WEBVTT - Weighing Wall Street's Appetite for Restaurant Stocks 0:00:00.080 --> 0:00:02.840 Welcome to Chopping It Up. I'm your host, Michael Halen, 0:00:02.960 --> 0:00:06.559 the senior restaurant and food service analyst here at Boomberg Intelligence. 0:00:06.760 --> 0:00:11.800 This is our Inaorball podcast. I'm happy to introduce my guests. 0:00:11.880 --> 0:00:16.560 He's a fellow Jersey boy, a fellow Georgetown hoya, Gregory Frankfurt. 0:00:16.600 --> 0:00:21.280 He's the senior restaurant analyst for Guggenheim. It's up, Greg. Yeah, Mike, 0:00:21.320 --> 0:00:25.919 thanks for having me on Andy's accident. You got it, man, 0:00:26.280 --> 0:00:29.440 And unfortunately for our guests is audio only because Greg 0:00:29.520 --> 0:00:34.160 is rocking meme mustache right now. Uh. He absolutely looked fantastic. 0:00:34.200 --> 0:00:37.640 He thought it was a video webcast, so my apologies, 0:00:38.280 --> 0:00:42.600 uh to you. Greg. Alright, alright, I was I need 0:00:42.600 --> 0:00:45.240 to keep some facial hair for my uh for my girlfriend. 0:00:45.240 --> 0:00:46.519 I don't think she's ever seen me with a clean 0:00:46.560 --> 0:00:48.839 shaven face, so that's that's why we kept it on. 0:00:49.760 --> 0:00:52.320 It looks good, Man, looks great, all right, man, So 0:00:52.400 --> 0:00:54.320 let's let's get into it. I want to pick your 0:00:54.320 --> 0:00:57.200 brain on some things. Um. You know, Greg does a 0:00:57.280 --> 0:01:00.000 great job over there at Guggenheim, and our respect is works. 0:01:00.000 --> 0:01:01.760 So I'm excited that I could have him on here. 0:01:01.800 --> 0:01:04.760 First so uh FED chair Powell claims that the U 0:01:04.840 --> 0:01:07.920 S consumers in a good place, right, But you know, 0:01:08.000 --> 0:01:10.400 as you and I know McDonald's and Wendy said, low 0:01:10.400 --> 0:01:13.880 income consumers were pulling back in one queue. Uh so, 0:01:14.000 --> 0:01:17.759 what's your data telling you about second quarter restaurant performance? Yeah, 0:01:17.760 --> 0:01:21.200 it's interesting. I mean, we're we're at an absolute time 0:01:21.520 --> 0:01:25.319 of uncertainty. UM. I've been speaking with a lot of 0:01:25.959 --> 0:01:28.160 public and private restaurants for the the last couple of weeks, 0:01:28.920 --> 0:01:32.320 and I think if you would have asked UM any 0:01:32.319 --> 0:01:35.200 of these restaurants three or four weeks ago, how is 0:01:35.240 --> 0:01:38.720 the consumer holding up, they would have said, Everything's fine, 0:01:38.760 --> 0:01:41.360 It's totally fine. Consumers really strong. I mean you look, 0:01:41.440 --> 0:01:46.080 you look back at uh nasstrack numbers for UM for May, 0:01:46.200 --> 0:01:49.200 we were still running an up six. UM in April 0:01:49.240 --> 0:01:50.960 that was that was an up seven. So I mean 0:01:51.120 --> 0:01:54.320 those results are are are very healthy, and that's usually 0:01:54.360 --> 0:01:59.000 the middle and higher income guests UM. And then on 0:01:59.040 --> 0:02:01.680 the quick service you've seen you saw pretty good results 0:02:01.680 --> 0:02:03.200 in one Q. I think I think some of the 0:02:03.960 --> 0:02:06.840 UM companies have said very slightly at the margin, you've 0:02:06.840 --> 0:02:09.720 seen a little bit of degradation UM in the lower 0:02:09.720 --> 0:02:13.320 and consumer and customer. What I've heard the last couple 0:02:13.360 --> 0:02:17.240 of weeks is a little bit of office um. But 0:02:17.320 --> 0:02:21.160 it but it's hard because as anyone who's who's looked 0:02:21.160 --> 0:02:24.359 at daily or weekly data points before, there's so much 0:02:24.400 --> 0:02:27.760 noise and and so a week or two doesn't make 0:02:27.800 --> 0:02:29.680 a trend. But I think with so much scrutiny on 0:02:29.680 --> 0:02:33.640 the consumer right now, a lot of companies and investors 0:02:33.639 --> 0:02:37.040 may be trying to extrapolate the trend and so um, 0:02:37.400 --> 0:02:39.440 it's really hard to tell. I thought that consumer has 0:02:39.440 --> 0:02:41.520 been in a really good spot. I mean, you've looked 0:02:41.520 --> 0:02:44.080 at how much people have saved and and and checking 0:02:44.080 --> 0:02:49.799 account balances, um. And they basically tripled uh, checking account 0:02:49.800 --> 0:02:53.320 balances in the US during the pandemic. UM people you know, 0:02:53.600 --> 0:02:56.799 took down revolving credit card balances. That has come back 0:02:56.840 --> 0:03:00.240 to where it was two years ago. Um. But you 0:03:00.240 --> 0:03:02.560 could probably have another four or five six months of 0:03:02.639 --> 0:03:07.320 runway on that. UM. And so I think I think 0:03:07.360 --> 0:03:11.079 things are okay, um, but there are slight slight cracks 0:03:11.080 --> 0:03:13.400 at the edges, which which is understandable given how much 0:03:13.400 --> 0:03:16.760 inflations out there. Yeah, and so what uh you know 0:03:16.840 --> 0:03:19.800 with some of those companies that you've spoken to some 0:03:19.880 --> 0:03:22.640 of these management teams, you know, what are some of 0:03:22.680 --> 0:03:27.120 their concerns around the consumer? Is it inflation? Is it 0:03:27.520 --> 0:03:30.000 you know, lapping stimulus from last year. Is it? Is 0:03:30.040 --> 0:03:32.480 it the wealth effect from the implosion we've seen in 0:03:32.760 --> 0:03:35.720 crypto and and the stock market declines that we've seen. 0:03:37.600 --> 0:03:40.200 I think all of the above. I mean, there's UM 0:03:40.280 --> 0:03:42.920 the other one that has not gotten talked about. But 0:03:42.960 --> 0:03:46.680 I was speaking with an executive today about is UM 0:03:46.720 --> 0:03:49.360 maybe code COVID has researched a little bit. Maybe that's 0:03:49.400 --> 0:03:52.200 having a you know, fifty basis points semifive basis point 0:03:52.200 --> 0:03:55.280 impact on trends And if there's so, I I bring 0:03:55.320 --> 0:03:59.000 that up because UM, there's just so many different cross 0:03:59.000 --> 0:04:00.880 currents on the consumer now. I think it's hard to 0:04:01.840 --> 0:04:04.440 hard to parse it out. UM, but inflation has to 0:04:04.440 --> 0:04:07.920 be a part of it. And UH. One thing I 0:04:07.960 --> 0:04:12.160 was looking at recently is if you look at UM 0:04:12.240 --> 0:04:15.760 the consumer. UH. There's a consumer expenditure survey put out 0:04:15.760 --> 0:04:20.080 by the Bureau of Labor Statistics, and it shows, UM 0:04:20.160 --> 0:04:23.479 the amount of money that is basically being spent by 0:04:24.240 --> 0:04:26.280 pulling the numbers up right here, but the amount of 0:04:26.279 --> 0:04:29.159 money that's being spent by the lowest death sile of 0:04:29.279 --> 0:04:34.000 consumer incomes on grocery and restaurants and gas the portion 0:04:34.000 --> 0:04:38.760 of their total spending UM. The lowest death sile spends 0:04:39.560 --> 0:04:44.520 UH three of their expenditures on gasoline. The highest death 0:04:44.520 --> 0:04:48.600 sile spends two point two. So gas is and you're 0:04:48.600 --> 0:04:52.839 spending one point six of your of your expenditures on gasoline. 0:04:53.640 --> 0:04:56.320 There's there's eight basis points of higher CPI for the 0:04:56.360 --> 0:04:58.880 lowest and con consumer. Same thing with food at home, 0:04:58.920 --> 0:05:02.360 but to a lesser extent. About ten of their expenses 0:05:02.360 --> 0:05:05.960 are on groceries UM. For the highest it's about five percent, 0:05:06.440 --> 0:05:08.760 and that's up twelve percent. So you just you just 0:05:08.800 --> 0:05:10.960 get you know, a few different lines. I guess the 0:05:11.160 --> 0:05:13.279 point I'm trying to make is the stuff that is 0:05:13.320 --> 0:05:17.480 inflating the most shelter shelters UM. Actually in the CPI 0:05:17.560 --> 0:05:19.560 only have five and a half percent, but UM, I 0:05:19.640 --> 0:05:21.400 think anyone who's gone out there and tried to rent 0:05:21.440 --> 0:05:26.160 the home recently knows UM that it's the rest are 0:05:26.279 --> 0:05:29.279 not of five and a half percent UM. That's usually 0:05:29.320 --> 0:05:33.760 twenty of the lowest incomes expenditure and eight percent for 0:05:33.800 --> 0:05:36.159 the highest income. And so there's just all these things 0:05:36.160 --> 0:05:39.800 that are pressuring the CPI inflation the most hit the 0:05:39.839 --> 0:05:44.479 lowest income consumer the most aggressively. Yeah, and it's uh, 0:05:44.520 --> 0:05:47.720 you know, my mentor in the stock business taught me that, 0:05:47.880 --> 0:05:50.520 you know, you think like the other guy. And and 0:05:50.720 --> 0:05:54.160 part of that included, you know, thinking like middle income 0:05:54.279 --> 0:05:57.320 consumers of lower income consumers. People in middle America don't 0:05:57.360 --> 0:06:00.320 live like your I uh Greg, you know Bleo on 0:06:00.320 --> 0:06:03.719 the coast lived lived very different, right, and so um, 0:06:03.760 --> 0:06:06.720 fifty dollars out of your budget because of increased gasoline 0:06:06.720 --> 0:06:09.800 prices is fifty last dollars you're going to spend at 0:06:09.839 --> 0:06:13.440 a restaurant or or discretionary wise. So um, you know 0:06:13.800 --> 0:06:16.200 that's why we've seen kind of you know, heard commentary 0:06:16.240 --> 0:06:18.320 from McDonald's went and he's basically saying that, you know, 0:06:18.520 --> 0:06:23.560 lower and consumers are starting to trade down, and um, um, 0:06:23.600 --> 0:06:25.800 you know I'm just being foolish. I guess what they're 0:06:25.800 --> 0:06:29.400 spending than they have, right. I remember when boj Angles 0:06:29.400 --> 0:06:32.360 went public, we were talking to them and and just 0:06:32.480 --> 0:06:35.920 the uh they said they could see it in their 0:06:36.240 --> 0:06:39.240 daily comps. They could see when people got paid every month, 0:06:39.279 --> 0:06:43.040 and so um, a lot of Americans live paycheck to 0:06:43.080 --> 0:06:46.760 paycheck thankfully. Uh, you know, I don't think you or 0:06:46.800 --> 0:06:50.920 I do. Um. And and so it's it's something as 0:06:50.960 --> 0:06:53.880 difficult as a restaurant analyst to truly get in the 0:06:53.920 --> 0:06:56.160 minds of of everywhere in this country who who is 0:06:56.200 --> 0:06:58.279 in that situation? Um, but that's how a lot of 0:06:58.279 --> 0:07:01.920 people have to live. Yeah, yeah for sure. All right, 0:07:01.960 --> 0:07:03.520 So now I'm gonna give some props. Don't get a 0:07:03.520 --> 0:07:06.000 big head on me. But you know, in November we 0:07:06.000 --> 0:07:10.720 were restracting our heads about two margin assumptions. Right to 0:07:10.800 --> 0:07:14.640 your credit estimates have come way down. But are they 0:07:14.680 --> 0:07:19.920 low enough? Uh No, they're not. Um. And this is 0:07:19.920 --> 0:07:21.480 where it gets into a little bit of a tricky 0:07:21.520 --> 0:07:26.960 situation because um, how stops trade. And I've tried to 0:07:27.040 --> 0:07:29.840 kind of try to emphasis emphasize this to people, is 0:07:30.520 --> 0:07:32.400 there's two ways to have a stock out perform. You 0:07:32.440 --> 0:07:36.880 either need to have a belief that the earnings of 0:07:36.920 --> 0:07:39.920 the company will be higher than the market things, or 0:07:39.920 --> 0:07:41.840 that the multiple of the company will be higher than 0:07:41.840 --> 0:07:43.720 the market things. So it's I've always thought it's a 0:07:43.760 --> 0:07:46.280 little bit arrogant to have a view that the multiple 0:07:46.360 --> 0:07:48.680 should be higher. And so if you know a lot 0:07:48.760 --> 0:07:50.760 of it comes down to I think numbers will beat 0:07:50.840 --> 0:07:54.560 or miss UM. But right now what's embedded in in 0:07:54.720 --> 0:07:58.960 stock prices is clearly lower than where the sell side is. UM. 0:07:59.360 --> 0:08:01.680 The sell side numbers are always a bit of bit 0:08:01.760 --> 0:08:05.400 slow to move. UM. You know. I was just looking 0:08:05.680 --> 0:08:09.680 h maybe a week ago at earnings revisions so far 0:08:09.800 --> 0:08:15.800 this year, and you know, most companies for EPs revisions 0:08:16.000 --> 0:08:19.640 there's somewhere down between two and which with most of 0:08:19.720 --> 0:08:22.560 being down four or five, six seven percent, which is 0:08:22.560 --> 0:08:24.640 not a huge move if you if you think the 0:08:24.680 --> 0:08:27.440 consumer is gonna get really tight, and especially given how 0:08:27.520 --> 0:08:30.560 much the the cost pressures have moved UM. And a 0:08:30.600 --> 0:08:33.160 lot of the stocks again this was this was a 0:08:33.200 --> 0:08:35.520 week or two ago. But we're down you know, fifteen 0:08:35.559 --> 0:08:38.240 to thirty five percent, and so stocks have gotten cheaper, 0:08:38.280 --> 0:08:41.760 restaurants stocks have gotten cheaper. UM. But I think very 0:08:41.800 --> 0:08:45.120 clearly street numbers are generally too high UM. And I 0:08:45.160 --> 0:08:47.960 think where investors are leaning in right now is where 0:08:48.000 --> 0:08:51.760 they have confidence that the numbers will be relatively close 0:08:51.800 --> 0:08:55.600 to where consensus numbers are. UM. And you've you've clearly 0:08:55.600 --> 0:08:59.560 seen that and how the stocks have traded, Yeah, for sure. 0:09:00.040 --> 0:09:04.480 Degree And uh, you're comment about multiple is a great one, right, 0:09:04.520 --> 0:09:08.800 and I think it explains why in this sector of 0:09:08.880 --> 0:09:11.560 the stock market, long short investors tend to do so 0:09:11.679 --> 0:09:14.160 much better than long only, right, Like it can be 0:09:14.320 --> 0:09:18.320 arrogant to to claim that a stock or or some 0:09:18.480 --> 0:09:20.959 names in the sector deserve a higher multiple. I think 0:09:20.960 --> 0:09:23.960 it's a lot easier case to say X y Z 0:09:24.120 --> 0:09:28.360 company should have a superior multiple to ABC for all 0:09:28.520 --> 0:09:35.240 these reasons. Right, Yeah, completely completely, And I'd love I'd 0:09:35.240 --> 0:09:37.200 love to talk to some of the some how much 0:09:37.240 --> 0:09:40.400 things have changed on the expense side from the beginning 0:09:40.440 --> 0:09:43.720 of this year, Because when companies were guiding and you know, 0:09:43.920 --> 0:09:47.120 even on fourth Courter earnings call an end of January 0:09:47.120 --> 0:09:50.640 early February, a lot of companies were saying, look, the 0:09:50.760 --> 0:09:54.400 labor situations tight. We're maybe paying seven eight nine percent 0:09:54.400 --> 0:09:58.760 wage inflation year every year this year, expecting that this year, um, 0:09:58.800 --> 0:10:01.240 but the commodity situation, shion has gone a little bit worse. 0:10:01.280 --> 0:10:04.600 For expecting five or six percent commodity inflation. Now those 0:10:04.640 --> 0:10:08.480 numbers are thirteen to sevent on the commodity side, ten 0:10:08.559 --> 0:10:11.280 to twelve percent of food side. And if you're a restaurant, 0:10:11.600 --> 0:10:14.440 you just can't really price that through as the margins 0:10:14.440 --> 0:10:19.040 have been down. Yeah, and actually uh yeah, I mean 0:10:19.320 --> 0:10:24.160 we've seen unprecedented you know, a menu pricing. Um, you know, 0:10:24.320 --> 0:10:27.920 and and last time we saw this into a recession, 0:10:27.960 --> 0:10:30.280 you know, during the Great Financial Crisis, it was the 0:10:30.280 --> 0:10:33.000 pizza makers, right, it was Dominos and Papa John's raised 0:10:33.000 --> 0:10:36.240 their prices aggressively into a recession. And even though pizza 0:10:36.320 --> 0:10:40.000 remains one of the cheapest ways to feed a family, uh, 0:10:40.040 --> 0:10:45.400 it really hurt transactions for for both of those chains. Right. So, um, 0:10:45.440 --> 0:10:47.760 I guess can you talk a little bit about pricing 0:10:47.880 --> 0:10:52.079 and and who's being more conservative, uh, you know in 0:10:52.200 --> 0:10:54.680 your covered universe, and then also maybe a little bit 0:10:54.679 --> 0:10:59.040 about who you think can of performed during the recession. Yeah, 0:10:59.280 --> 0:11:01.920 for sure. And um, the one point I'd make on 0:11:01.960 --> 0:11:06.440 pricing it it's very difficult right now. If your Chilis 0:11:06.559 --> 0:11:09.319 or Applebee's are all going, I'm just using those examples, 0:11:09.800 --> 0:11:12.480 figure out how much your guest is paying. It's pretty easy. 0:11:12.800 --> 0:11:15.200 Four customers coming to the restaurant, and you take the 0:11:15.200 --> 0:11:17.040 amount they paid and divided by four and that's your 0:11:17.040 --> 0:11:20.200 average check. But if you're McDonald's or Taco Bell or 0:11:20.240 --> 0:11:23.480 Wendy's and you have a car come through the drive through, 0:11:24.200 --> 0:11:26.720 you don't know if that's one person or two two people, 0:11:26.840 --> 0:11:29.400 or you know someone's taking home defeat effinitively at six 0:11:29.920 --> 0:11:32.319 and so trying to part out average checks, particularly for 0:11:32.400 --> 0:11:35.080 quick service right now is very difficult. But UM, in 0:11:35.200 --> 0:11:38.360 terms of base level menu pricing, in the fourth quarter, 0:11:38.400 --> 0:11:42.880 as you exited the year, most companies were taking four 0:11:42.960 --> 0:11:45.680 or five six percent pricing, and I think McDonald's was 0:11:45.840 --> 0:11:50.000 probably the quickest UM to get high pricing. I guess 0:11:50.520 --> 0:11:53.440 Chippola would be another example, but McDonald's and Chippole were 0:11:53.440 --> 0:11:57.439 probably the two. They were most aggressive quickly about getting 0:11:57.480 --> 0:12:00.360 pricing into the business. And you saw that margin in 0:12:00.400 --> 0:12:03.080 the first quarter where McDonald and again I know some 0:12:03.160 --> 0:12:06.839 of it depends on traffic, but UM, McDonald's margin and 0:12:06.960 --> 0:12:09.319 were down four or five where a lot of their 0:12:09.320 --> 0:12:13.800 competitors were down six seven eight percent UM because their 0:12:13.840 --> 0:12:16.600 pricing was you know, by six seven and it was 0:12:16.679 --> 0:12:18.840 a couple of points below McDonald's. I think you get 0:12:18.840 --> 0:12:21.000 through the rest of this year, you're gonna see eight 0:12:21.040 --> 0:12:23.400 to ten percent pricing across the board you over year 0:12:23.480 --> 0:12:26.680 for most of these companies. UM. Chipotle has obviously been 0:12:26.760 --> 0:12:30.960 higher with with around thirteen um. And generally what I've 0:12:31.000 --> 0:12:34.920 heard is very little, uh consumer pushback and these times 0:12:35.000 --> 0:12:36.880 have to take more pricing, they have to because of 0:12:36.920 --> 0:12:40.000 the cost pressure. Yeah, and you know the franchisees are 0:12:40.120 --> 0:12:42.360 are are going to do it, you know, until they 0:12:42.360 --> 0:12:46.160 start to start really feeling that pushback. Um. You know. 0:12:46.440 --> 0:12:48.880 It was interesting though on the first quarter calls, Man, 0:12:49.000 --> 0:12:51.880 I feel like the Equity Capital Markets guys were in 0:12:51.920 --> 0:12:54.199 the ears of all of these CEOs because they're all 0:12:54.240 --> 0:12:56.959 pointing out how you know, there's a couple hundred basis 0:12:56.960 --> 0:13:01.640 points difference between food at home and food food at 0:13:01.640 --> 0:13:04.000 home versus food away from home and right, and they're saying, well, 0:13:04.040 --> 0:13:07.280 food at home is inflation is worse, So that's good 0:13:07.280 --> 0:13:11.400 for us, and and I get it, but not really 0:13:11.440 --> 0:13:13.800 because it's still cheaper to buy the food at the 0:13:13.800 --> 0:13:18.440 grocery store and cook yourself anyway, slice it right. Yeah. Yeah, 0:13:18.440 --> 0:13:21.440 I've always thought of it's it's a great question, and 0:13:21.480 --> 0:13:25.960 I've always thought of what what restaurants really provide is 0:13:26.040 --> 0:13:30.800 they provide people. Um, let's say you're arrestaurant. You're gonna 0:13:30.800 --> 0:13:33.920 have a hundred customers come through your restaurant, Uh, and 0:13:34.040 --> 0:13:36.640 give an evening. I'm just making up the number. Um, 0:13:36.640 --> 0:13:39.240 those customers could all go home and spend an hour cooking, 0:13:40.280 --> 0:13:45.199 or you could have you know, six seven cooks in 0:13:45.240 --> 0:13:47.040 the back of the kitchen spent two hours cooking. And 0:13:47.040 --> 0:13:50.840 so it's a huge labor savings tool in the United 0:13:50.840 --> 0:13:54.440 States is the restaurant industry. That's kind of the value 0:13:54.440 --> 0:13:58.679 prop that that we provide a we centralized, pretty individualized cooking. 0:13:58.720 --> 0:14:01.560 We've we've had huge labor eavings over the last really 0:14:01.600 --> 0:14:06.280 seventy five years from the rise of restaurants. UM. But um, 0:14:06.360 --> 0:14:08.319 one of the things that you've seen is you've seen 0:14:09.200 --> 0:14:15.040 more faster wage growth at the lower income UH worker, 0:14:15.720 --> 0:14:19.240 and that's usually the restaurant worker. And so the challenge 0:14:19.240 --> 0:14:21.080 for restaurants right now, I think, more so even than 0:14:21.120 --> 0:14:25.000 the commodity standpoint, is the fact that broad wages drive 0:14:25.120 --> 0:14:29.120 your revenue and lower income wages drive your expenses, and 0:14:29.160 --> 0:14:31.400 lower income wages are rising faster and so there's largin 0:14:31.440 --> 0:14:35.040 compression and it's actually a bad thing for the economy 0:14:35.120 --> 0:14:37.360 and the population. But it is a challenge for restaurants 0:14:37.440 --> 0:14:40.520 right now in the margin front, for sure. All Right, 0:14:40.560 --> 0:14:42.640 So who's your what's your favorite name right now and 0:14:42.680 --> 0:14:48.320 why I'm continuing to lean into McDonald and Yum. And 0:14:48.640 --> 0:14:51.320 this goes back to my common earlier of where do 0:14:51.520 --> 0:15:01.440 I see pretty high visibility into hitting consensus earnings numbers UM? 0:15:01.560 --> 0:15:06.000 And you look this year, McDonald's EPs is down two 0:15:06.800 --> 0:15:10.880 You'll remember that obviously given the Russia situation, that that 0:15:10.920 --> 0:15:13.440 would make up the majority of that change is just 0:15:13.440 --> 0:15:16.600 just losing that UM. Yama is down two percent as well. 0:15:17.000 --> 0:15:20.480 It's some more situation with Russia. So really numbers have 0:15:20.560 --> 0:15:23.440 not moved a whole bunch, but you have UM some 0:15:23.560 --> 0:15:27.400 of the full service names UM where numbers are you know, 0:15:27.440 --> 0:15:30.160 down ten fifteen percent and may and may still move lower. 0:15:30.200 --> 0:15:33.520 There's a lot more uncertainty when you're in the business 0:15:33.560 --> 0:15:37.240 of collecting revenue and paying out food and paying out labor. 0:15:37.240 --> 0:15:40.520 With a company operated model, UM, there's just more risk 0:15:40.560 --> 0:15:43.760 to numbers right now versus the franchise model, which is 0:15:44.000 --> 0:15:48.040 generally more UM what McDonald's or Yum or Jack or 0:15:48.040 --> 0:15:51.960 Wendy's are are employing UM, which your earnings are a 0:15:52.000 --> 0:15:55.080 little more insulated. I think it's worth getting into the 0:15:55.120 --> 0:15:59.240 franchise ease as well, because if your franchise, or you're 0:15:59.240 --> 0:16:02.320 not completely insulated to cost pressures your franchise ease. If 0:16:02.320 --> 0:16:06.240 they're feeling it um at the end, that will that 0:16:06.240 --> 0:16:08.600 will cause slower unit growth at some point down the line. 0:16:09.080 --> 0:16:14.080 And the biggest risk I think too McDonald's, Yum, Wendy's, 0:16:14.120 --> 0:16:18.720 Jack in the Box two us are dominoes is if 0:16:18.760 --> 0:16:21.480 you're franchise in two thousand twenty one, when margins were 0:16:21.480 --> 0:16:24.800 a three basis points, if they kept leveraging six times 0:16:24.800 --> 0:16:26.520 and put on a whole bunch of debt and there 0:16:26.560 --> 0:16:29.040 were a lot of franchise e to frenchy transactions at 0:16:29.040 --> 0:16:31.360 that point in time. Banks have been lending it a 0:16:31.360 --> 0:16:34.360 little more aggressively into the limited service side to The 0:16:34.440 --> 0:16:37.200 concern I would have is that you may have some 0:16:37.280 --> 0:16:39.600 challenges in the bank, on the bank lending side to 0:16:40.320 --> 0:16:42.960 franchise ease in this space. That's that's the that's the 0:16:43.000 --> 0:16:46.000 spot to watch. Yeah, yeah, i'd agree. You know, on 0:16:46.000 --> 0:16:48.720 Wall Street loves their unit growth, man, that's for sure, 0:16:49.320 --> 0:16:52.160 you know. And I'd add to something to that too, man, 0:16:52.280 --> 0:16:56.880 I think scale matters right. Like McDonald's can put items 0:16:56.920 --> 0:16:59.760 on their value menu for a dollar or three dollars 0:16:59.800 --> 0:17:01.920 that you know, Jack in the box and when they's 0:17:01.960 --> 0:17:05.760 just just can't match right, well, then McDonald's has done 0:17:05.800 --> 0:17:07.600 a great job. I mean, obviously they got a little 0:17:07.640 --> 0:17:11.400 bit um tripped up if you go back to kind 0:17:11.400 --> 0:17:16.200 of two thousand twelve to sort of fifteen range Thompson 0:17:16.240 --> 0:17:20.680 and US what negative um And then they and then 0:17:20.720 --> 0:17:23.320 obviously with the lunch ball, they breakfast starts start to 0:17:23.359 --> 0:17:26.040 turn around this business. They if you drive around the 0:17:26.160 --> 0:17:29.320 US and you go look at the assets that McDonald's 0:17:29.320 --> 0:17:30.919 has put in the ground the last three or four 0:17:31.000 --> 0:17:33.439 or five years of experience of the future and compare 0:17:33.440 --> 0:17:37.040 it to some of the other brands. Um, their stores 0:17:37.040 --> 0:17:39.960 look better and and it's just a more enjoyable experience 0:17:39.960 --> 0:17:42.840 of the sales volumes are three million dollars. A lot 0:17:42.880 --> 0:17:46.520 of their peers are um one eight to two million dollars, 0:17:46.600 --> 0:17:50.320 and so the franchise ese are making a hundred and 0:17:50.320 --> 0:17:53.320 fifty two hundred thousand dollars a year more in cash 0:17:53.359 --> 0:17:55.920 flow from some of their peers. That's a great position 0:17:55.960 --> 0:17:58.239 to be in when your prices are are even more 0:17:58.280 --> 0:18:01.439 reasonable than your peers. That's a great point. Yeah, management 0:18:01.480 --> 0:18:05.760 Guns management has done a hell of a job over there. UM. Yeah, 0:18:05.760 --> 0:18:07.679 I guess let's talk about Jack in the Box a 0:18:07.680 --> 0:18:09.480 little bit. Man. It's a name we've talked about a 0:18:09.520 --> 0:18:12.919 little bit, you know. It's There's a lot of things 0:18:12.960 --> 0:18:15.399 going on right now. Right. I think it's kind of 0:18:15.400 --> 0:18:18.440 a story. I think it's a story where a lot 0:18:18.480 --> 0:18:21.240 of people lost money on it in the past or 0:18:21.359 --> 0:18:24.240 underperformed to being invested in the past. So I think 0:18:24.280 --> 0:18:27.520 it's it may be a hard sell, UM, but there's 0:18:27.520 --> 0:18:30.600 definitely some things that are interesting going on right the acquisition, 0:18:30.640 --> 0:18:32.399 potential sale at least back. Why don't you talk to 0:18:32.440 --> 0:18:35.320 us a little bit about Jack in the Box. Yeah, 0:18:35.359 --> 0:18:39.120 I know it's it's um, Jack in the Boxes. It's 0:18:39.560 --> 0:18:42.600 it's got a new management team, UM. Darren Harris was 0:18:42.640 --> 0:18:45.720 just came out of the CTO a couple of years ago, UM, 0:18:45.760 --> 0:18:48.200 and he's he's made a few changes. Obviously. They sold 0:18:48.240 --> 0:18:52.040 Cadoba a few years ago to Apollo. UM just recently 0:18:52.119 --> 0:18:54.960 closed on the acquisition of Del Taco. And I think 0:18:55.040 --> 0:18:57.600 some out there go, all right, you're swapping one Mexican 0:18:57.680 --> 0:19:01.840 chain for another Mexican chain. What are a doing? UM? 0:19:01.880 --> 0:19:04.080 But I think they're completely different stories. And I say 0:19:04.119 --> 0:19:08.920 that because UM and not to criticize Cadoba, but Cadoba 0:19:09.160 --> 0:19:13.240 really tried to be a Chipole national competitor. UM. You know, 0:19:13.320 --> 0:19:15.880 they rushed into a lot of markets and generally got 0:19:15.920 --> 0:19:18.760 to a little bit low lesser scale than Chipole and 0:19:18.800 --> 0:19:22.399 say did very stretched UM unit base they were I 0:19:22.400 --> 0:19:24.679 think it was in forty eight states there there um 0:19:25.640 --> 0:19:29.840 uh their portfolio, whereas Dell talk was much more concentrated 0:19:29.880 --> 0:19:33.680 into I think it's thirteen to fifteen states out west UM, 0:19:33.960 --> 0:19:38.679 very similar states toward Jack's unit presences UM. And so 0:19:38.760 --> 0:19:43.639 I actually think the acquisition from that perspective makes some sense. UM. 0:19:43.680 --> 0:19:46.200 I think the criticism that investors have for this is 0:19:46.240 --> 0:19:50.560 an increasing your company operated exposure UM and and that 0:19:50.680 --> 0:19:55.639 just creates more earnings volatility, which is which is fair UM. 0:19:55.760 --> 0:19:58.399 But but but Jack's managing I think has done a 0:19:58.400 --> 0:20:01.800 pretty good job of le into you just set yourself. 0:20:01.800 --> 0:20:04.679 I think two questions ago. Uh. Wall Street loves the 0:20:04.760 --> 0:20:07.600 unit growth. UM. They've been signing up a ton of 0:20:07.640 --> 0:20:10.480 development agreements. UM. The goal is to get to four 0:20:10.520 --> 0:20:13.400 percent unit growth in the next couple of years from 0:20:13.520 --> 0:20:17.720 zero today. I don't think Wall Street expects really any acceleration. 0:20:18.200 --> 0:20:20.840 And so even if they start, you know, getting units 0:20:20.840 --> 0:20:23.000 in the ground and show a path to one and 0:20:23.000 --> 0:20:25.480 a half to two and a half percent unit growth 0:20:25.560 --> 0:20:27.720 sometime in the next two to three years. That would 0:20:27.720 --> 0:20:31.320 be a very very positive sign for the stock. Um. 0:20:31.320 --> 0:20:36.040 It's uh, it's very it's very cheap. Um. Cheap isn't 0:20:36.080 --> 0:20:41.120 necessarily working in this market. Um, but it's I think 0:20:41.200 --> 0:20:44.760 the manager team is doing the right things on trying 0:20:44.800 --> 0:20:48.600 to accelerate store growth. Yeah. And if you know, if 0:20:48.600 --> 0:20:50.600 you think the stock is cheap, they're gonna have they 0:20:50.600 --> 0:20:54.280 should have a lot of cash to you know, between 0:20:54.320 --> 0:20:56.800 the refranchising and the sale least back to buy back 0:20:56.920 --> 0:21:00.600 cheap stock. So as a former equity trader, uh, you 0:21:00.600 --> 0:21:05.840 know that always gets the intendants up, you know. Um. Yes, 0:21:05.920 --> 0:21:07.840 and if they if they think the stocks cheap, I 0:21:07.840 --> 0:21:09.960 think they'll lean into repurchase this to your point, sorry 0:21:09.960 --> 0:21:12.400 I cut you off. No, No, it's all good man. Um. 0:21:13.000 --> 0:21:14.640 So let's get into a couple more of your names 0:21:14.680 --> 0:21:16.760 before we finished up here. What's it gonna take for 0:21:17.040 --> 0:21:22.000 Burger King to turn its US business around? Yeah, Burgusking 0:21:22.080 --> 0:21:25.120 is an interesting one because, um, the volumes of their 0:21:25.160 --> 0:21:27.520 stores are kind of more than the one point four 0:21:27.560 --> 0:21:29.440 to one point five million dollar range. We talked earl 0:21:29.440 --> 0:21:32.560 about McDonald up for three and so the franchisy cash 0:21:32.600 --> 0:21:36.919 flows are not as healthy as at a Wendy's or McDonald's. UM. 0:21:37.000 --> 0:21:39.760 And the other big challenge they have is that, UM, 0:21:40.040 --> 0:21:43.439 I think because of that, franchisees have not put the 0:21:43.520 --> 0:21:46.480 capital into the back, into the brands, into the assets 0:21:46.480 --> 0:21:51.160 in the way that McDonald's has the last couple of years. UM. 0:21:51.200 --> 0:21:54.840 You know, they've got a new brand management in Tom Curtis, 0:21:54.880 --> 0:21:58.080 who's a former Domino's executive. UM. He's looking at things 0:21:58.080 --> 0:22:00.440 a lot, a lot differently. A lot of what he's 0:22:00.440 --> 0:22:03.040 focused early on so far has been on the operational 0:22:03.080 --> 0:22:06.560 side of things. UM. You know, they've done several things 0:22:06.600 --> 0:22:10.200 the last couple of years. They they started handbreading their chicken, UM, 0:22:10.200 --> 0:22:14.600 which initially drove sales a bit, but from from every indication, UM, 0:22:15.000 --> 0:22:17.159 is a little bit too complicated and adding too much 0:22:17.280 --> 0:22:20.959 labor versus the benefit that they're seeing on the sales side. UM. 0:22:21.040 --> 0:22:23.240