Can Toast Thrive in the Restaurant Renaissance?

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In this podcast, CORP-DEPO analysts Tim Beyers and Rick Munarriz discuss:

  • Surprisingly good data from the Restaurant Performance Index.
  • The metrics that matter when investing in the restaurant sector.
  • The future of Toast — the company, not the food.

A full transcript is below.

This podcast was recorded on July 14, 2025.

Tim Beyers: Let’s discuss the restaurant industry, as I believe it’s a topic you’re particularly knowledgeable about, Rick. You were once known as TMF Edible, though that name has long passed. However, whenever I need to talk about restaurants, I come to you. Today, I want to focus on the subject, and I have a question that I think you can provide some insights on. The Restaurant Performance Index, which measures overall restaurant business activity, increased by 0.4% in May. Remarkably, this marks the third consecutive month of growth. Given the unusual economic figures we’ve seen recently, what do you make of this consistent upward trend in the restaurant industry?

Rick Munarriz: Indeed, it’s fascinating how things can take an unexpected turn, especially given the rocky start to the year. Sweetgreen, a newly public company, reported negative earnings in their first quarter. Companies like Starbucks, Applebee’s, iHOP, Papa John’s Pizza, and KFC have experienced five consecutive quarters of negative growth. The restaurant industry has faced challenges, but then there’s this surprise – three quarters of positive performance from Sweetgreen, with the index even exceeding 100, a sign of expansion, not just recovery. However, the question remains: will this momentum hold? Despite some restaurant owners expressing skepticism about the strength six months down the line, they were the ones who underestimated the resilience of the economy. Ultimately, it’s the consumers who decide, and they seem eager to return to dining out.

Tim Beyers notes that users of the Toast Mobile app are increasing noticeably, with engagement likely leading to more business and a 20% rise in point-of-sale web traffic year over year. The question is whether Toast can serve as a bellwether for the restaurant industry, a topic we’ll be discussing in a debate later on. Rick, what are your thoughts?

Rick Munarriz expresses his viewpoint that Toast, while excelling in its point-of-sale system and demonstrating impressive growth in the number of restaurants, may exaggerate the state of the restaurant industry as a whole. Instead, he suggests investors should concentrate on the expansion of their own investments. In essence, Toast’s success doesn’t necessarily mean that all companies in the industry are thriving. Despite being protected from trade wars through well-established supply chains, there remains uncertainty about whether consumers will continue to patronize restaurants. However, as customers gradually return, it’s important to remember that Toast is a high-quality company, and soon we will discuss the bull and bear arguments surrounding its performance. Yet, investors should not presume that success for Toast equates to prosperity for all companies in the industry, as that’s not always the case.

Tim Beyers: So it seems like we’re witnessing some groundbreaking concepts in the food industry, right? One trend that appears to be growing is the increase of innovative restaurants, and I have three examples to discuss briefly. However, I’m curious if there are any particular ones that catch your eye. The three I mentioned were Chipotle’s Chipotlanes, Wingstop’s digital ordering system, which allows customers to order wings without even entering the restaurant, and Sweetgreen’s infinite kitchens. Are we likely to see more restaurant innovation in this vein, Rick? Which of these emerging concepts do you find most intriguing?

Rick Munarriz believes all three companies are doing commendable work, despite a sluggish start in the first quarter of this year. Each of them possesses the necessary elements to flourish further, like key ingredients in a recipe. Moving on from the restaurant analogy, let me emphasize Sweetgreen as an intriguing choice. The concept of ‘infinite kitchen’ initially struck him as unrealistic, but he soon realized it offers increased efficiency compared to human workers. During peak hours, especially lunchtime, this automated system can churn out numerous salads swiftly, catering to large corporate orders with precision. This is a significant advantage for Sweetgreen, given its premium pricing model. Waste from incorrect or complex orders would be detrimental, and the ‘infinite kitchen’ allows them to avoid such issues. Moreover, small local salad bars lack the financial resources to make this kind of investment in automation.

As an observer, I find myself pondering over the intricacies of investing in restaurant companies, especially for those who are new to this domain. If you’re venturing into a market filled with numerous public restaurant companies, here are some key factors that seasoned investors often emphasize.

One such term that initially puzzled me is ‘comps’. As a novice, I struggled to grasp its significance. Rick, could you enlighten us on the metrics we should focus on regarding comps? In other words, what aspects of restaurant performance should we pay particular attention to when examining comps?

As an observer, I find myself pondering over the concept of Comps in the restaurant industry. At first glance, it appears straightforward – comparing sales figures from different periods. However, it can indeed be tricky to grasp due to various factors that influence those sales.

In essence, Comps are like year-on-year comparisons of a restaurant’s sales. A restaurant must have been operating for at least a year (some chains require 18 months) before its sales can be included in the Comps. This is because initial sales spikes can sometimes misrepresent the restaurant’s performance, and they aim to normalize these figures by waiting for at least 12-18 months after opening.

Once a restaurant has been open during both periods, its sales are added up and divided by the sales from the preceding year. The resulting figure represents the growth or decline in sales, often referred to as the Comps growth rate. Essentially, it tells us if the average unit of the restaurant is selling more or less than before.

However, as you rightly pointed out, Comps are not just a simple comparison of sales figures. Factors like foot traffic (is it increasing or decreasing?), menu pricing adjustments (are prices going up over time?), and menu shifts (are customers ordering higher-priced items or staying for dessert more often?) all play crucial roles in determining Comps.

Ultimately, Comps are a vital metric within the restaurant industry, serving as a strong indicator of health. While it may seem straightforward at first glance, delving deeper reveals the complexities that make it an essential tool in assessing a restaurant’s performance over time.

Tim Beyers: Without a doubt, Chipotle boosted my expenses when they introduced the Cheriso, making me eat more burritos. [laughs]

Rick Munarriz also pointed out Chipotle, as they had introduced a chicken al pastor last year, but realized it wasn’t necessary to limit their chicken options. Instead, they decided to offer various poultry choices. The chicken al pastor was moderately successful, but this season they unveiled the hot honey Chipotle chicken, and it has been a hit. This new offering should help Chipotle experience a stronger comeback in the current quarter compared to the first quarter of this year.

From Your Enthusiastic Guide: As we delve into the world of restaurants, let me share some insights on a crucial aspect: location. In discussing Chipotle’s potential growth, I highlighted that despite its popularity, it still maintains a relatively modest geographical reach. This opens up exciting opportunities for expansion across various locations. Now, when evaluating a restaurant or a restaurant chain, the significance of locations can’t be overlooked. So, how should we approach this? When considering the value of a restaurant or a restaurant group, it’s essential to weigh the potential of each location and its impact on the overall growth strategy.

As an observer, I noticed that the most thriving chains of businesses often trace their roots back to around fifteen to twenty years ago when they first set their sights, or targets, on success.

Tim Beyers: It was a long time ago.

Rick Munarriz had mentioned that back then, there were around 500 Chipotle restaurants, with a goal of expanding to around 3,000-4,000 locations. Now, we’ve surpassed that mark, aiming for over 10,000 stores. The charm lies in the fact that when a restaurant is successful, its growth potential is limitless.

Tim Beyers: Literally a movable feast.

Rick Munarriz: Indeed, a flexible feast. Thank you for providing a solution to my joke predicament earlier. However, let me clarify, this situation is indeed occurring. Expansion generally benefits companies significantly and in various ways. One noteworthy occurrence in the first quarter of this year – the first three months – will soon be revealed: Chili’s, owned by Brinker International, a company that was not anticipated to quadruple since the start of last year and typically falls outside our Rule Breaker universe. However, they have accomplished it. They have reported consecutive quarters with 31% growth in comparable sales, an achievement worth noting. The crucial factor here is not expansion because their revenues actually increased by 27% in their latest quarter. Instead, the strong comparable sales at Chili’s are responsible for this success, while Maggiano’s, which has been smaller and struggling, has made less of a contribution. This development bodes well for them.

In contrast, Cava, which reported 28% revenue growth, exhibited stronger top-line growth than Brinker. However, they only achieved 10.8% growth in comparable sales, a figure I use humorously because 10.8% was quite good for them. This represented 7.5% increase in customer traffic, with the remainder being due to customers paying more upon arrival at Cava. Clearly, restaurant growth accounted for 18% of the total 28%, indicating that the majority of their model’s success came from this aspect.

In examining restaurants, there exist two primary expansion strategies: first, the ability to cost-effectively expand numerous locations, expanding your presence in the market. Secondly, the capacity to experiment with menu items and prices, encouraging customers to spend slightly more. These represent the two directions of growth within this industry. This sector is captivating, and we are about to discuss a company that excels in it – stay tuned as Rick and I engage in a friendly discussion on my top pick, Toast.

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Rick Munarriz notes: It’s fitting for a company named Toast to experience this bull-bear dynamic. The term ‘toast’ carries intense connotations; when things go well, you toast someone, but when they don’t, you ‘toast’ too. In this case, the toast is positive. Do you recall your initial encounter with a tablet for bill payment at a restaurant? It was likely intriguing due to its novelty. The second time, you might have felt a bit sentimental, even rebellious. You missed the sound of leather bill folders flapping, subtly sliding your credit card, reminiscent of a clue game board. The wait for the total and tip calculation made you feel like a celebrity, with your server asking for your autograph. By the third time and every time afterward, the change became clear. You no longer counted the instances; the revolution had set in.

You likely find Toast a mutually beneficial proposition. As a customer, you benefit by being able to settle your bill swiftly if you have other commitments, while the waitstaff benefits from faster table turnover, which in turn increases their tip earnings, thanks to Toast’s efficiency. Restaurant operators also reap advantages, as Toast offers more than just speedy payment solutions; it serves as a one-stop solution for managing inventory, payroll, online orders from delivery apps, and even email marketing. Toast is proving itself effective, and its success story is evident. Two summers ago, Toast was serving 85,000 restaurant locations when first recommended in our Rule Breakers. Today, it supports over 140,000 establishments. Although there are alternatives available, Toast’s growth indicates that it provides a significant edge over the competition. In the challenging year of 2020, with lockdowns and restrictions impacting the restaurant industry, Toast managed to thrive. Despite the overall US restaurant sales falling 24% to $659 billion compared to the previous year, Toast’s revenues rose by an impressive 24%. Toast truly shines when the restaurant industry as a whole is prosperous.

In 2021, Toast’s revenue is expected to more than double. The key to its success lies in its ability to expand market share, enhance client productivity, and ensure their success. Since going public four years ago, Toast has consistently grown by 24% each quarter. Its operating margins have also improved every year. Originally popular among independent operators, Toast recently secured a major deal with the parent company of Applebee’s and IHOP, following a successful round before that. Managing a restaurant is becoming increasingly challenging, but survival rates for new eateries are dismal. The restaurant industry is like the tadpole or sea turtle hatchling in the startup world. Toast functions as a cheat code, offering a one-stop solution for operators to get off to a running start. As an investor, you’d be wise to back providers of successful and legal cheat codes, and Toast is certainly one of them. Allow me to express my admiration for Toast, Tim.

Tim Beyers: Great. I appreciate it. Let’s delve into the bear case for Toast. While I find it an excellent company and have been increasing my investment, I must acknowledge potential risks. I won’t sugarcoat it, but understanding these pitfalls is crucial. Firstly, Toast lacks significant pricing power. This has remained consistent since I began tracking the stock nearly three years ago, with annual revenue per location hovering around $40,000. If you’re planning an evaluation, bear in mind that Toast doesn’t seem to have the ability to increase prices significantly.

Secondly, input costs can rise substantially. We all know the restaurant industry is volatile and subject to various factors. What benefits Toast’s customers often benefits Toast as well, but conversely, if things turn sour for customers, it could negatively impact Toast.

In essence, while Toast may still be profitable, relying on it to generate more income per location might not be realistic based on historical data. And remember, higher input costs can pose a significant challenge in the restaurant business.

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Tim Beyers: Hey Rick, we’re back! I want everyone to take a stab at this one, and I promise you, Rick doesn’t know the answer. We’re doing this live, so let’s see how it goes. Rick, could you tell me what restaurant generates the highest average revenue per location on a global scale? To clarify, when I say ‘busiest’, I mean which one brings in the most money per location, or unit volume/revenue, if you will. So, Rick, what’s the world’s busiest restaurant based on that criteria?

Back in 1997, I had a hunch about something special. Specifically, I was talking about the Planet Hollywood at Disney World, which was raking in an impressive $50 million annually. On the other hand, it was clear that the Hard Rock chain wasn’t reaching those heights, and it seemed to be faltering wherever it went. I know for a fact that McDonald’s and Subway aren’t in the same league, as they manage around 3-4 million dollars per year, but their success doesn’t come from high prices – it’s all about volume. They attract a lot of customers, but their profit comes more from quantity than quality. As for Cheesecake Factory, I remember it used to generate approximately $8.1 million per unit. However, I can’t help but feel that the company we’re discussing might be an international giant I’ve never come across before. But at this moment, I can’t think of any other business that could surpass those figures.

Tim Beyers’ suggestion: I’d like to provide you with another clue. Let’s focus on QuickServe restaurants for now, which means The Cheesecake Factory is out of the question. However, it’s relevant to consider QuickServe.

Rick Munarriz believes that Chick-fil-A surpasses McDonald’s in terms of performance. If you’re gesturing at him, yes, he has chosen Chick-fil-A. It’s not entirely fair because Chick-fil-A is privately owned, making it an unfair comparison since McDonald’s is a public company.

Tim Beyers: However, these companies are beneficial since they are moving towards Chick-fil-A’s level of success, and interestingly enough, there are two of them – Chipotle and Cava. As of our latest data, Chick-fil-A has an average sales per restaurant of approximately 8.46 million in 2023. These two companies are striving to reach that level of success.

Rick Munarriz,: That’s just six days a week.

As an avid enthusiast, let me share my excitement! I’ve been diving into this sector six days a week, and it’s nothing short of amazing! A fantastic resource, indeed. If you’re thinking about investing here, let me steer you towards QSR magazine and the QSR 50. These are the gems where I sourced my data. QSR magazine, the QSR 50, to be precise, is an annual ranking of the top quick-serve restaurant operators based on their unit level performance, most of which are publicly traded companies.

Now, Rick, let’s wrap up this discussion about restaurant investing. I predict you’ll keep pushing boundaries as a rule-breaking investor in this field. If someone’s interested in investing in the restaurant sector, what would be your one piece of advice?

Rick Munarriz advises: Maintain your curiosity and seek out innovators, focusing on what appeals to you personally. Trust your instincts might be the most effective approach. Focus on companies with significant growth potential. For instance, Chipotle was a great choice when it first appeared on our Rulebreakers list, even though I hadn’t visited it before. All I did was examine their financial data, sales figures, and expansion plans, which made perfect sense to me before they reached Florida. Look for companies with a high growth potential, as we discussed earlier. But yes, invest when the company is still growing rapidly.

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2025-07-18 22:06