uploads///Units Added and Unit Growth

Comp: How Quickly Are Fast Casual Restaurants Adding Units?

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Sep. 23 2015, Updated 3:05 p.m. ET

Unit growth

Unit growth is another way a restaurant can grow its revenue. But growing too quickly can be negative for a restaurant, as it burdens the company’s capital needs, management, and training. So how quickly, and which fast casual restaurants are growing?

Most of the fast casual restaurants above are primarily company-operated except Panera Bread and Shake Shack (SHAK). Panera has more franchise locations, while Shake Shack has an almost equal mix of company-operated and franchised restaurants in its system.

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Expanding unit growth

Almost all of the fast casual restaurants have double-digit unit growth with the trailing 12-month median unit growth rate as of 2Q15 at 12%. Habit (HABT) is excluded from the above chart due to unavailability of data on a trailing 12-month basis (or TTM). For Shake Shack, only company-operated unit growth data was used.

Naturally, younger companies like Shake Shack are growing at a higher rate compared to others. Over the past five years, Shake Shack has grown at an average of 73% and Habit has grown at an average of 33%. This high growth could be a concern, but may not necessarily be negative, as these companies also have a lower unit count, so adding even a few units amplifies their growth rates.

Potential upside

Panera (PNRA), Fiesta (FRGI), and Potbelly (PBPB) are all adding units relatively slower with a historical growth rate of 5.2%, 7%, and 10.9%, respectively. These companies have the potential to add more units.

Chipotle’s (CMG) unit growth was 12%, which is around the median. Over the last 12 months, Chipotle added 197 net new units, but closed only three locations. This may mean that the company is able to handle its current growth rate and there may be a potential to add more units each year. The company has added units at the rate of 13% over the past five years. The Consumer Discretionary Select Sector SPDR (XLY) has 1% of its holdings in Chipotle and 1.5% of its holdings in Yum! Brands (YUM).

Over the past three years, Noodles added units at an average growth rate of 16%. Despite the worst same-store sales growth and lowest revenue per square foot, Noodles (NDLS) is adding units faster than most of the restaurants. Adding units to grow revenue without getting same-store sales right may hurt the company’s prospects, because later these stores could perform poorly and lead to closures.

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