RESTAURANTS: THINKING ABOUT NEXT YEAR

Restaurant industry sales continue to bounce along, with average same sales bouncing around zero plus or minis 1 percentage point. November is going to be hard to read, with Weeks 3 and 4 affected by the Thanksgiving calendar shift.   On a 2 year view,  SSS before the 2 Thanksgiving break, were only .6 % on a 3 week basis.[1]

Why? I continue to see that there haven’t been any macro or micro (restaurant space ) catalysts. Only one challenge the government shut down has ended. But no other headwinds. To [2]be sure, McDonalds has moved to appx. 5% positive. Burger King moved to negative territory, and Wendy’s moved materially weaker, to a minus 10% zone.   The casual dining segment outperformed QSR again. Outback moved to positive territory. 

At the recent Restaurant Finance and Development Conference, I heard a lot of talk about “next year.” I think about it too, but that should not be the central answer to 2025 developments.

I can’t follow these brand’s new unit build strategies:  the rationale why Sweet Green (SG) and Chipotle (CMG) have signaled the intent to build so many new units in CY2026 is questionable. Chipotle is guiding to plus 315 to 345 units and Sweetgreen at 15 to 20 units in 2026. The 2025 value was 37 units.

With both brands stuck in negative SSS territory, the have a contracting market with more units opened. They need to ix some brand specifics first.  

How to read P&L numbers in this environment

Reading restaurant results  is all the more vital now, to trigger corrections.

Other than looking at just EPS and SSS, there are several expanded perspectives that  operators and investors should consider in terms of trying to figure out what is going on. See the following:

Profit Flow Through  demonstrates profit efficiency with changes in sales. In company operated brands and locations, it is easy: changes in restaurant margin (or EBITDA) dollars divided by changes in sales dollars. Almost always, if sales are up, store margin dollars should be higher too. How much higher? It depends on brand and sales mix[3] Profit gain $ dividend by sales $ should be 30-45%.

If the flowthrough is too low, that means that marketing is off or unit controllable factors are off.

For franchised brands, this level of detail for franchisees is almost never given.[4]

However, for franchises brands that operate company stores, which can be the basis.  For example, normally Burger King (Miami) and McDonalds (primarily Europe) are the company zones, so some adjustments are necessary.  But it is a start.[5] If the brand is totally franchised, no data is published. Contact an analyst like me or Wally at Restaurant Research for the larger brands .

Look at multiyear same store sales (SSS). All of the  restaurant, retail and lodging industries, among others, are obsessed with SSS. This is often because analysts and lenders ask.  The problem is while year over year comparisons tell  a story,  meaningful developments may have distorted the prior year results. Examples: the pandemic effects, weather, or holiday periods.

The company may have revealed 2 year SSS most likely in the earnings call discussions. If not, another way to do it [6] but one that you  may be forced into is: (total sales in year three, divided by the average number of units open that year as an average) then divided by: (the total sales in year one, divided by the average number of units open in year 1).

We then comparing average unit sales for year 3 and year 1. You can then subtract from year 3 and run that as of percentage of year one sales.  You will come up with a number such as plus 5 or minus 1 . That’s the number you are looking for.

One important note Is that if SSS are not up 2.5% or more, percentage and dollar store margins will erode. Even in 2025, we are running more inflation than that.

More on restaurant prospects and generational change

Following as perspective is Part 2 of last month’s  discussion about restaurant brands and generational shifts, from long time industry expert Mr. Mac Brand, founder of Bellwether Food Group:

There’s been a great deal of discussion around what Starbucks’ missteps are, much of it accurate and fairly explained. At the same time, there’s another, more significant factor in play here.

Like fashion, restaurants have a life cycle, and Starbucks is the legacy brand, closing stores, evaluating their menu, all things legacy brands eventually must do as their brand matures, the market changes, new competitors emerge, and consumers' “life-phase” out of regular usage. Remote work hurt the brand significantly. (That’s a topic for another article)

The typical Dutch Brothers brand is newer, so many of their loyal customers are Gen X and Z, who are establishing their brand preferences in these early phases of their lives as paying consumers. For many, the occasion of indulgence at Dutch Brothers is one of the very first consumer experiences that they can control, which they experience with their peers.

Everything about Dutch Brothers is newer, and therefore more “fashionable” with these consumers. If you’re 45-50 years old, it’s been a while since you went to Starbucks 3-4 times a week for a Frappuccino, as you might have done in your 20s or 30s.

[1]  Thank you Gordon Haskett and

[2]  Values and relationships are based on norms and industry expectations.

[3] Presence of material bar/alcohol sales mix or catering will help.

[4]  It is possible to do calculations on an average  brand bases at RBI (thank you Chair Patrick Doyle)

[5]  Use of the 10K and US FDD can be of help in backing into non-US results.

[6] It would be better to include only those units all year 3 that were also open in year 1, but sometimes that data is unavailable.