Full-Service Restaurant Valuations – June 30, 2021 Update
The restaurant industry met with significant challenges in 2020. The pandemic, government-mandated social distancing requirements, and economic shutdowns all wreaked havoc on full-service restaurants. These businesses had a difficult time adapting to the drastic change in consumer behavior. During the first six months of 2021, publicly-traded full-service restaurant valuations improved drastically. This article will examine some of the factors that appeared to impact valuations in this industry.
This article updates our December 31, 2020 analysis for the full-service restaurant industry. See also our June 30, 2021 update for the limited-service restaurant industry.
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 June 30, 2021.
Figure 1 summarizes the full-service restaurant groups’ median enterprise value (“TEV”), median revenues, and median earnings before interest, taxes, depreciation, and amortization (“EBITDA”). Latest fiscal year is abbreviated “LFY” (2020) and “LTM” means latest 12 months (latest available information as of June 30, 2021).
The TEV of full-service restaurants declined dramatically in 2020 due to the pandemic. Decreases in valuations coincided with precipitous declines in revenue and EBITDA. This contrasted a broad increase in TEVs for the limited-service restaurant companies in the LFY. We had attributed this increase to expectations for significant growth two to three years in the future. While the full-service restaurant groups also expected solid post-pandemic growth, the industry did not enjoy the same level of investor confidence.
In the LTM, however, valuations recovered precipitously and revenue and EBITDA began to increase again. In many cases, values associated with the full-service restaurant groups grew past pre-pandemic values. There are significant risks in the industry, including a resurgence of COVID-19 cases due to variants and ongoing challenges associated with widespread labor shortages. Amanda McNamara wrote an excellent article for Toast that you can read here on recent labor issues in the restaurant industry.
Valuation Multiples
Figures 2 and 3 present the historical trend of revenue and EBITDA multiples for the industry.
As valuations have risen faster than financial performance, multiples increased sharply in the LTM. We will examine some of the factors that may be impacting the TEV of the publicly-traded full-service restaurant groups.
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 2021 for most companies).
In Figures 4 and 5, the orange line represents data as of June 30, 2020, reflecting one of the worst times of the pandemic. NFY projections at the time (i.e., for 2020) called for significant declines in revenue and EBITDA. These declines are evident in the LFY period (2020) via the blue line. Current projections call for significant improvements in revenue and EBITDA in 2021.
We also looked to identify a meaningful relationship between growth and observed LTM revenue and EBITDA multiples. We could not discern a significant trend between growth rates and LTM revenue and EBITDA multiples. However, we noticed a tendency for companies with higher projected growth rates to trade at higher NFY EBITDA multiples. The relationship observed in Figure 6 suggests that investors are not yet pricing these companies based on the companies’ historical results.
Higher multiples are generally associated with companies that generate higher levels of growth. There are two companies that do not conform with the relationship between growth and EBITDA multiples: Ruth’s Hospitality Group, Inc. and The ONE Group Hospitality, Inc. Both companies operate high-end steakhouses, which were not easily adaptable to a take-out or delivery model.
Notably, the relationship seen in Figure 6 is limited to a certain degree by the availability of information. Only 10 of the 20 companies analyzed had data to plot in the chart.
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.
Figure 7 shows a possible correlation between size (measured by market capitalization) and LTM revenue multiples.
The relationship between size and revenue multiples is evident among most of the companies in the industry group. The variation in multiples among the largest companies may be due to other factors (such as profitability and expected growth). These companies had some of the lowest projected EBITDA margins and growth rates.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. We did not observe a meaningful relationship between profitability and revenue multiples in the LTM period. However, we observed a correlation between NFY EBITDA margins and NFY revenue multiples, as shown in Figure 8 below.
Multiples tend to cluster around 0.5x to 1.5x NFY revenue for those companies expected to generate between 5.0% and 12.0% of EBITDA margin. Companies with 12.0% to 17.0% EBITDA margins appear to trade at NFY revenue multiples between 1.5x and 2.5x. Finally, the companies with 20.0% or more in EBITDA margin traded at NFY revenue multiples of 3.0x or more.
Tying it All Together
The trends discussed in this article suggest that growth, size, and profitability are primary factors impacting the valuations of full-service restaurant companies. Certain factors, such as growth and profitability, appear to carry heavier weight with investors. In addition, investors seem to invest in the companies of this industry based on their projected financial metrics instead of their historical financial performance. The focus on near-term estimates makes sense, given the turmoil and operational aberrations caused by the pandemic.
A summary of the observations above is presented below and compared to those we made as of December 31, 2020.
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.
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