The U.S. restaurant industry was under strain in the latter half
of 2013 and the beginning of 2014. This was heightened by Fed's
"taper talk," the temporary government shutdown in October and
concerns regarding consumer spending trends. Rising food costs also
added fuel to the fire.
In this scenario, a little caution can do investors a lot of good.
Economic events or numbers may fail to restrict the downtrend, but
investors may jump to precautionary action to secure the portfolio.
We will pick some stocks that are likely to see further downside
and it might be an ideal time to trim them from your portfolio.
Before we discuss further about the stocks, let us look at what has
been plaguing the sector in the recent times.
Weaknesses Hurting the Sector
Food Cost Inflation
: The U.S. restaurant industry has been severely affected in recent
times by a rise in food prices. The consumer price index (CPI) for
U.S. beef and veal is up almost 10% so far in 2014 - the fastest
increase in retail beef prices since 2003-end. With the drought
conditions in Texas and Oklahoma worsening to some extent in April,
the situation deteriorated further for the beef production
According to the U.S. Department of Agriculture (USDA), overall
U.S. food price inflation for 2014, including food bought at
restaurants, would gain 2.5% to 3.5%. Food costs account for about
one-third of restaurant sales, thus making the industry vulnerable
to food cost inflation.
Limited Pricing Power
: U.S. consumers are facing the brunt of government budget cuts,
higher gasoline prices, payroll tax increases and delayed tax
refund checks. These factors have dented their discretionary
spending. The USDA forecasts that food-at-home inflation as well as
food-away-from-home inflation index in the U.S. is expected to grow
in the range of 2.5-3.5% in 2014. This would likely leave less room
for consumer companies to exercise pricing action putting
restaurant sales under pressure.
Affordable Care Act to Hurt Margins
: Since the sector plays a key role in the nation's employment
picture, the recent Affordable Care Act by President Obama,
commonly known as Obamacare, is expected to have an adverse impact
on the margins for the rest 2014. The law entails companies to
provide coverage for workers or face penalties, though it is not
applicable for employees clocking less than 30 hours per week on an
average. To avoid these austerities, most companies are trying out
different labor models such as recruiting more part-timers and
cutting work hours, in turn affecting margins.
Stocks to Remove from Your Basket
Here we list 3 stocks that may witness further downside. These
stocks - each with either a Zacks Rank #4 (Sell) or a Zacks Rank #5
(Strong Sell) - have witnessed downward estimate revisions over the
past few weeks. Moreover, each of these stocks has slid around 5%
in the last four weeks.
): The California-based restaurateur provides beverage and food
offerings. The company also retails consumer packaged goods through
various retail channels, such as grocery, mass, club and
convenience stores as well as online.
The company reported first-quarter loss of a cent, which compared
unfavorably with the Zacks Consensus Estimate of earnings of a
cent, mainly due to lower sales, which stemmed from the reduction
in the number of company-owned outlets, due to the company's
- Jamba has seen a sole negative revision in the last 30 days for
both the current quarter and current year estimates. Quarterly
earnings consensus slumped from 41 cents a share to 39 cents.
Yearly earnings consensus dropped from 43 cents a share to 39
- This Zacks Rank #4 (Sell) stock has lost around 5.0% over the
last four weeks.
Additionally, Jamba trades at a P/E Ratio of 27.46x, compared to a
negative industry average, which signifies the stock is expensive
compared to its peers
Chuy's Holdings, Inc.
): The Texas-based restaurateur operates Mexican and Tex-Mex
restaurants in Texas and 13 states in the southeastern and
midwestern United States.
The company reported first-quarter earnings of 16 cents per share,
which missed the Zacks Consensus Estimate by 5.9%, mainly due to
higher operating costs.
- Chuy's has seen mostly all its revisions being revised downwards
in the last 30 days for both the current quarter and current year.
Quarterly earnings consensus slumped from 25 cents a share to 23
cents. Yearly earnings consensus dropped from $1.00 per share to 98
- This Zacks Rank #5 (Strong Sell) stock has lost around 8.0% over
the last four weeks.
Additionally, Chuy's trades at a P/E Ratio of 40.48x, compared with
a negative industry average, which signifies that the stock is
expensive compared to its peers.
Diversified Restaurant Holdings, Inc.
): The Michigan-based restaurateur owns and operates Bagger Dave's
Burger Tavern - a full-service restaurant and full bar - and
Buffalo Wild Wings grill and bar franchised restaurants.
The company reported first-quarter earnings of a penny which were
in line with the Zacks Consensus Estimate, primarily because higher
revenues were offset by even higher costs.
- Diversified Restaurants has all its estimates revised downwards
in the last 30 days for both the current quarter and current year
estimates. Quarterly earnings consensus slumped from break-even
earnings to a loss of a penny per share. Yearly earnings consensus
increased from a loss of 4 cents per share to a loss of 5 cents per
- This Zacks Rank #4 (Sell) stock has lost around 6.0% over the
last four weeks.
With consumer spending trends at an all-time low due to a
sluggishly recovering economy, we believe it will be a prudent move
to get rid of these stocks now.
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