have many 0:19:27.359 --> 0:19:28.440 winners right now. 0:19:29.600 --> 0:19:31.560 Well, everything's gone straight up for six months. 0:19:31.640 --> 0:19:36.280 Yeah, we do, like we do like Dominoes. Frankly, young 0:19:36.720 --> 0:19:41.680 young Dominoes in the big franchise companies are pretty much, 0:19:42.680 --> 0:19:44.879 you know, sort of the top of the list. I 0:19:44.880 --> 0:19:48.760 guess you could say, but let me just check who 0:19:48.800 --> 0:19:52.600 else do I have here? So we've got restaurant I'm 0:19:52.600 --> 0:19:56.520 a big fan of what's going on at restaurant brands, Dominoes, uh, 0:19:56.720 --> 0:20:01.040 you and then and then we're there's a couple of 0:20:01.119 --> 0:20:04.959 names that we want to buy into the downturn, uh, 0:20:05.119 --> 0:20:07.080 that we're going to see coming into the fourth quarter, 0:20:07.280 --> 0:20:10.280 like Darden. Taste has been on the long list for 0:20:10.359 --> 0:20:13.720 us as well. First Watch. I think First Watch is 0:20:13.760 --> 0:20:17.399 a really cool little company. Frankly, it's a you know, 0:20:17.480 --> 0:20:19.520 a breakfast, brunch and lunch concept. 0:20:19.880 --> 0:20:21.399 But those are one shift model. 0:20:21.880 --> 0:20:24.600 Yeah, I love it, but those are the ones that 0:20:24.720 --> 0:20:27.040 sort of stick out to me as as the winners, 0:20:28.080 --> 0:20:32.120 and I actually have a brinker as along as well. 0:20:32.160 --> 0:20:34.679 I think there's some interesting things that are going on there, 0:20:34.760 --> 0:20:38.720 but you know that's a longer tail turnaround. Mm hmm. 0:20:40.040 --> 0:20:42.320 All right, cool, so let's go, I guess for the 0:20:42.359 --> 0:20:46.080 Winter Winners. Yeah, you know, I think we're on the 0:20:46.119 --> 0:20:48.720 side seams side on most of these. Russell Wiener I'm 0:20:48.720 --> 0:20:51.600 a fan of, and I'm a fan of his former mentor, 0:20:51.680 --> 0:20:55.879 Patrick Doyle. I think restaurant bands is I think it 0:20:56.000 --> 0:20:58.320 sounds like he's changing the culture over there and changing 0:20:58.359 --> 0:21:00.760 the focus and and and kind of got management focused 0:21:00.800 --> 0:21:06.840 on the right things. So yeah, it's interesting. What are 0:21:06.880 --> 0:21:11.280 your thoughts on on the turnaround at restaurant brands and 0:21:11.280 --> 0:21:13.560 what they're doing at BK and Popeyes right now? 0:21:13.840 --> 0:21:20.360 Yeah, so I think it's it's the focus on what matters, 0:21:20.760 --> 0:21:27.120 right and well, frankly three G destroyed the business, right, 0:21:27.520 --> 0:21:30.080 so it was you know, like craft Tiants and a 0:21:30.119 --> 0:21:33.359 couple of the other buglisers, Craft Tients and restaurant brands 0:21:33.359 --> 0:21:35.679 are the three sort of three G companies that have 0:21:35.800 --> 0:21:40.320 been destroyed by their you know, way of running their businesses. 0:21:40.320 --> 0:21:41.920 So with an iron fist, with. 0:21:41.960 --> 0:21:45.639 An iron fist right, And they didn't care about franchise 0:21:45.680 --> 0:21:49.639 profitability right. All they cared about was you know, sitting 0:21:49.720 --> 0:21:52.720 on you making sure you know, the people at Burger 0:21:52.760 --> 0:21:55.280 King were sitting on pickle buckets in Miami because they 0:21:55.320 --> 0:21:58.479 just cut G and A to the you know, to 0:21:58.520 --> 0:22:03.720 the bottom. So read undoing what was what was done 0:22:04.040 --> 0:22:07.040 in the last you know, ten years is important and 0:22:07.200 --> 0:22:10.360 you know, Patrick Doyle coming in and focusing on franchise 0:22:10.400 --> 0:22:15.280 profitability will be you know why that stock wins. And 0:22:15.640 --> 0:22:19.159 that can happen a couple of ways. Most importantly, sales 0:22:19.200 --> 0:22:24.600 go up. But before that happens, you're seeing them force 0:22:25.000 --> 0:22:28.639 franchise's out of the system. I don't know, that's maybe 0:22:28.680 --> 0:22:30.920 not a good way to put it, but the reality 0:22:30.960 --> 0:22:33.080 of the matter is when you look at you know, 0:22:33.200 --> 0:22:37.920 McDonald's or Wendy's or Young you know, Taco Bell, KFC, 0:22:38.040 --> 0:22:41.159 Pizza Hunt, any one of these big brands that have 0:22:41.320 --> 0:22:45.240 been successful in the turnaround, it's all because they have 0:22:45.640 --> 0:22:50.240 fixed the franchise system right, and they take the old franchisees, 0:22:50.640 --> 0:22:53.680 they force them out. You know, whether it's a generational 0:22:53.720 --> 0:22:57.800 thing or you know, a forced sale or closures or however, 0:22:57.880 --> 0:23:00.680