Use access key #2 to skip to page content.

Do restaurant comps matter for investors?



November 22, 2013 – Comments (0) | RELATED TICKERS: CMG , BWLD , NDLS

I've always enjoyed following and investing in restaurants. Restaurants can be some of the most relatable businesses for individual investors, especially teens and young adults, to understand and follow. Restaurants also give investors the excuse to eat out under the guise of evaluating the business, just the type of research you might expect Peter Lynch do on potential holdings in the Magellan Fund. Restaurants become all the more exciting for investors when you have innovative players, such as Starbucks, Chipotle, and Buffalo Wild Wings, who master and expand a niche concept nationally and, in some cases, globally. 

One trick to understanding and evaluating restaurants is comparable restaurant sales, or "comps," which typically represent sales made at restaurants that have been open for at least 18 months. This is the equivalent of the "same-store sales" terminology used in the retail sector. In essence, comps measure the sales coming from established restaurant locations and exclude sales figures from recently-opened locations. 

Why do comps even matter for investors? Comps give us an indication as to what causes a company's growth (or lack thereof). If comps, on a year-over-year basis, increase by 1% for Restaurant A, this indicates that established locations are seeing minimal sales growth. On the other hand, if Restaurant B's comps stand at a 10% increase, this demonstrates that Restaurant B's established locations are actually bringing in substantial amounts of new revenue. 

In the case of Restaurant A, which has relatively low comps of 1%, we can assume that any revenue growth from the company will largely come from the opening of new locations. For Restaurant B, we can deduct that revenue growth will stem both from established locations as well as newly-opened restaurants. 

As I noted in my recent write-up of Noodles & Company, Noodles' comps stand at 2.7%. Compared to Chipotle, which regularly sees comps in the high-single digit or low double-digit percentage range, Noodles relies much more heavily on the successful expansion and opening of new locations in order to generate revenue growth. This isn't necessarily a bad thing, as every company will have its own unique strengths and potential weaknesses, but it is beneficial for investors to know how the company is likely to grow in the future. 

Comps are a simple analysis tool to gauge where a restaurant business looks to expand revenue. Low comps signify a business that is primarily dependent on opening new locations to generate revenue growth. Higher comps give restaurant businesses a "growth cushion;" these businesses have ongoing sales growth with their established locations and do not necessarily depend upon regularly opening new locations to expand revenue. 

Of course, comps are a small piece of the puzzle of analyzing a restaurant business. I find comps to be a useful tool and a worthwhile metric to track when following a company over time. No one metric should be used as a substitute for thoughtful and ongoing individual due diligence. 

With restaurants, though, I do see comps as something that investors would be wise to follow.

David K 

0 Comments – Post Your Own

Featured Broker Partners