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Restaurant Roundup: Darden Doubles Down on Fine Dining, Portillo's Off to a Strong Start in Texas

R.J. Hottovy
May 5, 2023
Restaurant Roundup: Darden Doubles Down on Fine Dining, Portillo's Off to a Strong Start in Texas

Following a busy two weeks of updates from restaurant operators, we thought we’d review some key updates from across the industry. In February, we discussed that the industry was looking for a narrative for 2023, and there still appears to be divergent themes taking place across the industry. QSR operators and some casual dining operators have reiterated that lower and middle-income consumers are still fighting the impact of inflation (not just food, but also rent and healthcare costs), although they are still willing to visit restaurants that are showing menu innovation. On the other end of the spectrum, fine-dining restaurants continue to outperform casual-dining chains on a Yo4Y basis owing to increased business travel and solid visit frequency rates among more affluent households.

Below, we’ve taken a look at some of the key developments in the restaurant industry using's visitation data.

Darden: Making Sense of the Ruth’s Chris Acquisition

Darden Restaurants plans to add another brand to its portfolio with the planned $715M acquisition of Ruth's Chris Steakhouse announced earlier this week (representing 9.4x Ruth’s adjusted 2022 EBITDA before transaction expenses). Ruth's Chris–which has 154 total locations (52% company-owned, 48% franchised), including 131 in the U.S and another 23 international–will expand Darden’s fine dining segment, which already includes The Capital Grille and Eddie V’s. The acquisition is expected to close in June 2023 and would extend Darden's lead as the largest full-service restaurant chain in the U.S. with over 2,000 restaurants.

Staring at a looming recession, why would Darden pull the trigger on acquiring an upscale restaurant brand? Darden CEO Rick Cardenas highlighted several reasons in a overview presentation with investors earlier this week, including strong unit economics (system sales of more than $860M–implying average unit volumes of $6.2M–restaurant-level margins of roughly 19%, and $76M in transaction-adjusted EBITDA), nominal guest overlap with existing Darden brands, and Ruth’s potential runway for growth. Additionally, Darden called out the health of the fine dining segment, noting that it is expected to outperform casual dining with respect to sales and margins in the years ahead. data supports Darden’s positive bias about the fine dining segment. We’ve separated our full-service restaurant index between fine dining and casual dining chains below, and pre- and post-pandemic (Yo4Y) visitation data indicates that the fine dining category is outperforming casual dining (although this is partly a function of permanent casual dining closures during the pandemic). This is consistent with statements from Cardenas, who noted that consumers with income levels above $150,000 continue to dine out and maintain or increase their spending at casual or fine-dining restaurants on this week’s transaction announcement update. Given fine dining’s position relative to casual dining and the general health of higher-end consumers, Darden’s acquisition of Ruth’s Chris should help to accelerate its top line, give the company another brand to fill commercial real estate availability, and drive incremental margins (run-rate synergies of approximately $20M by end of fiscal 2025, or 4%-5% of sales based on Darden’s prior acquisitions).

Chipotle: Innovation Still Matters

While Q1 2023 updates from restaurant operators reinforced the idea that consumers remain squarely focused on value, Chipotle’s results were notable because of the visitation impact stemming from menu innovation, namely this quarter’s launch of Chicken al Pastor. According to Chipotle CEO Brian Niccol, the launch of Chicken al Pastor has been a success since its launch with indications that it is outperforming Pollo Asado (which was the company’s most successful protein limited-time-offer to date). Management noted that transaction trends were positive throughout the quarter, and that strength continued into April, which data corroborates (below). Chipotle’s YoY visitation trends are also outpacing the fast-casual category.

Product launches like Chicken al Pastor are helping Chipotle to drive visits despite menu price increases of roughly 10% compared to the year ago period (which were a contributor to 1Q 2023 comparable-store sales growth of 10.9%). Interestingly, management noted higher-income consumers continued to visit (and at a higher frequency than previous periods), but that it was seeing some recovery among lower-income consumers (thought still not all the way back to the same level as a year ago). Digital orders as a percentage of food & beverage revenue (39.3% this quarter versus 41.9% last years), but in-store visit growth helped to offset this weakness.

Burger King: Signs of Progress on Reinvention Plan

Last fall, we discussed Burger King’s "Reclaim the Flame'' plan to accelerate visitation growth and improve franchisee profitability. The key points of the plan included a $400M investment from the Burger King brand, comprised of a $150M investment in advertising and digital investments ($120M in advertising fund investments, and $30M in mobile app enhancements) and $250M earmarked for a "Royal Reset" including restaurant technology, kitchen equipment, building enhancements and high-quality remodels and relocations. (The investments are incremental to ongoing franchisee efforts to modernize stores).

Burger King’s visitation trends have lagged McDonald’s and the broader QSR space, but this week’s Q1 2023 update from the brand and its parent company Restaurant Brands International gave us some evidence that the brand’s reinvention plans are starting to have impact. Below, we’ve benchmarked Burger King’s YoY visitation trends versus our QSR category visitation index, and see that the brand has narrowed the gap to the broader index. This trend also comes despite the bankruptcy of two larger Burger King franchisees this year: 90-unit Toms King and 118-unit Meridian Restaurants Unlimited.

Looking ahead to the rest of 2023, Burger King expects to see a higher number of restaurant closures than it normally would in a given year.  According to Restaurant Brands International CEO Josh Kobza, “Historically, we've closed a couple hundred units at Burger King US each year and had a couple of years in the 300 to 400 range, such as 2020. We currently expect gross closures in that 300 to 400 range here for the full year, though I would emphasize that there is a fair degree of uncertainty regarding exact numbers, and this will depend, to some extent, on the pace of recovery in the business, which we've already begun to see.” Shedding lower-volume locations should help Burger King to narrow the gap with its peers in the years ahead.

Portillo’s: Strong Start for the Class of 2022

One of our favorite ways to use visitation data is to measure the effectiveness of when a retail or restaurant chain moves beyond its core markets. In the past, we’ve looked at cohort analysis for sweetgreen and In-N-Out Burger, noting that it takes time for most chains to reach the same level of visits per location in newer markets (although with some exceptions like we saw with In-N-Out’s expansion into Denver in 2020).

We’ve looked at Portillo’s visitation trends as it expanded to new markets after the company filed for an initial public offering in 2021, but with CEO Michael Osanloo discussing the performance of stores in newer markets on the company’s Q1 2023 update, we thought we’d revisit the topic. For starters, we compared 2022 visit per location trends for Portillo’s locations in Illinois, Indiana, Arizona, and Florida (below). We see that Illinois still generates more visits per location than the company’s growth markets, the gap is not as wide as some of the other restaurant chains we’ve seen who have moved to new markets (especially if we factor in late 2022 openings in the Indiana and Arizona markets that brought down the annual visit per location figures).

Portillo’s recently opened a location in Gilbert, Arizona, completing its Class of 2022 openings (some of the planned 2022 openings were pushed into 2023 due to construction delays). According to Osanloo, the Class of 2022 is “already exceeding its underwriting expectations” and the performance “gives us great confidence in the longer-term ability of our national expansion strategy to generate attractive returns for our investors.” Osanloo specifically called out the recently-opened location in The Colony, Texas as being a strong outperformer, which our data supports (below).

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R.J. Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank. R.J. also brings a wealth of experience with early-stage investments as a committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he advised over 50 food service companies on more than $200 million in early-stage capital raises and M&A transactions.

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