Season 1 Episode 19: May Restaurant Sales and Transactions Update



Also Listen On:

1. May Restaurant Sales and Transactions Update
2. Fast Food Performs Well in Hard Times
3. Pizza Hut Seeks to Regain Lost Market-share
4. Continued Concerns with Third-Party Delivery
5. KFC New Product Innovation

Title: Welcome to The Restaurant Boiler Room Episode 19. I’m your host, Rick Ormsby, Managing Director at Unbridled Capital.

Today, in the Boiler Room:

May Restaurant Sales and Transactions Update
Fast Food Performs Well in Hard Times
Pizza Hut Seeks to Regain Lost Market-share
Continued Concerns with Third-Party Delivery
KFC New Product Innovation

The Restaurant Boiler Room is a one-stop-shop for multi-million dollar merger and acquisition activity and financial complexities affecting the franchise restaurant industry. We talk money, deals, valuations, and risk – delivered to the front door of franchisees, private equity firms, family offices, large investors, and franchisors on an every-other-week basis. Feel free to find our content at Unbridled Capital’s website at

Now, let’s enter the Boiler Room:

A. May Restaurant Sales and Transactions Update

Background: TDn2K reports that May comp sales were up 1.1% while traffic was persistently negative at (2.2%). Both figures were significantly better than April, which showed negative restaurant comp sales.
Comments: TDn2K also reports that the Rolling 3-month trend is 0.53% in comp sales and an alarmingly negative (2.55%) in comp traffic. This continues to be concerning for the franchise industry particularly since the margin pressures in the marketplace are hovering at all-time highs. I don’t personally see much reason to believe this trend is going to change in the positive direction anytime soon, especially regarding the comp traffic problems. Operators are encouraged to start tightening the ship and focusing on the one thing that always works: serving the customer with excellence.
Effects on M&A: EBITDA dollars are dropping at the franchisee level in most brands right now. While multiples remain high and cap rates are very favorable due to the dropping 10-yr, overall valuations are starting to slide because actual EBITDA is moving lower. If you multiply a lower EBITDA with a slightly higher EBITDA multiple, the outcome is worse than it was 6 months ago in many instances. This trend is exacerbating in many brands, where wage pressures, food inflation, and lower sales are creating negative valuation trends. As always, quality is king. The best brands are taking market-share right now, growing sales and traffic despite overall industry challenges. 78% of DMAs tracked were able to post positive same-store sales growth. They summarize the month with several key comments: 1. Guest counts continue to drop for most brands, 2. Concerns for Economic Slowdown Fueled by Trade War Fears and 3. The Industry is Experiencing High Turnover Rates.

For any potential seller of a franchise company right now, beware that a 5-10% valuation drop – due to declining EBITDA dollars – is likely if you wait too long. M&A transactions take 6-9 months to complete, and buyers consider declining results when going through due diligence and loan underwriting, long after the initial bid deadline is complete and LOI is awarded.

Fast Food Performs Well in Hard Times

Background: I read a recent article from Christopher VanWert entitled ‘Fast Food Performs Wellin Hard Times.'
Comments: I certainly do not give advice on stocks, but I do believe it is very true that the best performing QSR establishments will receive the benefit of trading-down during a recession. When I was getting my MBA at Vanderbilt just after 9/11, few companies came to campus for recruiting because of the recession at that time. However, Yum Brands did come to campus, one of the few that was actively hiring. Within franchise restaurants, however, various brands have different customer bases and price points. For example, a mid-priced casual-dining chain may do very poorly in a recession because customers trade-down to fast food for lower prices and to avoid a tip. I worry about fast-casual restaurants in a recession – this segment of the market wasn’t around much in 2009-2011, so it is difficult to predict what would happen if a major recession hit us today. However, I suspect that fast-casual would struggle, mostly because their price point is quite a bit higher than fast food. I do agree that people tend to throw healthy eating out the door when they don’t have the money.
Effects on M&A: There is a built-in premium in franchise EBITDA multiples for companies that have a broader appeal, stronger results and a more formidable brand. And while you can’t look at the elevated multiple paid for a Taco Bell company, for example, and say ‘this price factors in the fact that Taco Bell is one of the least likely restaurant companies to have trouble in a recession because their prices are so low and they have no real national competitor,’ it is certainly a subjective factor that has an overall effect on the appeal of M&A transactions in different brands, when seemingly otherwise two companies in different brands have the exact same financials but trade at wildly different prices.

Pizza Hut Seeks to Regain Lost Market-share

Background: Jonathan Maze recently wrote an article entitled ‘Pizza Hut Works to Fix its Asset Problem.’ He cites that Pizza Hut has been stagnate in sales over the past 5 years, while Domino’s has grown revenues by about 75% over the same time. This has resulted in Domino’s overtaking Pizza Hut as the largest pizza competitor by market-share, while both Little Caesar’s and Papa John’s have also grown their market share during this time. Maze reasons that the Pizza Hut asset model is a problem, where around 40% of the assets are dine-in locations when only around 10% of Pizza Hut sales come through the dining room.
Comments: It is certainly true that Domino’s has been on an amazing run over the past few years. When I was working at Yum Brands Corporate in the early 2000s, Pizza Hut had an overpowering He opines that the inverted yield curve, historically low unemployment, and high valuations have signaled troubled times ahead, and that fast food stocks have historically been a decent shelter for recessions because Americans typically trade-down to cheaper, less-healthy food options when they are short on cash.

Pizza Hut was started as a dine-in pizza chain, meant for both small towns and big cities. The pizza segment has shifted in recent years to a delivery model with dine-in pizza establishments becoming more local, often appealing to customers with craft beers and a wider menu. It is true that dine-in Pizza Hut restaurants still make sense in small towns with limited dining options. And let’s not forget that Pizza Hut has a fantastic legacy, a great brand name, an industry-leading franchisor in Yum Brands, and a generational shift in its franchise base. Over the past few years, Unbridled has been at the epicenter of helping the legacy Pizza Hut franchisees in the sale of their businesses. Most Pizza Hut franchisees are large operators, and an influx of young and well-capitalized franchisees, a changing asset model, and better technology should eventually help Pizza Hut regain lost market- share. Changing the asset model will take time, but let’s hope that Pizza Hut is on the right track within its franchise base.

Effects on M&A: Domino’s continues to an investment available mostly to owner-operators or investors that have few other business interests. As such, Domino’s M&A market is not very fluid, but it is certainly hard to argue with their structure and results. Papa John’s and Little Caesar’s, like Pizza Hut, are more agreeable to multi-unit franchisees who operate other brands and have other business interests; however, both of those brands have a heavy concentration of smaller franchisees with lower unit counts. Pizza Hut’s large unit count – over 50 units on average per franchisee – and its relationship under the Yum umbrella – will continue to allow the brand to attract higher EBITDA multiples and valuations as the overall franchise industry accelerates its consolidation to large, multi-unit operators with several brands as well as family offices and private equity firms.

Continued Concerns with Third-Party Delivery

Background: Tom Kaiser at Franchise Times recently published an article that reviewed a Wells Fargo study on third-party delivery. Among his findings are that customers don’t want a bunch of delivery apps on their phones, that they appear to be cost conscience in terms of coupons for lower delivery fees to generate demand, and that customer frequency for delivery appears to be an area of opportunity.
Comments: I’ve had too many closed-door conversations over the past year with franchisees who don’t think third-party delivery will work well because of the cost model. Granted, most of these folks do not operate in large metro DMAs; however, their constant concern is that they are losing money and are concerned about product quality. Most franchisees, however, certainly recognize that delivery must be a part of an on-going business strategy, even if a loss leader. If others are doing it, I must do it too. However, don’t forget that restaurants operate on razor-thin margins, so decisions are made quickly when profitable sales are replaced with unprofitable ones.
Effects on M&A: Having seen delivery flow through many P&Ls, I believe delivery is hurting company valuations because it isn’t normally profitable and is at least somewhat cannibalistic in replacing more profitable sales in-store. Operators and investors are encouraged to carefully monitor their company performance and changes in valuation – at the bottom line – as third-party delivery becomes a greater force in restaurants. Increased sales do not always mean increased profits. And since M&A advisors (like Unbridled) value franchise businesses primarily on Trailing 12 month or Rolling 13-period financials, a company’s valuation can change on a dime – both up and down.

KFC New Product Innovation

Background: After successful test markets, KFC will be rolling-out the KFC Cheetos Chicken Sandwich in a 4-week Limited Time Offer (LTO) starting on July 1.
Comments: I love what KFC marketing is doing. President Kevin Hochman is a marketing guru, and the company has noticeably stepped up its new product innovation pipeline recently with products like the Chicken and Waffles sandwich. The Cheetos Sandwich will likely create a big splash of fresh news, driving incremental sales to KFC restaurants. And, this strategy piggybacks the wild success at sister-brand Taco Bell – where the Doritos Locos Taco created several years of big news, different flavor profiles, and huge sales comps. All of this comes at a time when consumer preferences are mutating an increased favorability for flavors and spices. It is also a perfect counterpunch to overall industry trends of discounting and lack of menu innovation. It is my opinion that well-executed new products are an essential part of growing market share in the restaurant sector, which is inundated with too much competition and a crowded value message.
Effects on M&A: KFC post-G&A EBITDA multiples have been increasing substantially in the past year. These multiples are now at or near historic highs, and while they might not trend higher, buyers and sellers will see valuations increase if actual EBITDA continues to rise. A very successful LTO could likely bump sales and EBITDA during July and could also produce a rising tide for several months thereafter.

Closing: As a final shout-out for this episode – congrats to my alma mater, the Vanderbilt Commodores. This week, they just finished off a historic baseball season, culminating with a College World Series championship against Michigan. No matter the discipline, business, or sport – I appreciate people or teams who reach the pinnacle of their craft.

Thanks so much for entering the Boiler Room today. You can find our podcasts on iTunes, Google Play, Stitcher, TuneIn, and Spotify. If you like these podcasts, please listen, rate, and review! I also encourage you to visit our website at for the best franchise M&A and financial resources in the industry. Our website includes podcasts, videos, white papers, and a list of our M&A transactions.

Disclaimer: Please note that neither Rick Ormsby nor Unbridled Capital LLC give legal, financial, or tax advice. These podcasts represent opinions that have been prepared for informational purposes only. We expressly disclaim any and all liabilities that may be based on such information, errors therein, or omissions therefrom.