Restaurant Stocks

About Restaurant Stocks

There are two completely different investments here and the market prices them accordingly. A franchisor collects a royalty on somebody else's sales, owns almost no property, carries no kitchen staff, and converts most of its revenue to cash. Those are asset-light annuities and they trade at premium multiples deservedly. An operator that owns its restaurants carries the food cost, the wage bill and the lease, and earns a thin single-digit margin for the trouble.

Company-operated chains are a leveraged bet on three costs that move for unrelated reasons: commodity prices, minimum wages, and rents fixed years earlier. Menu prices have to cover all three, and raising them is also the fastest way to lose traffic.

When reading same-store sales, split it into traffic and ticket. Growth that is entirely price with falling footfall is a business quietly losing customers while the headline still looks fine. That distinction is usually where the trouble shows up first, and it shows up a year before it reaches earnings.

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