Restaurants: Recognizable Realities In 2015

The restaurant space slogged it out in 2014. Finally, with meaningful wisps of economic recovery seen in Q4 and more disposable income running in the system, hope of discretionary spending is seen. Several attractive IPOs, Habit (NASDAQ:HABT), and Zoe's (NYSE:ZOES) made it through the gauntlet and with more to come in 2015 (SHAK and others). On January 5, Jim Cramer of CNBC said that domestic restaurants are key to the market performance in 2015. That sets a high bar.

Of course a reality gap exists between Wall Street wants and needs and Main Street corporate realities. The prism restaurants operate is not really seen by Mr. Market. Looking beyond the veil, restaurants are a tough business, talk to the departed CEOs of Darden (NYSE:DRI) and Bob Evan's (NASDAQ:BOBE) about that

There are several ongoing dynamic restaurant financial realities that underpin restaurant performance. All are realities, all are opportunities. All are addressable.

Need to manage and improve restaurant profit flow through. Also known as the PV ratio, we should not have been surprised to hear that the ten year US McDonald's (NYSE:MCD) average sales per unit (AUV) grew $770,000 but flow through grew by just $70,000, or 9%. Was it all those beverages that cannibalized food? A national survey just reported the McDonald's average consumer expenditure reported at $3.88 per person, which is shockingly low.

It's a broader restaurant issue however: For a client, I recently examined three QSR brands (McDonald's (MCD), Burger King (NYSE:QSR), Wendy's (NASDAQ:WEN) and three casual dining brands, Denny's (NASDAQ:DENN), Bob Evans (BOBE),and Applebee's (NYSE:DIN) that grew average store sales only $46,000 and unit EBITDAR by only $500 between 2009 and 2014, about a 2% flow through rate. Shockingly low sales gains, even worse flow through.

Both Chili's (NYSE:EAT) and Outback (NASDAQ:BLMN) added a boatload of new at or under $10 items to their menus in 2014, and Chili's added their signature fajitas to its 2 for $20 menu. This exasperates the flow through problem; let's hope additional upsell initiatives kick in to maintain the average check.

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Disclosure: The author has no positions in any stocks mentioned.

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