US Restaurant industry - Franchisors
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US Restaurant Industry Part II – Franchisors

In October, we published an analysis of the Restaurant industry in the United States where we covered the economics of 34 companies, explaining in detail and step by step the process of analyzing an entire industry from scratch. On that occasion, we focused on the operators’ part and commented on several specific ones such as Arcos Dorados (McDonald’s franchises, but its business is mainly that of an operator) or One Group Hospitality, for which you have available theses.

This time, in addition to adding several restaurants to the general analysis – in which we updated all the information with the year-end results – we focused on exploring various restaurant chains that have a franchising strategy (for this, we have taken as a cutoff that more than half of their restaurants are franchises).

The rationale behind this decision is that we believe the restaurant industry will be one of the major beneficiaries in an environment of declining interest rates and decreasing inflation (as we are experiencing so far this year, and as we discussed in The Week in the Markets; these two factors are taking longer to materialize than initially anticipated). This approach (Franchisors vs Operators) is somewhat more conservative due to the greater predictability of earnings.

As almost always, we will focus on small caps although we will include several medium caps. We will use large and mega caps as reference points. Since economies of scale are so prevalent in the sector, rather than comparing ratios among large and small caps, we will look at what has worked in companies that have grown considerably over the years and what has not, in order to try to identify those patterns in the smaller companies that we are now examining in more detail, specifically:

El Pollo Loco, Dine Brands, Jack in the Box, Papa John’s, Denny’s, Wendy’s, Rave Restaurant and Wingstop.However, we will also take the opportunity to compare them with other large, well-known companies such as McDonald’s, Starbucks, Restaurant Brands International, Domino’s, or Darden to highlight several significant differences.

In addition to the quantitative aspect, we will critically review the corporate decisions regarding capital allocation, M&A, and the current strategy of all the companies.

Summary of FY23 Results

Before we begin, we take the opportunity to update the industry tracking table (in our Excel, we have all the data – P&L, BS, CF, units developed, number of franchises, Capex, Operating CF, trends, etc. – for all these companies – so if you want more detail/analysis on any of them, please write directly to [email protected]). As the purpose of this analysis is to focus in more detail on the eight companies mentioned earlier, let’s briefly review the main trends of what the year 2023 has been like.

US Restaurants FY23
  • Increase in revenue primarily due to price increases rather than an increase in customers. Most of these increases are captured by medium-sized companies, with Arcos Dorados being the main beneficiary (Latin America Expansion).

  • Increase in EBITDA margin, mainly among operators due to passing on price increases to consumers and lower energy costs as well as a lower rise in inflation. The costs of personnel have increased the most, recorded within SG&A, which have a greater impact on franchisors.

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