Russia Exposure Looks Modest for Restaurant Operators

Editor's note: Read the latest on how Russia's invasion of Ukraine is affecting the global economy and what it means for investors.

In light of recent announcements by wide-moat quick service operators McDonald's and Starbucks that they intend to suspend all business in Russia until further notice, we are providing updates on exposure to the region for others in the restaurant space using Euromonitor estimates. As outlined in earlier notes, McDonald's MCD 2021 revenue and operating profit exposures were roughly 9% and 2%-3%, respectively, suggesting a mid-single-digit percentage impact to our $250 fair value estimate if the business is permanently abandoned (our bear case). For now, we maintain our assessment of intrinsic valuation as we await clarity regarding the long-term equilibrium in that market. After McDonald's, the next largest exposure to the region in our restaurant coverage is Yum Brands YUM, with KFC deriving $1.3 billion in 2021 systemwide sales (just north of 2% of the operating company's systemwide sales) from Russia, with the impact to operating profits likely slightly lower since the market is fully franchised. Further, Burger King, a narrow-moat Restaurant Brands International QSR banner, commands the third-largest footprint, with $615 million in 2021 sales constituting about 1.8% of operating company systemwide sales. Wide-moat Domino's DPZ generated $77 million in regional sales in 2021, an immaterial (0.4%) share of consolidated systemwide sales, while Starbucks' SBUX direct exposure clocks in at just $76 million (0.3% of company-owned system sales).

In broad strokes, the direct impact of the complete deconsolidation of the Russian market for our publicly traded restaurants would be muted, with most operators seeing no more than a low-single-digit percentage fair value estimate impact. The more poignant (and difficult to measure) effects are indirect--fuel pricing and flow-through effects on cost of food goods and consumer wallets, as we see it, weighing on restaurant margins.

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