The BIG News December 2006
Industry Giants: Monthly Comps Reports Are History
by Sarah E. Lockyer
Nation's Restaurant News
Several restaurant operators, frustrated by what they call an inordinate amount of attention to same-store sales results, are ending the practice of reporting the metric on a monthly basis.
In the recent past, Starbucks Corp., Papa John's International Inc. and Yum! Brands Inc. have announced that they soon would begin reporting same-store sales on a quarterly basis. In releasing the figures, which are considered to be barometers of a brand's health, less frequently, company officials have said they hope to encourage longer-term views of their business strategies.
While publicly held restaurant companies are not required to release monthly same-store sales results, the move to quarterly schedules by some of the industry's largest entities could persuade other companies to follow suit, ultimately resulting in less information available for investors and observers.
Starbucks' unexpected announcement that it would immediately stop issuing monthly comparative-store sales results and instead report quarterly results was made at the end of its latest quarter.
Michael Casey, chief financial officer of the Seattle-based operator or licensor of more than 12,400 Starbucks Coffee locations, told investors that the monthly metric caused some investors and observers to focus too much on near-term results rather than taking a long-term view.
“Providing the information on a monthly basis encourages a short-term focus and provokes volatility in the company's stock,“ he said.
Starbucks' monthly sales reports often incited surges or deep dips in the company's share price, depending on the result. The latest example was in July, when Starbucks recorded its smallest monthly same-store sales gain since 2001, an increase of 4 percent for the four weeks ended July 30 over the same period a year earlier. The company's stock declined 12 percent the day after the numbers were filed, even though a gain of 4 percent is within the company's stated goal of sustained long-term, same-store sales increases between 3 percent and 7 percent.
Papa John's and Yum quickly followed Starbucks' lead. Other restaurant companies, like publicly traded Domino's Pizza Inc. and privately held Bruegger's Enterprises Inc., have reported only quarterly same-store sales results for some time.
Louisville, KY.-based Papa John's said during its latest- quarter conference call that December would be the last month it would report monthly same-store sales results, and that next year it would begin reporting results on a quarterly basis.
The company said it decided to do so to match “the reporting methodology of our two primary national competitors,” namely the Domino's and Pizza Hut chains.
“In addition to avoiding the potential competitive disadvantage of continuing to report monthly,” Papa John's said in a statement, “we believe reporting on a quarterly basis will actually benefit investors by providing a more meaningful view of our long-term performance trends and strategies.”
Papa John's operates or franchises about 2,986 pizza delivery locations worldwide.
Yum Brands, also based in Louisville, Ky., said its decision to move to a quarterly reporting schedule was made because the company wanted to focus on the long-term total results of its portfolio of brands, which includes KFC, Pizza Hut, Taco Bell, Long John Silver's and A&W All American Food. There are more than 34,000 restaurants in the Yum system. The company also said it builds shareholder value through restaurant expansion, especially in places like China, where the company boasts higher returns on invested capital.
“Our focus is on the total business, and longer-term quarterly results are more indicative of our performance and how we add value,“ the company said. “It sends the right message to all of our teams. We do not run this business month-to-month; it is building long-term value that counts.“
Foodservice is not the only industry in which some companies are choosing to disclose less information rather than more, a practice commonplace before the collapse of Enron led to rules for greater financial disclosure. Retailing giants Wal-Mart and Target moved from a weekly to a monthly same-store sales reporting schedule earlier this year, and Talbots moved to a quarterly schedule. Home Depot, in a move observers deemed controversial, said this summer it would no longer report the metric at all.
In almost all of the moves to reduced reporting schedules, companies cited the alleged infatuation with same-store sales among investors and securities analysts.
But at a restaurant industry conference in Las Vegas this month, securities analyst Joe Buckley, a senior managing director at New York-based Bear, Stearns & Co. Inc., said this was not the case. He noted during the Restaurant Finance & Development Conference that same-store sales results are a very important metric, “as a measure of the health and competitiveness“ of a brand. He also said the numbers are “the most important determinant“ of unit-level margins as profit flow-through directly relates to same-store sales changes.
However, he added, “Wall Street is accused of overemphasizing [same-store sales], but the only group of people I have seen more focused on same-store sales than investors are restaurant operators.“
Many restaurant companies at the conference reinforced this belief, noting that they are actively working on ways to build same-store sales in an ultracompetitive and unfriendly macroeconomic environment. Companies said they wanted both top- and bottom-line drivers to combat challenges that include ominous commodity prices, higher occupancy costs and the increasing popularity of couponing by competitors, which drives traffic but not sales.
Harsha V. Agadi, president and chief executive of Church's Chicken International in Atlanta, said that, among other initiatives, his company outsources to contain costs, which helps to leverage the sales that units are able to net. For example, Agadi said that the company outsources its entire IT infrastructure to India and plans to outsource its accounting and customer service to that country by January. Church's operates or franchises more than 1,500 restaurants worldwide.
“If you do not outsource, you will perish over time,” he said. “Your margins are what make you survive.”
Tom Davin, chief executive of Panda Restaurant Group Inc., based in Rosemead, Calif., highlighted his company's emphasis on quality, service and cleanliness.
“If you can service your guest well, you can increase same-store sales,” he said. “Great operators satisfy guests and then drive that through to the bottom line.”
Panda operates or franchises about 800 Panda Express quick-service restaurants, five Panda Inn full-service restaurants and 12 quick-service Hibachi-San units.
E-mail the author: Sarah E. Lockyer