Full-Service Restaurant Valuations – December 2022

Valuations of the publicly-traded full-service restaurant players were volatile between June 2021 and June 2022. We noted a substantial increase in valuations in excess of financial performance in June 2021 followed by a pullback in valuations by December 2021 (though valuations remained higher than in December 2020). By the end of 2022, valuations had declined further. This article will examine some of the factors that appear to have impacted the valuations in the industry.

This article updates our June 2022 analysis.

Important notes: This article examines potential driving factors for full-service restaurant company valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what the author interpreted as the primary value drivers. It will not touch on every observation in the data. For a quick read on the basic concepts of risk and return and how they apply in the context of this article, please visit: What is Value? and Risk and Return in the Market Approach.

The industry constituents for this analysis are listed below. The effective date of this analysis is December 30, 2022. For this update, BBQ Holdings, Inc. was removed as it had been acquired by MTY Franchising USA, Inc. in September 2022.

List of constituents analyzed in this article

Figure 1 summarizes three items for the full-service restaurant companies:

  • Total enterprise value calculated as the sum of market capitalization and interest-bearing debt less cash;
  • Median revenues; and
  • Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).

The latest fiscal year is notated “LFY” (2021), while the latest 12-month period is labeled “LTM” (latest available information as of December 30, 2022).

Fig. 1 - Trend of historical enterprise values, revenue, and EBITDA

As can be seen in Figure 1, the industry’s historical revenue and EBITDA dipped significantly in the LFY-1 (2020) period due to the COVID-19 pandemic, before recovering in 2021. Revenue continued to grow through 2022, but EBITDA declined (in part due to rising operational and food costs). Valuations generally declined toward the end of 2022.

According to Toast’s Q4 2022 Restaurant Trends Report, inflation represented a primary concern for restaurant operators and guests through the end of 2022. Per Toast’s data, the average Valentine’s Day dinner at a full-service restaurant (the busiest dinner day of the year) for restaurants within 12 major U.S. metropolitan areas was $69 with tip and no tax. The cost of the average Valentine’s Day dinner in 2023 within the same geographic areas was $121 (with tip, no tax)!

The recent change in valuation may be attributable, in part, to uncertainties associated with future growth given current economic uncertainties and continued concerns regarding inflation.

Valuation Multiples

Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.

Fig. 2 – Trend of historical median revenue multiples
Fig. 3 – Trend of historical median EBITDA multiples

As shown in Figures 2 and 3, median valuation multiples declined sharply from 2020 to 2021. Revenue multiples continued a sharp decline through the end of 2022, while a more modest decline in EBITDA multiples was observed. Between December 2021 and June 2022, revenue multiples moved lower for all but one company (Brinker International, Inc.) in the group, while EBITDA multiples for 11 of the 16 public full-service restaurant companies declined.

The Growth Story

Growth often has a strong influence on how multiples differ among companies in an industry. A summary of the consensus forecasts for each group is presented in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2022 for most companies).

Fig. 4 – Comparison of historical and projected revenue growth: prior year vs. current year
Fig. 5 - Comparison of historical and projected EBITDA growth: prior year vs. current year

In Figures 4 and 5, the orange line represents data as of December 2021. Projections at the time called for stabilization in revenue and some improvement in EBITDA from 2022 through 2024. However, current projections now call for stronger revenue growth but weaker EBITDA improvement.

Current projected revenue and EBITDA trends are muted relative to a year prior but still call for growth over the next few years.

We also looked to identify a meaningful relationship between growth and observed revenue and EBITDA multiples. We could not discern a significant trend between growth rates and revenue or EBITDA multiples, as shown in Figures 6 and 7, respectively.

Fig. 6 – Chart plotting revenue multiples against projected revenue growth rates
Fig. 7 – Chart plotting EBITDA multiples against projected EBITDA growth rates

The seemingly random distribution of multiples relative to their associated projected growth rates in Figures 6 and 7 would suggest that growth does not have a singular impact on the valuation multiples for the industry.

The Size Story

Larger companies are generally perceived to have lower levels of risk relative to smaller companies due to improved product or geographic diversification, deeper management teams, access to a variety of distribution channels, and better availability of capital, among other factors. Size (as measured by market capitalization) is plotted against LTM revenue multiples in Figure 8.

Fig. 8 – Chart plotting revenue multiples against market capitalization

As can be seen in Figure 8, size did not have a measurable impact on the magnitude of valuation multiples. However, we noted a wide spread in valuation multiples among companies of all sizes, indicating that any relationship between size and revenue multiples to be weak.

The Profitability Story

Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. LTM EBITDA margins and LTM revenue multiples are plotted in Figure 9 below.

Fig. 9 – Chart plotting revenue multiples against EBITDA margins

In Figure 9, companies generating greater levels of margin appeared to trade at higher revenue multiples.

The Leverage Story

Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) issued to equity holders. In Figure 10, we plot LTM revenue multiples against their associated debt-to-total capital ratios.

Fig. 10 – Chart plotting revenue multiples against debt to total capital ratios

In Figure 9, there appeared to be some loose correlation between revenue multiples and leverage ratios. However, the relationship between these ratios and valuation multiples was not consistently observed throughout the dataset.

Tying it All Together

The trends discussed in this article suggest that profitability and leverage are influencing current valuations of publicly-traded full-service restaurant companies. The lack of correlation observed between growth and valuation multiples seems to suggest that investors are focused on other variables, such as the health of the broad U.S. economy, inflation, the future impact of COVID variants, and/or capacity issues due to continued labor shortages. These factors would increase the risk of achieving the projected results.

A summary of the observations above is presented below and compared to those made in our December 2021 analysis.

Summary of how the various factors analyzed in this article were observed to impact valuation multiples

I hope you found this analysis helpful. All input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.