Investors in restaurant companies should track margins because they tell us which companies are most profitable. A company’s profitability impacts stock prices. We will look at how each restaurant has performed in terms of margins during the quarter.
Overall margin lifts
Overall, most of the restaurants saw a rise in adjusted EBITDA margins. The median EBITDA margin for the above group of restaurants was 14%. Five out of eight restaurants experienced an improvement in margins as a result of an increase in average check, which was largely driven by menu price increases, which offset food and wage inflation.
Over the past seven quarters, Chipotle’s (CMG) margin expanded to 22%, as you can see in the chart above. This is positive, because an expansion of margins, which was achieved by high same-store sales growth and sales leverage, increased the earnings of the company. A restaurant has fixed costs like rent, but by spreading these costs through higher sales, a restaurant can achieve sales leverage. Shake Shack (SHAK) also has a high margin at 18%.
In contrast, Panera’s (PNRA) margins have contracted because of its investments in Panera 2.0. This has also negatively impacted its earnings growth, which explains the company’s lackluster performance. But this is a one-time charge depressing the margins, and the situation could reverse if Panera 2.0 initiatives prove beneficial.
Noodles (NDLS), Potbelly (PBPB), and Zoe’s (ZOES) are at the bottom with relatively lower margins compared to above peers. While this is negative, it may also mean that these companies have an opportunity to improve their margins if they get their business model right.
Next, we will look at how these companies stack up in terms of valuation multiples.