Tax reform has restaurants confident heading into 2018

But companies at the ICR Conference reveal the industry’s conflicting challenges regarding sales.

Restaurant companies presenting at the ICR Conference in Orlando, Fla., this week expressed some optimism about their businesses heading into 2018.

And why not? They just got a big boost to their profits thanks to tax reform.

Almost every company presenting at the three-day event, in which public and private restaurant chains make presentations in front of Wall Street investors, said they expect major tax benefits this year.

“Overall, tax reform is going to be very good for us,” said Arne Haak, the chief financial officer with Ruth’s Chris Steak House. “The 35% [tax rate] is going to drop significantly for us.”

Such comments were echoed by numerous concepts.

Fogo de Chao, the Brazilian steakhouse chain, said that changes in international tax law will enable the company to bring cash it earns in its Brazilian locations back to the U.S. “In addition to net overall tax reduction, we’ll have greater flexibility from a balance sheet perspective,” CEO Larry Johnson said.

And it’s not just the companies, but the franchisees. “We’re happy with the way tax reform went from a corporate perspective and a franchisee perspective,” Dunkin’ Brands CEO Nigel Travis said.

Executives said that Dunkin’, which owns Dunkin’ Donuts and Baskin-Robbins, has one of the highest tax rates in the restaurant industry. They expect their tax rate, 38% to 39%, should go down to about 21%. “It’s premature, but 21% is much better than 38%-39%,” Dunkin’ CFO Kate Jaspon said.

Executives also said that franchisees should see a tax benefit in the next five years on improvements they make inside their restaurants, which could help them expand or remodel locations.

On Monday, Darden Restaurants increased its earnings expectations for its current fiscal year and said it would spend $20 million from its tax savings on “workforce investments.”

Company executives at ICR didn’t provide any more details on those investments, with CEO Gene Lee calling them “retentive in nature,” meaning the company is working to keep its best workers.

These investments will continue beyond 2018.

The big question heading into this year is whether tax reform provides a benefit on the top line. Theoretically, lower taxes should spur increased spending—as it frequently does when consumers get a little extra cash.

That would then happen beginning in March, when workers start seeing changes in their paychecks with the new tax structure.

Lee suggested it would. “We think the stimulus being put into the economy should be positive,” he said. “It should be different than the Bush tax cuts (in 2001) when everybody got $600 to $800. This goes into their cash flow weekly.”

But, Lee said, “For restaurants, this is not going to be a windfall. We still need to compete.”

Indeed, for all of the optimism, this is an industry that remains challenged with weak same-store sales and traffic.

The industry is widely considered to be saturated in the U.S., which makes things more competitive and puts pressure on companies to improve their operations and efforts to make them more desirable to consumers.

It also means there will be winners and losers. Going into the conference, for instance, the chicken wing chain Wingstop reported a strong, 5.2% rise in same-store sales in the last three months of 2017.

Meanwhile, the entertainment chain Dave & Buster’s reported that its late-year same-store sales have declined by 5.1%.

“The restaurant industry is increasingly divided into the haves and the have-nots,” Bernstein Research analyst Sara Senatore wrote in a note on Thursday.

Still, one area that is giving many companies some hope for sales building is delivery. While some companies like Darden and Habit Burger and others expressed skepticism about the service’s future, most companies appear to be going all-in on the service.

“We think we’re in a better position than anybody else,” Weldon Spangler, CEO of the take-and-bake pizza chain Papa Murphy’s, said in an interview. “Our product doesn’t erode.”

The company started testing delivery using third-party services last year and expects to have the service in a quarter of locations by February. He said the service will be “a slow build” but said sales are “incremental” and come with a higher average ticket.

Papa Murphy’s was hardly the only one. “We’re ready to implement more delivery,” Red Robin CEO Denny Marie Post said.

She believes that delivery can help Red Robin improve its takeout and to-go sales from 8% to levels more in tune with the 12% to 14% that many other casual-dining chains are seeing. “We’re a little late, but we have the runway to take advantage and move forward.”

Wingstop is testing delivery in three markets: Las Vegas, Chicago and Austin. The company expects a rollout in more markets late this year and into 2019.

CEO Charlie Morrison said the company is delivering with DoorDash as its “logistics partner.” The company is providing services, but Wingstop is controlling the ordering process—the orders come in through the company’s website or app, giving it control of the data from those orders.

“The economics work better,” he said. “It’s more efficient. We don’t need the market to drive people to take our food home.”

Among many people at the conference, delivery is no longer a choice, in fact.

“It’s not about whether they cannibalize themselves,” said Noah Glass, founder of the digital ordering company Olo. “If they don’t offer delivery, I’m not a customer.

“I don’t think it’s a choice. Restaurants have to do it well, and they have to do it thoughtfully.”

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