The Language of Restaurant Earnings Calls—Translated
by John A. Gordon, Principal and Founder of Pacific Management Consulting Group
Four times per year the publicly traded restaurant management teams have the high honor and duty to present their quarterly earnings. These sessions, along with those companies that present to analysts and investors via company investor days, as well as high profile annual meetings like the ICR XChange meeting in January each year, and periodic sell side research firms investor access meetings are carefully watched by investors, observers, analysts, the press and of course, other competitors. It is high anxiety time and a lot of work to get ready for these meetings; it’s a prime way to communicate to investors, analysts, competitors and employees. Privately held companies will present to their lenders or private equity sponsors in much the same way.
Of course, company representatives want to be positive about their company. [1] Over a period of time, a form of “earnings call speak” has evolved, a kind of niche shorthand that is useful to keep in mind for the next time you are listening to a competitor speak or in a cocktail event, boasting about how good your results actually were.
A few of the more commonly heard phrases and translations follow:
Phrase One: “It met our internal expectations”. This refers to sales, or traffic or ticket or hit rate, new store ROI or some other initiative that is still developing; it is not quite worth boasting about yet. It may not even a positive result, although it may be at some future point. It is worth a follow-up in the future, because nothing in this business works as quickly as we hope that it might.
Phrase Two: “We are relaunching the X “. This is a marketing phrase indicating that we are doing over something that we hope will give us better results than earlier. Two takeaways from this: (1) it will take time before any kind of results can be read from the relaunch (2) at a minimum, there will incremental marketing expense incurred.
Phrase Three: “We saw sequential improvement” … generally, relates to sales or profitability that improves somewhat from prior period to current period, but again, not positive or positive enough on a year to year basis to boast about. A break in a poor trend is always welcome of course; the true meaning of the phrase depends on the magnitude of the numbers; for example, a US pizza brand has same store sales (SSS) down all year and “sequentially improves” from “minus 11 to minus 9” in the last quarter that’s not that much improvement.
Phrase Four: “We are seeing planned sales transfer from unit x to unit y in the z market”. Planned sales transfer is another phrase for cannibalization; given the expense of rent and high fixed cost leverage, any kind of cannibalization has to be unwelcome unless one can get out of unit x. I’ve also seen this phrase used in relation to new stores cannibalizing older stores in the same market. Either way, some real estate portfolio rebalancing looms in the future for that brand.
Phrase Five: “Adjusted Net Income, Adjusted EBITDA, Adjusted Net Income per Share was x”. Looking at the restaurant universe, practically every company uses “adjustments” to subtract out unusual expense (almost always) or revenue items (rarely) that are unique or one-time nature. Use of adjustments is very wide spread in industry.[2] Such expenses as executive severance, and store closings are routinely adjusted in display even though they happen all the time. Still, adjusted earnings cannot be taken to the bank; adjustments cannot pay bills or open new units. Only real cash can. The reader or listener to this kind of discussion should think about what has happened and why. Some adjustments each quarter are to be expected, but how much is the adjustment swing?
Phrase Six: “The weather was too hot/too cold and negatively impacted sales”.
We restaurant managers know that weather does matter; a portion of restaurant sales is strictly impulse driven; it snows in the US in a few places in May and October and some summer evenings are impossibly hot for outside dining to work. One flaw is that “bad” weather is properly called out but too favorable weather is not called out. In the past, one coffee operator has called out both too hot and too cold weather to note reasons for a sales miss, but that ignored the fact that their product mix was roughly 50% hot beverages , 50% cold beverages couldn’t have mattered too much.
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John A. Gordon is a long-time restaurant industry veteran who both composes and tears apart restaurant earnings calls for a living. He works complex restaurant strategy, operations and managerial finance engagements for clients, and is reachable at jgordon@pacificmanagementconsultinggroup.com, office (858) 874-6626, website: https://www.pacificmanagementconsultinggroup.com.
[1] While I am no attorney, my experience and readings are that SEC regulations provides some guidance, but generally the company can format the calls as they see fit but must be truthful, public and not misleading.
[2] There will be more adjustments affecting our industry going forward, with full lease liability recognition, franchise ad fund revenue and expense recognition and amortization of franchise initial fees as accounting issues in 2019 and going forward.
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