Toast Earnings: Slowing Industry Sales Overshadow Upbeat Location Additions and Profit Improvement

Narrow-moat Toast’s TOST second-quarter results were strong, with $1.1 billion in sales and $15 million in adjusted EBITDA, ahead of our estimates for $977 million in sales and negative $4 million EBITDA. Sales momentum was fueled by impressive net new location additions (7,500 or 35% annual growth, ahead of our estimate of 6,500), and solid software average revenue per-unit growth of 16%, outpacing our 12% forecast. While we expect to nudge up our year-end estimates for $3.8 billion in sales and negative $15 million in EBITDA to management’s guided ranges of $3.81 billion-$3.87 billion and $15 million-$35 million, respectively, we remain less than sanguine about the broader restaurant sector. As evidence, Toast had a slowdown in processed payments per store in the quarter, falling from 9.4% in the prior quarter to just 0.7%, which reflected sweeping declines in customers. As restaurateurs continue to take a surgical look at costs, we expect a deceleration in average software revenue per store, at least until macroeconomic pressures abate. More concretely, we expect to lower our 2024 restaurant-level sales and software revenue per-unit estimates by 8% to $1.2 million and 2% to $5,970, respectively, resulting in an expected mid-single-digit percentage cut to our $22.50 fair value estimate. Shares continue to look fairly priced despite a low-double-digit percentage surge in after-market trading on Aug. 8.

Despite the softer near-term outlook, we continue to believe Toast is in the early stages of its growth narrative with a comprehensive and growing suite of restaurant software solutions. The firm continues to expand its suite of add-on applications with the addition of Toast Catering and Events in the quarter, and already boasts a handful of partner restaurants using more than $10,000 in elective Toast software products, supporting our long-term projection of $13,500 per-unit software revenue or roughly 1% of store-level sales.