Restaurants are Flatish, Except for Some…
Through early June, restaurant top line activity remained flatish. Some brands are showing real strength while others are exceedingly weak on either one year or two basis. May/June SSS were just marginally softer from March, the 2026 peak to date. [1] Check is always higher and traffic lower[2] At the beginning of the calendar year, we noted twenty-two negative macro influences on our sales; the spike in world gasoline costs have not helped.
In parts of the QSR segment, some brands are just drastically imperiled. Several private equity owned brands, such as Subway, Carl’s and Hardee’s, Sonic, plus publicly traded Wendy’s and Jack in the Box are so much down that the risk of some franchisee default is very likely. [3]
[This really is not the time to force new unit growth as part of these downtrodden QSR SDAs. That adds to debt at a difficult time and adds to more unit count, which is a big part of our overpenetration problems.]
The brands that are strong stay strong for a prolonged period. For example, Chili’s hit the formula and remained a share gainer for about 2 years. In spring 2026, Chili’s began to comp over 2 years of big gains. It is now flat. So, what. This is simple math progression and does not mean the brand is weak. Whether the investment or analytical community can admit it or not, multiplr years of big sales gains do not replicate year after year after year with large sales gains. Holding those gains and then tackling other opportunities seems best. For example, Kevin and the Brinker team are now working to improve and rehabilitate Maggiano’s, their other brand.
The problem with low sales comps and margins
With both sales comps low and negative, we will have margin percentage and dollars problems. For decades, average ticket and food/labor inflation were in rough balance, at about 3% plus. That changed in March of 2020. When the pandemic hit, right away global supply chain transit gummed up. Except for QSRs with a drive though base, sales and labor demand fell off. Once most of our business was able to open back up, we found it hard to get staff. Some ex-employees had moved on, and new competitive wage rates were higher. From mid-2022 through 2024, we were hit with double digit dual food and labor inflation. Then we took a lot of price, from 2019 on, but especially in 2022-2025. Now we have a price value problem in some but not all brands.
The story at Starbucks and McDonalds is stark.
Two global brands in turnaround mode have had dramatic store level margin declines recognized lately: Starbucks and McDonalds. Only recently, has Starbucks returned to a mid-single digit SSS range (a very nice plus 7% in Q1), but at great cost. Starbucks North America EBIT fell 9.1% from Q2 2026 v. year ago, on top of a 50% decline last year (2025 v. 2024). Deleverage and higher wage and staffing costs per the “back to Starbucks” program were cited.
In the Q1, McDonalds reported 3. SSS of +3.8%. Company operated margin fell to 5.2% versus 6.3% in 2025. G&A is factored in store level margins are higher but down. The company store trend is a proxy to how franchisees are doing. CEO Chris K noted that franchisees are under margin pressure and noted their own unhappiness with the company store margins. [4]
This is not hard to figure out: a low price thrust throughout the world and higher labor rates and commodity inflation.
[Note: In my view, since these are highly visible public brands, change investments might better be phased and more staged rather than doing everything at one time.]
The Pizza Hut Disposal
While long rumored, the Pizza Hut sale has finally happened. On first blush, YUM Brands is out of the pizza business, other than supporting the YUM China entity as it must. I imagine that YUM Brands desires Pizza Hut intellectual property to be retained by someone. We will find out.
The YUM US numbers were really poor. I can’t blame the YUM team for forcing change as an portfolio management decision. The worldwide consumer discretionary business changes on a dime.
Of note the earnings multiple for both Pizza Hut deals looks to be about 7.9X. This is low for a global US franchise brand, but Pizza Hut has been declining for over 15 years. BTIG/Peter Saleh saw those same rough numbers. This is a prelim number as some portion of YUM corporate expense might still be passed to PE LongRange.
I’m not sure how this will work going forward. LongRange is a very small PE firm with no obvious restaurant investments or expertise. Perhaps they have another partner in sight. The cost of rehabbing Pizza Hut and dealing with struggling franchisees will take time and expense.
About the author: John A Gordon MAFF is a long-term restaurant industry veteran. He has been in several financial analysis and planning (FP&A) roles, and now, via his 24-year management consultancy, Pacific Management Consulting Group. Call him anytime to talk restaurant stuff in detail: 619 379 5561; jgordon@pacificmanagementconsultinggroup.com.
[1] Very grateful to Jeff Farmer (Gordon/Haskett), Andy Barrish (Jerfferies), National Restaurant Association (Research and Analysis), Restaurant Research, Michael Halen (Bloomberg), Bureau of Labor Stattics and Department of Census, Black Box and many others providing extremely useful analysis and commentary.
[2] We know that the increase in delivery, off premise sales channel is depressing the counting of customer counts.
[3] At least one major QSR brand is in deep discussions to defer royalties.
[4] Chris K briefly mentioned the prospect of refranchising,
