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Good Things Come in Threes in the Stock Market

May 6, 2024

This is a tiny ETF, covering the performance of restaurant shares and although it has done quite well since the 2022 low point, I am not suggesting that you buy them. I am interested in what it says about the sector, in a bull market, and the implications for the shares featured below, which I do think you should buy.

I am not sure why restaurant shares are on such a roll at the moment but they are, and with such opportunities to emulate McDonald’s and go for world conquest they still look full of running.

CMG Announces Biggest Share Split in US History

On 26 June shares in Chipotle Mexican Grill will start trading ex a 50 for 1 share split, which will take the price down to around $60. Nothing else changes but splits are often a sign of management confidence in prospects and make the shares more appealing to retail investors. They may also encourage short-term profit taking but most shares head higher eventually after a share split.

Business is good.

For the quarter, sales grew 14pc to reach $2.7bn, driven by a 7pc comp. In-store sales grew by 19pc over last year, as throughput reached the highest levels in four years. Digital sales represented 37pc of sales. Restaurant level margin was 27.5pc, an increase of 190 basis points year-over-year. Adjusted diluted EPS was $13.37, representing 27pc growth over last year. And we opened 47 new restaurants, including 43 Chipotlanes. The strength in our business has continued into April, and as a result we are increasing our annual comp guidance and now estimate comps in the mid to high single digit range for the full year.

Brian Niccol, CEO, Chipotle Mexican Grill, Q1 2024, 24 April 2024

I can’t believe I had around $0.5m worth of these shares a decade ago. Yet another fish that got away.

A big factor in their performance is Brian Niccol, ex-CEO of Taco Bell, who became CEO in March 2018 (a massive ‘something new’). Instead of being on a mission to make the world a better place, Niccol took CMG on a mission to become a more successful company. Since he arrived the shares have never looked back.

Niccol is super-confident.

As I’ve said in the past, I believe the next Chipotle is Chipotle. 

Brian Niccol, CEO, Chipotle Mexican Grill, Q1 2024, 24 April 2024

It’s an Incredibly Exciting Time at Wingstop

Wingstop is on a roll.

Coming off of an industry leading year in 2023, the momentum in our business continued into our first quarter as we delivered 21.6pc same-store sales growth, which was almost entirely driven by transaction growth.

We opened 65 net new restaurants, a 14pc growth rate. Company owned restaurant margins were 25.5pc, highlighting the effectiveness of our supply chain strategy and our best-in-class unit economics. And we delivered adjusted EBITDA of $50.3m, representing a 45pc growth rate over the prior year.

As a result of the strength in our business and the strong start to the year, we are increasing our 2024 comp guidance from mid-single-digits to low-double-digit same-store sales growth. I am extremely proud of our team members, brand partners and supplier partners for delivering these results and truly humbled to be part of a brand that is experiencing such unprecedented growth.

And yet we believe we have so much more growth in front of us. It’s hard to believe that just a little over two years ago, we hosted an Investor Day and outlined our path to grow average unit volumes to $2m from roughly $1.5m at the time. At that Investor Day, we shared our multiyear sales driving strategies of scaling brand awareness, expanding our delivery channel, menu innovation, leveraging our digital guest database to fuel data-driven marketing and digital transformation.

Fast forward to today, two years later, and our AUVs are now over $1.9m and quickly approaching our $2m target. And while our execution against these strategies has delivered two year stacked same-store sales growth in Q1 alone in excess of 40pc, we believe we have meaningful growth in each of these strategies as we look ahead.

It’s an incredibly exciting time at Wingstop. As we scale toward our vision of becoming a top 10 global restaurant brand, we remain anchored in the foundation of our strategy, our people and our culture, what we refer to as the Wingstop way. The pillars of our strategy have not changed over the years. Sustaining same-store sales growth, maintaining best-in-class returns and accelerating growth.

Michael Skipworth, CEO, Wingstop, Q1 2024, 1 May 2024

The group also believes it has a huge digital opportunity.

We are making Wingstop more top of mind and filling the top of the funnel with new guests. It’s especially evident with the expansion of our digital database, which has surged to more than 40m users. In fact, Q1 marked our highest level of new guest acquisition on record. While we are seeing growth across all cohorts and income levels, these new guests we’re bringing into the brand are demonstrating a higher frequency than our traditional guests.

But yet, I believe we are just scratching the surface on the opportunity to leverage our digital database. As our restaurant AUVs expand, digital sales also continue to increase, now accounting for 68pc of sales in Q1. This record level of digital sales comes at a time when we are rolling out our proprietary tech stack, My Wingstock, which we believe is an enabler to our aspirational goal of digitizing every transaction. My Wingstop has created a great deal of excitement with our brand partners and restaurant team members.

Michael Skipworth, CEO, Wingstop, Q1 2024, 1 May 2024

The international opportunity also looks spectacular.

With an AUV of $1.9m and a low upfront investment of around $500,000 on average, our brand partners are enjoying industry leading unlevered cash-on-cash returns of more than 70pc, which has fueled significant demand for growth.

Our brand partners recognize how unique these returns are and our focus on accelerating growth, which is showing up in our development pipeline. We had a record 1,400 restaurant commitments under development agreements at the start of 2024. Brand partners are eager to put more restaurants in the ground and reinvest back into Wingstop.

Our vision is to scale Wingstop into a global brand. And I’ve shared in prior calls how we believe our international business is supercharged for growth. There is tremendous excitement across the globe as consumers have the opportunity to experience our flavor for the first time.

Same-store sales trends resemble that of the U.S. business, double digit growth stacked on top of double digit growth in the prior year and primarily driven by transactions. Averaging across all markets outside of the U.S., we have nearly doubled our AUV since the start of 2022. In the U.K., AUVs now exceed $2.5m, leading our U.K. brand partner to accelerate growth and expand to more than 40 units.

Our newest markets, Canada, Puerto Rico, Korea are executing that U.K. playbook and achieving record sales weeks. We believe our new markets are scaling awareness on a curve that draws parallel to the success we are experiencing in the U.K. The strength we’re having in our global development and visibility into our pipeline gives us the confidence to increase our 2024 outlook to a range of 275 to 295 net new restaurants.

This implies a unit growth rate well above our three to five year target of 10pc plus. The strength of the Wingstop business and our execution against our strategy that has proven power continue to position us on a path to achieve our vision of becoming a top 10 global restaurant brand.

Michael Skipworth, CEO, Wingstop, Q1 2024, 1 May 2024

Nor do the guys have any head-to-head competition.

We are excited by the start to the year and results that demonstrate the category of one we believe we operate in.

Michael Skipworth, CEO, Wingstop, Q1 2024, 1 May 2024

Winsgtop has 2,214 restaurants worldwide. For comparison, McDonalds has over 38,000.

US Discovers Mediterranean Food

This is how they describe themselves.

CAVA is the category-defining Mediterranean fast-casual restaurant brand, bringing together healthful food and bold, satisfying flavors at scale. Our brand and our opportunity transcend the Mediterranean category to compete in the large and growing limited-service restaurant sector as well as the health and wellness food category. CAVA serves guests across gender lines, age groups, and income levels and benefits from generational tailwinds created by consumer demand for healthy living and a demographic shift towards greater ethnic diversity. We meet consumers’ desires to engage with convenient, authentic, purpose-driven brands that view food as a source of self-expression. The broad appeal of our food combined with these favorable industry trends drive our vast opportunity for continued growth.

CAVA website

Cava is another restaurant chain on fire and at an even earlier stage in its potential journey.

 In 2023, we demonstrated the power of our category-defining brand and the significant whitespace opportunity ahead of us. We opened 72 net new restaurants during the year, growing our footprint by more than 30pc. Traffic in our existing restaurants continued to climb. And following a successful IPO, we generated 3 consecutive quarters of positive net income. As we create the next large-scale cultural cuisine category, our extraordinary potential is clear. We fulfill consumers’ growing desire for bold, unique flavors with no compromise between taste and health. Our Mediterranean concept has broad appeal across genders, generations, and income levels and proven portability from coast to coast in cities and suburbs.

We now have a presence in 24 states in the District of Columbia and continue to target annual unit growth of 15pc or more with a long-term goal of 1,000 restaurants by 2032. We’ve built a strong foundation to support that growth, and our powerful unit economic engine continues to drive us forward. Even with continued macroeconomic and geopolitical uncertainty, our value proposition is resonating with consumers.

Brett Schulman, CEO, CAVA, Q4 2023, 27 February 2024

Business is booming.

Our results in the fourth quarter of 2023 were outstanding with a more than 52pc increase in CAVA revenue; 11.4pc CAVA same-restaurant sales growth, including a 6.2pc increase in traffic; 19 net new restaurants, ending the quarter with 309 restaurants, a 30pc increase year-over-year; adjusted EBITDA of $15.7m, a $12.2m increase over the fourth quarter of 2022; and net income of $2m.

And for the full year, we delivered record results, including a nearly 60pc increase in CAVA revenue; 17.9pc CAVA same-restaurant sales growth, including a 10.4pc increase in traffic; 72 net new restaurants; adjusted EBITDA of $73.8m, a $61.2m increase over 2022; and net income of $13.3m. Our 2023 performance was grounded in the execution of our strategic plan.

Brett Schulman, CEO, CAVA, Q4 2023, 27 February 2024

The group is in full-blown expansion mode.

To further the success of our team and our business as we scale, we’ve built additional infrastructure to support our plans for growth. We’re excited to announce that our new manufacturing facility in Verona, Virginia, has commenced operations. A 55,000-square-foot production facility, Verona produces CAVA dips and spreads and along with our existing facility in Laurel, Maryland, can support at least 750 restaurants, as well as the growth of our CPG business. This vertically integrated model takes complexity out of the restaurants and improves costs overall and lets us maintain the quality and integrity of our chef-crafted recipes.

On the culinary front, our best-in-class team continues to innovate, creating newness in our menu and giving guests reasons to try CAVA and come back more often. A prime example of this is our new grilled steak protein. Our Mediterranean take on this beloved main demonstrates the bold, unique flavors that make CAVA special. It is rich but not heavy, and features the brightness of sun-dried tomato, herby oregano, and a touch of red chili for fruity heat. Our Dallas and Boston market tests are progressing well, and we expect to roll steak out company-wide in the second half of 2024.

Brett Schulman, CEO, CAVA, Q4 2023, 27 February 2024

Inflation Gives Most Efficient Chains a Golden Opportunity to Win Market Share

I have finally discovered a reason for the strong performance of selected restaurant shares including those featured above.

Restaurant chains outperforming their competitors seem to have one thing in common: keeping prices down.

It is a tactic that comes as consumers, fatigued from two years of steep inflation, are limiting discretionary purchases and shifting their food spending to grocery stores instead of restaurants. McDonald’s executives said Tuesday consumers are looking for value as economic pressures mount.

The restaurant brands that have taken the most restrained approach to raising prices have widened their lead against their peers over the past three months, Guggenheim analyst Gregory Francfort said in a research note this week.

The analyst is calling Wingstop, Texas Roadhouse, Chipotle Mexican Grill and Domino’s Pizza the Mount Rushmore of recent outperformance, each boasting double-digit, year-to-date share price gains relative to a 7pc jump in the S&P 500.

“We continue to believe that the best moat in the restaurant industry is making more money than peers on >10pc lower price points,” Francfort wrote.

The success has been evident in recent results, and could also appear as Texas Roadhouse reports earnings on Thursday [they have since reported].

Wingstop, with its shares up 44pc year to date, on Wednesday said revenue jumped by more than a third in the first quarter, clearing analyst projections, while same-store sales climbed more than 21pc, almost entirely due to more transactions.

The story has been similar in recent quarters as the chicken-wing chain, with more customers providing a boost to the top line while price increases have been contained to around 1pc to 2pc annually, Benchmark analyst Todd M. Brooks said in a research note last week.

Wingstop’s chief executive, Michael Skipworth, told analysts on Wednesday that the company’s disciplined approach to menu pricing is paying dividends. “We believe that indulgent Wingstop occasion delivers upon both quality and value and has us uniquely positioned,” he said.

Price increases at Chipotle were limited to about 2.8pc during its first quarter of the year, in which it recorded a better-than-expected 7pc rise in same-store sales. The company’s shares are up 37pc so far this year and reached a record high on Monday.

Domino’s Pizza, up 26pc year to date, has been leaning heavily into its value offerings and deals.

The pizza chain is coming off its best quarter since the pandemic with a 6pc jump in revenue. The top-line growth came despite menu prices increasing less than 1pc in the first quarter, suggesting that higher customer traffic is driving most of the gains, analysts said.

“We anticipate share gains to sustain as new drivers remain impactful and consumers applaud DPZ’s price-value proposition,” Oppenheimer analysts Brian Bittner and Michael Tamas said in a research note this week.

Texas Roadhouse is set to release first-quarter earnings after the bell on Thursday. Wedbush analysts Nick Setyan and Michael Symington said last month that the company, whose shares are up 27pc year to date, is leading other sit-down restaurants in transaction growth primarily because it has repeatedly underpriced inflation.

Dow Jones Newswires, 1 May 2024 (Dean Seal)

I am going to buy shares in Texas Roadhouse. It sounds exactly like my kind of place, serving steak in a Texan and Southwestern cuisine style with waiters and waitresses who perform line dancing throughout the night. Each restaurant has a corner table dedicated to Willie Nelson with pictures and memorabilia. If you don’t know who he is I guess you are not a country music fan.

There is a heartbreaking story behind the group. The founder, W. Kent Taylor, committed suicide at 65 after struggling with unbearable tinnitus.

TXRH is a well-run business.

During the first quarter, we generated over $240m of operating cash flow, which was used to fund over $125m of capital expenditures, dividend payments and share repurchases. As we’ve done throughout our history, we will continue to return capital to shareholders and invest in growth projects.

Gerald Morgan, CEO, Texas Roadhouse, Q1 2024, 2 May 2024

TXRH has two other restaurant chains and they also sound amazing. One is called Bubba’s 33 and serves half-pound steaks, stone-ground pizzas and chicken wings. Like Wingstop, it is all about flavour and indulgence with no nonsense about healthy eating.

Shameless Indulgence at Bubba’s 33

While the Texas Roadhouse brand generated average weekly sales of over $163,000 in the first quarter, I want to also highlight the progress our operators are making at Bubba’s 33 and Jaggers. Bubba’s 33 averaged over $120,000 in weekly sales during the first quarter, with four locations scheduled to open this year and a growing pipeline for the coming years. We remain confident in the future for Bubba’s 33.

Jaggers, our quick service brand, is also experiencing momentum and delivered nearly $68,000 in average weekly sales. We continue to expect a mix of company and franchise Jaggers over the coming years, and the first international franchise in South Korea is scheduled to open later this year. Our investment and commitment to opening new restaurants at a more even pace has been successful.

In the first quarter, we opened nine company-owned Texas Roadhouses. We currently expect to open an additional six company-owned restaurants during the second quarter. For the full-year, we remain on-track to open approximately 30 company-owned restaurants across the three brands.

Our franchise partners opened two International Texas Roadhouse locations and a domestic Jaggers during the first quarter. We continue to expect as many as 14 franchise openings this year, including four Jaggers.

On the technology front, our conversion to Digital Kitchens is going as planned with 30pc of the approximate 200 scheduled conversions completed so far. The feedback from our operators remains highly positive. In addition to kitchen efficiencies, our operators also appreciate the calmer kitchen and less stressful execution during power hours.

Gerald Morgan, CEO, Texas Roadhouse, Q1 2024, 2 May 2024

You can see the appeal of these restaurants to their guests.

Offering high quality, freshly prepared food. We place a great deal of emphasis on providing our guests with high quality, freshly prepared food. As part of our process, we have developed proprietary recipes to provide consistency in quality and taste throughout all restaurants. We expect a management level employee to inspect every entrée before it leaves the kitchen to confirm it matches the guest’s order and meets our standards for quality, portion size, appearance and presentation. In addition, we employ a team of product coaches whose function is to provide continual, hands-on training and education to our kitchen staff for the purpose of promoting consistent adherence to recipes, food preparation procedures, food safety standards and overall food quality.

  • Creating a fun and comfortable atmosphere with a focus on high-quality service. We believe the service quality and atmosphere we establish in our restaurants is a key component for fostering repeat business. In our full-service restaurants, we focus on keeping our table-to-server ratios low to allow our servers to truly focus on their guests and serve their needs in a personal, individualized manner. Our Texas Roadhouse restaurants feature a rustic southwestern lodge décor accentuated with hand-painted murals, neon signs, and southwestern prints, rugs and artefacts. Additionally, our restaurants continuously play upbeat country hits. Our Bubba’s 33 restaurants feature walls lined with televisions playing sporting events and music videos and are decorated with sports jerseys, neon signs and other local flair. Our fast-casual concept, Jaggers, offers both drive-thru and dining room service in a modern design featuring a contemporary exterior and a comfortable and inviting
    dining room.
TXRH website

My experience of fast food in America is that it is amazing. The best lobster I ever had was in a US fast-food chain. It was huge and delicious.

The nearest counterpart in the UK would be pubs but I have never found a pub which played country music and live music has become rarer because of so many boring people complaining. I used to hear the music from a next-door pub to my house in Saffron Walden as clearly as though they were playing in my garden and the bands were seriously good. But local bores have put an end to that. If they don’t like living in the centre of town why not buy something in the country where mooing cows, crowing cockerels screeching foxes and hooting owls will drive you nuts? They have a shock coming when my terraces are completed and I am out there enjoying the sunshine and playing music on my stadium-quality Bose speakers. Hah! It is OK guys; I will turn the sound down around midnight.

Strategy – Buy All 3 (4) Shares

Eagle-eyed subscribers will have spotted the mistake – ‘good things come in threes’ turns out to be four! But what a foursome and all bent on world conquest. Well, maybe not Cava yet but I expect at some point they will be and meanwhile they have barely scratched the surface in America.

These are all ideal portfolio stocks. The Americans are as good at fast-casual dining as they are at technology. It is so bizarre that disastrous countries like North Korea, Iran, Cuba and Venezuela express such contempt for the US way of life when it is so immeasurably superior to what they deliver for their people. As one humorist said, if the US embassy in any of these countries started offering free green cards, they would be empty within days.

Share Recommendations

Chipotle Mexican Grill. CMG. Buy @ $3155

Winghouse. WING. Buy @ $388.55

CAVA Group CAVA. Buy @ $72.17

Texas Roadhouse. TXRH. Buy @ $163.71

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