Sector financial performance:

This company, who primarily manufactures and wholesales hotdogs and as well operates, licenses, and franchises beef hotdog and restaurants, has been grouped into quick service restaurants sector in food service industry.

It seems that the slowing down traffic was the major reason contributing to slowing down increase in comparable sales of fast-service restaurants between 2015 and 2017. Data indicates that the average increase in comparable sales all across this sector went down from around 5% of 2015 to around 1% of 2017 except the Mexican restaurants, which presents consistent 5-6% increase in comparable sales during this period. (Hamburger-QSR went down from 5% to 1%; chicken-QSR down from 4% to 2%; sandwich-QSR down from 4% to -2%; pizza-QSR down from 4% to 0%). Correspondingly, accompanied with declining sales, the traffic has been down for most of companies in this sector since 2015. For example, our data indicates that the average decrease in traffic of hamburger restaurants was 2% and 1% in 2016 and 2017.

Since 2017, it seems that traffic all across this industry has continued to decline but present signals of slowing down. Traffic in Mexican restaurant started to decrease in 2018 following the trend seen frequently in other types of QSR before 2017.  Comps turned into negative range and were down largely in Pizza sector in 2018, which, with sandwich companies present the worst decline among QSR sector in the past two years. Comps in chicken related QSR restaurants seem least impacted by generally slowing down in traffic all across industry probably due to relatively stronger demand and thus the ability to raise price. Decreasing Hamburgers’ comps seem to be hitting the bottoms as traffic rebounds and price rises.

It seems that the impacts from decrease in traffic have been offset partially by raising menu price/products mix. This is probably why we are seeing positive growth in their comparable sales from many restaurants while decrease in traffic.

For under-performed companies in this industry, franchising their company-operated restaurants obviously has been a better business strategy in dealing with decreasing sales and cash flow. However, all industry has been suffering from general decline in sales. Data indicates that the average cash flow/share of companies in this sector has been declining since 2017.

Our data indicate that, while slowing down comparable sales, there are general improvements in companies’ gross margins in the past several years benefiting from shifting of revenue to re-franchising, rising menu price, and decreasing commodity costs.

Different types of food styles present different gross margins depending on how easy/difficult they can find franchisees for their restaurant concepts. It seems that chicken-QSR demonstrates the best abilities to franchise their concept and thus present the highest average sector gross margin (average 47%). Hamburger QSR then follows, which presents average 36% gross margin. The typical gross margin for Mexican and pizza QSR is around 17% with a low proportion of franchised revenue. Sandwich sector presents the lowest gross margin of about 13%.

Correspondingly, chicken-QSR presents, according our data, the highest operating margin of average 30% with a SG&A as percentage of sales of 16%. Hamburger-QSR has an average 22% operating margin with a SG&A as percentage of sales of 13%. Mexican and Pizza -QSR has an average 8-9% operating margin with a SG&A as percentage of sales of 8-9%.

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Company performance:

It seems that, based on our data, the growth in demand for hot dogs of this company from food service wholesale clients ( including both its owned operation and licensed operation) has been fast between 2015 and 2017 as indicated by increase in volumes of wholesale and sales of its licensed programs. Sales from its company-operated restaurants declined straight during the same period of time. However, demand seems to be declining in the first few of months of 2018 as indicated by decline in price and licenses revenue first and then the wholesale volumes.

For the first three months of Fiscal 2019 compared with same period of 2018(ended 20180624)

Wholesale revenue decreased by 8% attributable to decrease of about 4% in volume and decrease of 5% in price.

Restaurant revenue decreased about 7%.

License revenue decreased 10%.

Fiscal 2018 compared with 2017(ended 20180325)

Wholesale revenue increased by 12% attributable to increase of about 9.4% in volume and increase of 1.8% in price.

Restaurant revenue decreased 4%.

License revenue decreased 1.5%.

For first nine months of Fiscal 2017 compared with same period of 2016

Wholesale revenue increased by 14.4% attributable to increase of 11% in volume and increase of 3.2% in price.

Restaurant revenue decreased 4%.

License revenue increased 11.5% attributable to increase of 8.5% in volume and increase of 4.1% in price.

Fiscal 2016 compared with 2015(ended 20170325)

Wholesale revenue decreased by 4.4% attributable to decrease of 8.2% in price offset by increase of 4.6% in volume.

Restaurant revenue decreased 10%.

License revenue increased 2.5% attributable to increase of 7.3% in volume offset by decrease of 4% in price.

Fiscal 2015 compared with 2014

Wholesale revenue was flat attributable to decrease of 3.7% in price offset by increase of 4.6% in volume.

Restaurant revenue increased 5%.

License revenue increased 11.6% .

Its gross margin (including wholesale products costs and restaurants operation ) went up from about 33% to 39% in 2017 as a result of lower price of raw materials (beef mainly). While its SG&A as percentage of sales has been down slightly its operating margin still went up to 26% in 2017 from 20% of 2014. Gross margin continued to decline as probably beef’ price declined. And this caused its operating margin up to about 27% in 2018.

Stock price

This stock currently has an enterprise price/EBI ratio of 26. We think that its stock is being relatively overvalued considering the weak demand from food service industry.