October 18, 2019 - 11:07am EST by
2019 2020
Price: 7.32 EPS 7 61
Shares Out. (in M): 44 P/E 109 12
Market Cap (in $M): 325 P/FCF N/A 14.3
Net Debt (in $M): 436 EBIT 40 77
TEV ($): 760 TEV/EBIT 19 9.8

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  • New Product Launch
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Highest quality QSR franchisee about to report significant EBITDA acceleration after losing ~50% of its value due to transitory headwinds. 110% base case upside.


Company Overview

Carrols Restaurant Group (TAST) is the largest Burger King (BK) franchisee with 1,023 domestic BK units across 23 states. TAST grows via organic restaurant development and via acquisition of smaller franchisees at attractive relative multiples. On April 30th, the company made its largest ever acquisition, buying Cambridge Franchise Holdings (CFH) consisting of 166 Burger King & 55 Popeyes Louisiana Kitchen locations.



TAST is valued like a challenged, subscale QSR chain, but we believe it is the best positioned platform for accretive acquisition of smaller franchisees. TAST’s comps and margins eroded in 2019 due to the combined effect of multiple transitory pressures, causing the stock to fall ~50% over the LTM and trade at a steep discount to its historical multiple and peers. However, the unprecedented success of BK’s Impossible Whopper (IW) and PLKI’s Chicken Sandwich (PCS) has sustainably accelerated TAST’s comps. This acceleration, combined with the unwinding of 2019’s unique headwinds, is likely to generate ~$150M in 2020 EBITDA relative to $125M consensus (20% higher). We project TAST is worth ~$15.5 per share (~110% upside) based on a 7.5x multiple (30% discount to peers) on our 2020 EBITDA. We believe the market will begin to appreciate this thesis once QSR reports Q3 BK and PLKI US & Canada results in late October.


Research Methods

We specialize in the consumer vertical and utilize a combination of alternative data and fundamental primary research to make long- and short-term projections. See the Appendix for more details on our TAST research and data ensemble.


Why TAST is Down ~50% LTM


-       Comp compression

o    TAST’s 1H 2019 comps decelerated to 1.2% from the mid-single-digit rate that they have averaged across the prior four years. The 2Q comp of 0.1% appeared especially disappointing because it was the first time TAST’s comps underperformed total BK North America comps since at least the start of 2016. This surprising underperformance created fear that TAST’s ability to comp in line or ahead of the systemwide average has been compromised.

o    We believe this 2Q underperformance is transitory. Our overall BK data ensemble shows that the 10 states where TAST has its highest store concentration outperformed the rest of the chain by ~2% from Q4 2017 through Q3 2018. The highest regional outperformance came in Q2 2018 where TAST’s primary regions outperformed the overall chain by ~2.6%, contributing to an especially difficult Q2 2019 compare. These regional differences are likely the product of the idiosyncrasies of regional economies/weather patterns and tend to even out over time. We expect TAST’s comps versus the rest of the chain to normalize by Q4 2019. See chart below. This view is bolstered further by our conversations with management, who asserted that TAST experienced abnormal regional sales patterns in Q2 but that nothing has changed structurally.


-       Margin malaise

o    TAST’s latest FY 2019 guidance implies EBITDA margins will contract by ~160bps from 2018. This contraction is driven by four coincident factors: deleverage from lower comps, increased discounting to drive traffic, higher labor & commodity expense, and a lower margin profile from recently acquired CFH stores.

o    We believe TAST’s margins will significantly outperform guidance and accelerate from there for the following reasons:

§  Comps will significantly outperform guidance in 2H 2019 for reasons we detail below (see Drivers of Reacceleration), and management recently told us incremental comps have 40-50% flow-through to EBITDA.

§  TAST’s accelerated discounting since late 2018 has been driven by the traffic deceleration experienced at BK during this time. We believe the strong, sustainable, organic traffic BK is experiencing has already reduced its reliance on discounting and should keep discounting at bay for the foreseeable future.

§  While beef costs remain inflationary, blended beef trimming prices are down ~4% since guidance was issued on August 8th.

§  As we describe below (see Long Term Story), underperforming margins at CFH’s stores are an opportunity for TAST to drive margin acceleration in 2020 and beyond.


-       Acquisition anxiety

o    TAST’s acquired CFH on April 30th for 5-5.5x restaurant level EBITDA (RL-EBITDA), which is ~1.5x higher than TAST’s average acquisition multiple between 2014 and 2018. This price combined with the underwhelming relative performance of acquired CFH stores during Q2 has created fear that TAST overpaid for CFH.

o    We believe the CFH transaction was a good use of capital for the following reasons:

§  CFH’s large size presented an opportunity to acquire accretive EBITDA dollars more efficiently in a single transaction versus several small ones.

§  The 500 additional BK ROFRs TAST earned as part of this transaction are very valuable, as discussed further below (see Long Term Story).

§  ~25% of the deal was for PLKI restaurants, their associated ROFRs, and development deals on 70 further units. We believe entry into PLKI gives TAST an additional growth avenue, brand diversification, and commodity diversification. Furthermore, we believe that the 55 acquired PLKI stores will prove to be an incredible bargain once the full potential of the PCS platform we describe below (see Long Term Story) is appreciated.


-       Cash concern

o    The aforementioned comp and margin declines combined with elevated near-term capex required to improve CFH restaurants has put TAST on a trajectory to burn $20M+ of cash in 2019 on management’s guidance. Unsurprisingly, a short case has developed suggesting that TAST is a business which will continue to lose money on its current trajectory. We believe this short case to be the biggest driver of TAST’s devaluation and the cause of a doubling in short interest over the past year.

o    We admit it’s not ideal that TAST committed itself to major cash outlays on CFH improvements while systemwide profit margins compressed. However, TAST has plenty of liquidity to fund this investment and we believe the imminent inflection in its operating performance will alleviate cashflow and profitability concerns.


Drivers of Reacceleration

-       Burger King (BK)

o    BK launched the plant-based Impossible Whopper (IW) nationwide in August. This platform is driving the most significant top line acceleration BK has experienced in several years because it’s attracting incremental customers. Our franchisee calls and proprietary consumer research indicates that a significant portion of IW buyers are vegetarians, flexitarians, and otherwise health conscious consumers who rarely eat at Burger King. Furthermore, we have discovered that lower income urban consumers, who were not expected to adopt this platform are among its biggest fans in many markets. BK has exclusive rights to IW until August of 2020 and major franchisees expect it to become a permanent part of the menu.

o    Our blended transactional and geolocation data ensemble is tailored to TAST’s footprint. It has an 83% correlation with TAST’s comps over the past 16 reported quarters, with an average predictive error is 2.0% over that interval. Our ensemble shows that the remarkable results BK experienced in IW’s St. Louis test market (as discussed by Earnest Research: has now manifested nationwide.  We project TAST’s Q3 comps significantly above the ~3% consensus and 2019 comps significantly above the high end of 2-3% guidance. Still more encouraging, is that we have seen little slowdown in comps after IW’s initial launch. Our data implies that September comps were roughly equal to August’s, with Q4 to date running above our Q3 projection. See Appendix for further commentary from our research calls.


-       Popeyes (PLKI)

o    PLKI launched its Popeyes Chicken Sandwich (PCS) in August, setting off one of the most remarkable frenzies seen in the QSR landscape in recent years: (

o    Although the success of the PCS was well publicized, most commentators assume that it’s a one-time benefit, especially since the sandwich is not yet back in stores. However, our data shows that PLKI has enjoyed a significant lift to comps even after supplies of the sandwich ran out in late August. Our ensemble has a 97% correlation over the past 10 quarters to PLKI’s US & Canada comps, with an average predictive error of ~60bps. We believe PLKI’s Q3 comps have accelerated by double digits, including a double digit run rate in September, after PCS supplies ran out.

o    A cursory glance at social media posts about Popeyes makes clear there is tremendous pent up demand for the return of the PCS. For example, in the middle of October, a month and a half after PLKI ran out of PCS supplies there are hundreds of consumer twitter posts per day calling for its return.

o    Consumer surveys such as one by Numerator support the notion of pent-up demand, with 92% of PCS buyers responding that they are “extremely” or “somewhat” likely to buy the PCS again:

o    PLKI announced its intent to bring back the PCS as a permanent menu item, and our franchisee calls indicate they expect the sandwich back in stores by the end of November. We speculate that PLKI is intentionally delaying the return of the PCS in order to build anticipation and create another news story with its returns. The current top banner on PLKI’s home page shows the crumbs of an eaten PCS with the tag line: BE RIGHT BACK.

o    After the initial excitement wears off, we believe that the PCS phenomenon is likely to permanently raise PLKI AUVs for the following reasons:

§  It’s a genuinely delicious product which appeals to many Chick-Fil-A customer who didn’t previously have alternatives. It is unlike anything else that PLKI has on its menu. We note that Chick-Fil-A is a controversial company and speculate that some of its customers could be enticed to switch if given an acceptable alternative.

§  At its peak, PCS drove comp acceleration of above 50% for two to three weeks at many locations. Our data ensemble shows that ~23% of PLKI customers in August did not eat there in the prior 12 months and a significant percentage of them have already returned after PCS supplies ran out. Retaining even a fraction of these new customers should permanently improve PLKI’s AUVs regardless of the future success of PCS.




Long Term Story

-       Best positioned Burger King rollup platform

o    TAST is by far the largest and best capitalized franchisee in the QSR system. It also owns the Right of First Refusal (ROFR) on ~470 additional BK acquisitions across the states where it operates. TAST has an excellent track record of accretive acquisitions, having acquired 123, 55, 56, 64, and 44 units from 2014 to 2018 respectively. These acquisitions were made at an average Restaurant Level EBITDA (RL-EBITDA) multiple of ~3.7x. TAST further reduced their effective acquisition multiple by improving Cost of Sales at acquired restaurants by an average of 250bps, resulting in a ~2.9x pro forma acquisition multiple. TAST historically traded for an average of ~4.8x RL-EBITDA in 2014-2018 before comps and margins decelerated. If TAST acquires the next 470 BK units for 3.7x RL-EBITDA / 2.9x pro forma RL-EBITDA, it would create ~$175M of equity value. This estimate excludes the value of organic growth and non-ROFR acquisitions. We do not contemplate any of these longer-term growth drivers in our price target framework.

o    Q2’s region-driven slowdown notwithstanding, TAST has comped above BK North America systemwide by an average of 2.1% over the preceding 3 years. We believe this outperformance is driven by TAST’s best in class scale, managerial expertise, and technology (e.g. POS system). Therefore, we expect TAST to structurally comp above the systemwide average on a normalized basis.


-       PLKI rollout opportunity

o    TAST was fortunate to enter the PLKI business before the launch of PCS. PLKI has a chance to be the biggest story in QSR over the next year+, and TAST is be the best public vehicle for betting on it because aggressive rollout of PLKI could impact TAST’s P&L more dramatically than QSR’s, which doesn’t benefit as much from operating leverage.

o    TAST now owns CFH’s development agreement for an additional 70 PLKI units and ROFR on acquisitions in Tennessee and Kentucky.

o    PLKI currently comprises a modest portion of TAST’s overall valuation, but this could change if the PCS phenomenon permanently rebases PLKI AUVs and TAST rolls out / acquires PLKI units aggressively. As an example, if PCS structurally increases PLKI AUVs by 15% and TAST builds the 70 units for which it already has development agreements, it would add ~$25M of incremental EBITDA (~17% of our estimated 2020 EBITDA). We do not contemplate any of these longer-term growth drivers in our price target framework.


Modeling Assumptions & Valuation

-       MSD or higher BK and double digit PLKI comps in 2H 2019; holding the 2yr comp stack flat through 2020E implies a ~5% comp in 2020.

o    We note that in addition to acceleration from the IW and PCS platforms, TAST’s comps in 2020E should benefit from planned improvements to CFH BK stores and the entry of PLKI into the comp base.

-       Incremental 2020E sales above consensus flow through to EBITDA at a 45% contribution rate as indicated by management, and Capex remains elevated at $115M, resulting in ~$150M in 2020E EBITDA / ~$20M FCF (~7% yield).

o    This implies an ~8.7% EBITDA margin, which is equivalent to 2018’s rate and consistent with normalized longer-term trends.

-       A 7.5x 2020E EV/EBITDA multiple this implies a $15.5 price target (110% upside)

o    This multiple reflects a 0.5x discount to TAST’s long-term normalized Fwd. EBITDA multiple of ~8.0x and a ~3.0x discount to its company-operated restaurant peer set (BLMN, BJRI, CAKE, CBRL, CHUY, DRI, EAT, FRGI, HABT, LOCO, NDLS, RUTH, TACO).


-       The Impossible Whopper (IW) and Popeyes Chicken Sandwich (PCS) could prove to be fads

o    We admit that the trajectory of IW and PCS is difficult to forecast with confidence beyond the next few quarters. There are, however, strong reasons to believe both platforms have permanently raised the AUVs for their respective chains.

-       TAST may fail to improve operations at CFH as successfully as it did at prior acquisitions.

o    While this is a significant risk given the number of stores in question, we note that TAST is the most capable, experienced, and successful major acquirer within the BK system. We believe it’s advisable to trust management to deliver on its objectives unless given reason to believe otherwise.




Research Methods

Throughout this report we reference our Alternative Data Ensemble, which we use to make operating performance projections and develop insights into fundamental drivers in order to take a longer-term view. This ensemble includes over a dozen data sources which track the operating performance of several hundred consumer/retail/eCommerce companies. It includes multiple independent credit/debit card panels, geolocation panels, BillPay statements, web scraping, social media aggregation, eCommerce receipt panels, clickstream panels, google trends, and price/discount monitoring. In aggregate, our ensemble monitors the activity of 50M+ domestic consumers.

In addition to our data ensemble, our research into TAST includes calls with management and several franchisees which, cumulatively, own hundreds of Burger King / Popeyes stores across more than 30 states.


Franchisee Call Quotes

-       “I’m friends with the gentleman who originally tested this new product [Impossible Whopper] in St. Louis. The numbers and success that he had were excellent and actually scared everyone on the Midwest board not due to the success of the test, but rather concern on the supply chain side.”


-       “It’s working everywhere across all of my restaurants, which shocked me.” (In reference to Impossible Whopper)



-       “The real eye opener for this phenomenon for me happened because I did not expect African Americans or the lower class, on the lower side of Chicago to be eating this and growing traffic. It’s something special when almost all of your customer types are coming in droves.”


-       “I haven’t seen anything like this since the BLT Taco at Taco Bell that had the same kind of buzz. I think this has staying power and some legs because it has some legs. Obviously, you can’t have double-digit comps forever, but it will go a long way in my opinion.”


-       “Northing has been as impactful in 6 years as the Impossible Whopper.”



-       BK Florida and Texas Markets Q2 vs Q3 comps

o    Florida went “from down 5% to up 5%”

o    Texas went “from flat to up 10%”


-       Impossible Whopper “not eating into margins” and “gives a reasonable margin.”


-       “Popeyes now has brought in moms and Chick Fil A customers.”


-       “Since the sandwich went up to 60-70% and right after sandwich still have transactions up 5-8%.” – referring to comps during and after PCS launch


Chick Sandwich margins “positive to promote” and “higher product margin than chicken strips.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


-       QSR Q3 earnings release late October (BK US & Canada comps highly correlated to TAST comps)

-       TAST Q3 earnings release in early November

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