Winter Left Some Restaurant Chains Cold, Exposed Others' Strengths

Yum! Brands, Chipotle Mexican Grill, and Red Robin Gourmet Burgers all revealed interesting info in their conference calls that clarifies their relative strengths and weaknesses.

May 2, 2014 at 12:00PM

Warren Buffett once said, "Only when the tide goes out do you discover who's been swimming naked." Maybe that quote needs an update. The recent snowstorms helped us discover a lot about Yum! Brands (NYSE:YUM), especially as compared to chains such as Chipotle Mexican Grill (NYSE:CMG) and Red Robin Gourmet Burgers (NASDAQ:RRGB).

Source: Yum! Brands.

Not so yummy domestically
On April 22, Yum! Brands reported fiscal first-quarter results. Worldwide system sales popped 4%. Worldwide operating profit soared 22%. China division sales jumped 17%. Operating profit skyrocketed 80%. India sales blew up 21%. You get the idea. Yum! Brands delivered stellar results everywhere in the world except the United States -- where Chipotle Mexican Grill and Red Robin Gourmet Burgers each hit it out of the park.

On Yum! Brands' earnings conference call, CEO David Novak mentioned "very poor performance" in the United States in reference to Pizza Hut, where same-store sales plunged 5%. The company generates 50% of its Pizza Hut profits from the domestic market. Markets abroad generate 90% of KFC's profit, but Taco Bell generates a whopping 97% of its profit from within our borders.

Taco Bell's domestic operation did worse than the company expected, as both its sales and profit margin fell. Same-store sales dropped 1% and Yum! Brands blamed 3% of the slippage on "unusually severe U.S. weather."


Source: Red Robin Gourmet Burgers.

Too cold for a hot taco?
The winter snowstorms apparently didn't even cause all of the problems, as temperature alone was cited as a factor. Novak stated, "Like most retailers our U.S. business was soft driven in part by cold weather." It makes sense that snowstorms would keep customers away, but just cold? Chipotle Mexican Grill is unquestionably in a different league than Taco Bell, but they're both playing the same sport. Chipotle Mexican Grill saw nothing but exploding sales and profits during the same quarter.

In the call Novak also blamed Taco Bell's disappointment on high commodity inflation. Chipotle Mexican Grill cited the same thing and it even plans "mid-single-digit" price increases in response to rising prices for beef, pork, and all sorts of other ingredients.

Chipotle Mexican Grill's warmth
Chipotle Mexican Grill points out that other retailers and restaurants were struggling with the cold, but the company's "warm and welcoming environment" brought customers in at an accelerated pace. According to Jack Hartung, CFO of Chipotle, the company did see volatility in the quarter because of extreme weather in some places, but these locations then saw sales spikes when the weather cleared up. It seems like those who couldn't get their Chipotle Mexican Grill "fix" on one day were sure to take advantage of the next opportunity.


Source: Chipotle Mexican Grill.

For Taco Bell, however, that didn't seem to happen. Is Taco Bell the type of place that is more of an impulse stop rather than an event? Red Robin Gourmet Burgers and Chipotle Mexican Grill might receive more planned visits. Perhaps many people won't leave the house just to go to Taco Bell, and if they don't get their Taco Bell "fix" they don't need to make up for it.

Red Robin calls this the "cabin fever" effect, where people get so tired of being cooped up in their homes that when the weather clears they show up at restaurants in droves -- but they don't necessarily run off to eat at fast-food places like Taco Bell. They want something a notch higher. No wonder Red Robin has an unofficial policy of specifically not blaming the weather.  In its last reported quarter, Red Robin saw adjusted revenue increase 3.7%, same-store sales pop 3.2%, and net income climb 8.8%. 

Foolish final thoughts
It's interesting to look at many restaurant companies as they report and quickly learn which reports show the effects of convenience and perhaps seasonality and which ones show customer cravings in the numbers. It will also be interesting to see if Chipotle's or Red Robin's sales taper off a bit in the quarters ahead as presumably the weather conditions become mild again.

As for Taco Bell, Yum! Brands may have the right idea when it comes to Chipotle. It is launching its own fancy fast-casual taco place that sounds like it will be a step above Chipotle Mexican Grill. If you can't beat 'em, join 'em -- and then beat 'em. Lobster taco, anyone? I'd hike, if necessary, in the snow for that one.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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