RESTAURANTS: CONDITIONS BEGINNING TO NORMALIZE

We have gotten past the February-March weakness in sales. Sampled year to year (seasonally adjusted) restaurant and bar sales year over year was plus 6.9% in April and plus .9% in May.  [1]  The much lower .9% real increase in May was unexpected, since other trackers are showing a more positive trend. Only one of the big public brands have bankruptcy concerns at this moment.[2]  Restaurant price inflation is still higher than grocery store inflation, a negative signal over the last 3 years, and notched a tick.

The pace of major brand restaurant M&A increased in June, especially Dave’s Hot Chicken (Roark) and tire kicking at Bojangles. 

Consumer sentiment and fear about tariffs and inflation is now improved.[3] However, some investment market tariff uncertainty around July 2025, tariff deadline remains.

The same trend as in April continued: QSR including the pizza brands were negative (traffic) but up sequentially; fast casual is up month to month and casual dining growth continued. Several casual brands are remaining or now positive.

·       The same brands are still the strongest brands: Dutch Bros (BROS), CAVA, Texas Roadhouse, Brinker-Chili’s (EAT), Shake Shack (SHAK), Olive Garden & Longhorn (DRI), In N Out, Jersey Mikes, Taco Bell (YUM). Chipotle (CMG) has cooled off for now.

·       Of interest, Chili’s continues its very positive trend despite comping over the one year anniversary of its powerhouse burger offer. Seems to me that they are getting trade up.

·       The weaker brands remain the same, with Red Robin (RRGB), Buffalo Wild Wings (private, Roark), Wendy’s (WEN) weaker and KFC US, YUM), Pizza Hut (US, YUM) and Subway (private, Roark) in the weakest positions. [4]   

Restaurant Store Margins: Now Stable, but Lower  

Company operated store level margins (EBITDA) took a hit into 2025. See Table One below. They have not recovered generally but remain in the mid 17% range.[5]  

The problem with EBITDA is it does not consider debt service (principal and interest expense) and CAPEX. That is a real measurement problem in the CAPEX intense restaurant space. It is an equalizing number but incomplete. TABLE One, below shows the store EBITDA and same store sales trend from a sample of brands:

The CAGR growth over this 2 year period was negative 1.2%. Note that franchisee unit margins are about 5% less (due to royalties) or in the 12% range, on average.  As an example, the multi-unit and brand $1B revenue Sizzling Platter, recently acquired by Bain, has a Fitch Ratings projection of going forward EBITDA margin at 12%, or $53 million, assuming some closings. [6]

Going forward… most of us in the restaurant analytical world expect pressure on COGS to continue, making it important to drive profitable sales and gain leverage on labor and OPEX fixed expense.   Importance to the middle of the P&L is clear, especially utilities.

Short takes….

·       Pinstripes, the now delisted eatertainment company is close to filing  Chapter 11. [7]In May, its lender, Oaktree Capital, assumed 85% ownership in return for giving a $7.5 million loan. In my view, Pinstripes was listed just before eatertainment brands took a plunge. Timing is everything.

·       For a client, we took a look at the very high G&A costs at SweetGreen (SG). While an attractive and growing brand, it still hasn’t made money yet on the net income line. It’s G&A is running at 23%, the highest in the publics. Turns out that depreciation is a big number along with stock based compensation. Both have come down as a percentage of sales. Restaurant level margin is a heathy 19.7% and has no debt. On this matter, management is focused on growing sales and the natural deleverage of fixed expenses that should occur.     

[1]   Census Department, Advance Food Service sales, June 17, 2025.

[2]  Call me at (858) 874 6626. 

[3]   University  of Michigan Survey of Consumer Sentiment.

[4]   Proprietary research.

[5]    Proprietary research, Restaurant Research, summer 2025.

[6]   Nations Restaurant News, June 17, 2025, with Fitch Ratings report of September 25, 2024, as attachment.

[7]   Bloomberg , June 14  2025.