Much of the talk on Middleby’s earnings call today was centered around their major headwinds in their Commercial segment. The number of restaurant closures sounds pretty bleak, which directly impacts orders for Middleby.
At our Commercial Foodservice business, gradual improvement in ordering levels we saw throughout the first half, dropped off as we progressed through the third quarter. Restaurant traffic, which was anticipated to improve at many of our customers in Q3, declined by reported 3.5% across the restaurant sector for the quarter. At the same time, food costs, which have been improving throughout 2023, saw a reacceleration of cost increases in recent months. These factors slowed execution against our customers’ business plans and ordering of equipment for upgrades and new store openings.
Tim FitzGerald, CEO of Middleby
Overall, the economic headwinds for the industry have resulted in an estimated 1,500 restaurant closures for 2024 as compared to originally expected unit growth of 6,000 from when we started the year. Although conditions are challenging, our chain customers business plans, while delayed largely have not changed. And for the longer term, the industry is still down over 100,000 foodservice locations, but with forecasted net unit additions expected to return in 2025 and with continued growth over the next five years.
I traditionally don’t focus much on Middleby’s Commercial business because it’s not relevant to outdoor cooking, but the unexpected shift in traffic is worth keeping an eye on. People are still eating food, and if they’re not eating at a restaurant, they’re eating at home. The more people eat at home, the more opportunity there is for grilling.
Positive Signs in Outdoor Cooking
Middleby’s Residential Outdoor business had been lagging competitors this year. It’s seems they’ve turned that underperformance around in the quarter that ended in September. They noted on their presentation that they’ve seen double-digit revenue growth.
They also noted that they are starting to see signs of a recovery. Middleby attributes positive sales trends in Outdoor as being from replacement demand.
At our residential business, the housing market remains challenged with low levels of existing home sales, new home starts and remodels. Existing home sales that we originally anticipated to improve during the year, continued to further decline in Q3 against multi-decade lows. This is continuing to have a significant impact on our business today, both on the top line and our profitability. Unit volumes across our residential brands are down 30% to 40% in comparison to historic normalized pre-COVID levels.
Tim FitzGerald, CEO of Middleby
The expected recovery back to pre-COVID volume levels will result in a significant profitability expansion back to our historic norms. While operationally, we are actively making investments in our manufacturing capabilities that are benefiting our efficiencies and quality, supporting our efforts to achieve our long-term profitability targets. While we navigate these current market conditions, we’ve seen initial signs of recovery with growth in certain areas, such as our outdoor business, which is driven in large part by replacement demand.
The replacement demand is something they we expect to turn into a major tailwind in the next couple of years. The grill replacement cycle is often estimated to be around five years, which means we’re on the edge of replacement purchases from Pandemic grill buying.
Any recovery in the housing market helps Middleby’s Residential Kitchen business the most, but it’s also important for their Outdoor business. It could turn to a tailwind along with the replacement cycle in the near future.