Article
Part II: Stacking up to McDonald's
QSRweb.com takes a look at how the smaller chains have fared during the recession.
October 20, 2009
The top quick-serve brands' road through the recession was quite a bumpy one, with McDonald's coming out on top. Of the remaining publicly traded companies, it's difficult to declare a winner because several of them are close to announcing their most recently quarterly results.
Strong push before the finish: Based on information available, Popeyes Louisiana Kitchen's parent company AFC Enterprises Inc. (Nasdaq: AFCE) seems to have benefited the most from consumer trade down and value-price shopping. In August, the company reported system-wide comps were up 4.9 percent, compared to a 1.9 percent lift in the prior year. The company started the recession reporting for the fourth quarter ending in December 2007 that global comps were down 2 percent.
AFCE experienced a recession-period high in December 2007 of $12.50, trending slightly downward throughout 2008 until it hit its low point last November of $2.85. By the time the recession was declared over on Sept. 15, AFCE closed at $8.03. Yesterday, the stock closed at $8.66.
John Gordon suggested in a Seeking Alpha commentary that Popeyes, with more than total 1,900 units, may have benefited from its lower unit penetration. He compared the company's barbell media promotions and national media push to Burger King, which saw comps fall for the same quarter.
Popeyes, however, had a deep discount promotion in April — and was able to maintain sales during KFC's big media push for its successful launch of its grilled chicken. The company continued to promote discounted meal specials throughout the quarter.Popeyes also could have benefited from the comfort food trend, as consumers sought solace from stress brought on by economic troubles.
Also looking good: Tim Hortons Inc. (NYSE: THI) also held up well during the recession, reporting comps increase of 1.7 percent in Canada, where it has more than 2,900 units, and 3.3 percent in the United States, where it has more than 500 stores. The company's fourth quarter 2007 comps were up 3.4 percent in Canada and 4.2 percent in the United States.
THI experienced its recessionary high in December 2007, trading at $39.93. Trading trended somewhat downward until reaching its lowest point in November 2008, falling to $20.04. By Sept. 15, THI closed at $28.99. Yesterday, it closed at $29.41.
The company benefited from the strong Canadian dollar during the quarter, boosting U.S. revenues — and costs. Tim Hortons' test of co-branding with Cold Stone Creamery in the United States and Canada went well, with plans to double the number of planned Canadian units to 12 and add to the 50 U.S. units already planned. Tim Hortons also received a warm welcome when it opened its first locations in New York City.
Tim Hortons also completed a reorganization over the summer, restructuring as a Canadian publicly traded company while retaining trading on the New York Stock Exchange.
According to a report on Zacks.com, the company did well against the market over the past year and continues to lead the industry due to its strong fundamentals. It offers a return on equity of 24 percent and net profit margin of 14 percent — well beyond the industry average of 10 percent and 2 percent, respectively.
Return to fundamentals pays off: Krispy Kreme (NYSE:KKD) entered the recession with low expectations, suffering from overzealous growth and other missteps well before the economy turned. KKD hit a high of $4.19 in December 2007 and hit is recessionary high of $5.65 in June 2008. Unlike other QSRs, KKD hit its low in February 2009, at $1.01. On Sept. 14, it closed at $3.70, and yesterday it closed at $4.08.
Krispy Kreme entered the recession with same-store sales down 2.3 percent. In its most recent quarter, the company reported comps were up 5.9 percent. Systemwide sales, however, were down 11.7 percent, impacted in part on foreign currency exchanges.
During the last year, the company took a number of steps to right the ship. It settled a longstanding SEC investigation, reported its first operating profit in four years, implemented new food and labor cost-management tools and training to improve shop operations, and rolled out a more efficient operating store model, the small retail shop.
Mark Krieger, food equity analyst, said the small retail concept stores are substantially cheaper to run. More importantly, the model allows management to be more responsive to customers. Customers may also feel they are getting a better deal since operator savings from lower overhead can be passed on to them.
Krieger also said the company has made several other improvements, including closing underperforming stores and paid down $20 million in debt in the last two quarters. "It was also pure genius to start offering soft-serve ice cream — this opens up a larger market of potential customers."
The company can benefit, he said, from an "out-of-the-box" marketing campaign to revitalize the brand and its products in order to expand its customer base. Focusing on more international franchise openings will also help in the long term.
In its niche: Hot dog chain Nathan's Famous Inc. (NasdaqGM: NATH) has performed well during the recession. The company traded at a high for $18 for the month of December 2007 and hit its recessionary high the following month, reaching $18.16. NATH's low was in February 2009, at $11.01. By Sept. 15, it closed at $13.48, and yesterday NATH closed at $14.85.
The company did not report same-store sales results but had a strong quarter as the recession began, reporting revenues were up 9.2 percent at $37 million and its net income up 35 percent to $5.8 million. In August, the company reported revenues were up only 1 percent at $14 million, with net income down 58 percent at $1.6 million, reflecting the prior year's sale of two of its former brands.
Greg Sushinsky said in an analysis for Forbe's Investopedia that Nathan's "has found a highly profitable niche with its historic hot dog trade." The chain's price point helped sales during the recession, as did the company's "remarkably tight operating model." Sushinsky foresees break-out growth for the company as the economy recovers.
On the way back: Jack in the Box Inc. (NasdaqGS: JACK) was one of the first brands to be hit by the recession, thanks to its prominence in California, where unemployment is among the highest in the nation. JACK traded at a high of $29.89 in December 2007 before hitting its recessionary high of $29.89 in February. The stock took a steep dive last November to $11.82 but recovered fairly quickly. By Sept. 15, it closed at $21.05. Yesterday, JACK closed at $20.
The company started the recession by reporting Jack in the Box company store comps were up only 1.5 percent compared to 5.6 percent the prior year. Comps at its fast casual brand were up 4.5 percent in the first quarter. In August, the company reported that same-store sales at Jack in the Box company restaurants were down 1.0 percent.
Steve West, analyst with Stifel Nicolaus, said that the company will begin lapping its prior year poor results, which were also affected by the burst of the housing bubble in California. The company improved its fundamentals in the state and reported positive comps there for the last three quarters in a row.
Jack in the Box continued to move forward with its refranchising efforts and store reimaging as well as product innovation, bringing back its 1970s favorite, the Bonus Jack, a Big Mac competitor. It also launched a $1 Big Cheeseburger.The company also is making preparations for the long term with the goal to grow into a national brand.
West said in a recent note to investors that the company's refranchising efforts and cost-saving initiatives should pay off with bottom-line results.
Sticking to its model: CKE Restaurants Inc. (NYSE: CKR) saw brand Carl's Jr. also hit hard by California's high unemployment, while Midwest/Southern chain Hardee's experienced challenges typical of the industry.
CKR traded at a high of $15.19 in December 2007 and remained somewhat stable until the market crash last fall, tumbling to $4.88 in November 2008. The stock recovered fairly quickly and closed at $10.81 on Sept. 15. Yesterday, CKR closed at $9.49.
At the beginning of the recession, Carl's Jr. company-owned stores reported comps were up 2.7 percent for December 2007, while Hardee's was down 0.6 percent. Last month, Carl's Jr. company-owned stores' comps were down 5.5 percent, with Hardee's down 0.6 percent.
Andrew Puzder, CKE Restaurants CEO, has remained steadfast throughout the recession that the company would not resort to deep discounts or giveaways, even though those tactics by competitors were likely drawing customers away. The company maintained that its premium burger sales were still strong but combo sales were down and affecting average check. The two chains decided to focus on the value and quality of its premium burgers, including taking aim at McDonald's with Big Mac copycats, the Big Carl and Big Hardee.
Charles Pinson-Rose, analyst with Standard & Poor's, said in a recent note to investors that Carl's Jr. will face an easier comps comparison over the rest of the year, with comps declines in the low single digits at both chains during that time. CKE Restaurants' strengths are its recent reduction of debt with free cash flow and its relatively stable credit metrics over the past two years.
Pinson-Rose said the company's weaknesses are related to the macroeconomy, including intense competition among QSRs.
Hit hard: Sonic Corp. (NasdaqGS: SONC) started the recession with a high of $24.65 in December 2007, and trading fell steadily afterwards before falling to $6.31 in November 2008 and then to $6.05 in March. By Sept. 15, SONC closed at $11.69. Yesterday, it closed at $11.17.
Sonic began the recession with comps up 3.2 percent systemwide. Yesterday, the company reported systemwide comps were down 4.5 percent.
During the recession, the company introduced its first value menu and promoted its Happy Hour beverage special, offering drinks at half price from 2 p.m. – 4 p.m. That strategy brought in traffic but lowered the average check, the company said in its earnings call.
West said the late afternoon Happy Hour visits also cannibalized dinner sales. "They continue to erode their check average more than what the increased traffic was bringing in," he said. "So it's not a good combination. I think it's going to be some time before they can get it to come back around."
Sonic is doing well in Northern and Northeast markets because the company's national cable TV advertising created pent-up demand in those markets. When the chain finally opened stores in those areas, the stores experienced opening-day sales records. West anticipates those sales will taper off as more stores fill the DMA. However, Sonic president Scott McLain told analysts during the earnings call that sales in those new markets fell off somewhat after the first year but were still above system average.
Related Media
Subscribe
Get the latest news and resources from QSR Web.
