Optimism on restaurant turnarounds led by new CEOs
Many restaurants are still recovering from disruption caused by the COVID-19 pandemic, but Fidelity's Kevin Francfort has developed an appetite for some larger companies that have recently hired new leaders to help expedite their return to normalization.
"We are optimistic about certain turnaround situations led by new executives that are taking strategic action to drive growth," says Francfort, co-manager of Fidelity® Select Leisure Portfolio, alongside Will Hilkert. "While some of these efforts may have a near-term impact, we are particularly excited about their prospects over a longer time frame."
In managing the fund, Francfort and Hilkert seek to own companies with a competitive moat that are in subindustries where demand is strong and supply growth is constrained, and have either strong cash generation or high-return investment opportunities.
Among the fund's largest positions as of May 31 was US Foods Holding, a foodservice distributor that caters to about 300,000 restaurants and foodservice operators. The company's recently named CEO—former president of competitor Performance Food Group—is trying to improve its operations through a variety of initiatives, including better routing software for drivers, enhanced warehouse technology, and improved inbound logistics operations.
Recently, the management team credited its new routing software for enabling improved cases delivered per mile driven relative to 2019, despite case volume remaining lower than it was before the onset of COVID-19. "We're optimistic the operating improvement will continue to drive strong profit growth," says Francfort.
Restaurant Brands International, the franchisor of Burger King, Tim Hortons, Popeyes, and Firehouse Subs, was another sizable holding at the end of May. The company's franchisee profitability was hurt by cost inflation and heightened promotional activity the past few years, according to Francfort. He notes that while some element of these headwinds have been felt across peers, the company's new chairman and CEO sees opportunity to improve, driven in part by the company's recent "Reclaim the Flame" initiative focused on the U.S. Burger King franchisee base.
"The parent company has increased its franchisee profitability disclosure and is implementing performance metrics meant to incentivize and reward strong operators," says Francfort. "We believe these initiatives have already had a positive impact and view the company as being on the right track toward improving its brands' system health."
Brinker International represents another good turnaround story in the fund, according to Francfort, noting that the company's new CEO immediately went to work by simplifying menus, rationalizing promotions, and streamlining operations at its operated stores.
"I am encouraged by these efforts to reinvest in the product and brand, notably through labor investments, an emphasis on food quality, and a return to national advertising," he says.
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