After hitting highs in April-May of 2013, the restaurant
industry has been struggling since June, with the Fed's 'taper
talk' adding to other issues. Despite this macro overhang, the
underlying growth drivers of the restaurant industry remain intact.
The outlook for the rest of the year has a positive bias given easy
year-over-year comparisons and an easing in food cost inflation.
Restaurant sales witnessed a modest gain in August, as per the
preliminary figures from the U.S. Census Bureau. Eating and
drinking place sales totaled $45.9 billion in August, up 0.3%
sequentially. As per National Restaurant Association, pent-up
demand in the sector is high, promising long-term earnings growth
for the sector.
Statistics bear out this relatively favorable environment. A recent
survey by the National Restaurant Association revealed that the
Restaurant Performance Index (RPI), measuring the present condition
and outlook on the U.S. restaurant industry, was 100.7 in July,
exceeding the 100 mark for the fifth successive month.
The Current Situation Index, which measures comparable store
sales, traffic count, labor costs and capital expenditures in the
restaurant industry, was 100.1 in July, also above 100 for last
fourth months. The latest index is indicative of the underlying
strength in the industry.
The Expectations Index, which measures the restaurant operators'
six-month outlook on the above indicators, was 101.3 in July,
staying above the 100 level for seven consecutive months.
While all three Indices managed to beat the safety threshold of
100, reaffirming operators' positive outlook on the industry for
the near term, all indices were down 0.6% sequentially, reflecting
the 'taper concerns.'
The Conference Board came out with the slightly discouraging
Consumer Confidence Index -- a barometer of the U.S. consumer
health -- on Sep 24, 2013. After increasing 5 points in August, the
index fell 2.1 points to 79.7 in September.
We believe, issues like trimmed GDP outlook for 2013 and 2014 for
the U.S. by the Fed, new stipulations related to "Obamacare,"
volatility in housing data, higher fuel prices and excess supply
may cloud the long-term picture. An extensive focus on value
proposition along with moderate pricing power could also prove
unfavorable to margins if exercised on a long-term basis.
Zacks Industry Rank
Within the Zacks Industry classification, the restaurant industry
is grouped within the broader Retail sector. We rank all the 260
plus industries in the 16 Zacks sectors based on the earnings
outlook and fundamental strength of the constituent companies in
each industry. To learn more visit:
About Zacks Industry Rank
As a guideline, the outlook for industries in the top 1/3rd of all
Industry Ranks or a Zacks Industry Rank of #88 and lower is
'Positive,' the middle 1/3rd or industries with Zacks Industry Rank
between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks
Industry Rank of #177 and higher is 'Negative.'
The Zacks Industry Rank for the restaurant industry is currently
#120. This is in the mid 1/3rd of all industries ranked,
highlighting the group's near-term Neutral outlook.
Key Performers in Second-Quarter 2013
Not all companies performed equally well in the quarter. While some
were laggards, others posted solid results mostly on their
individual strength. While 31% of operators missed the Zacks
Consensus earnings estimates this season, 60% surpassed theirs and
about 9% met. Some operators blamed a softer economic trend for the
insignificant growth in revenues.
) delivered weaker-than-expected earnings in the second quarter and
in-line revenues hurt by comps deceleration, while another renowned
), topped its earnings estimate but fell shy of revenue
expectations mainly due to issues in China. However, we believe
that both the companies will rebound in the long run, once the
global issues subside.
The restaurant industry falls under the broader Retail-Wholesale
sector, which portrays a stable earnings trend in recent times. The
second quarter 2013 results for the sector were impressive in terms
of both beat ratios (percentage of companies coming out with
positive surprises) and growth.
The earnings "beat ratio" was 51.2%, while the revenue "beat ratio"
was 32.6%. Total earnings for this sector went up 7.2% in the
second quarter from 5.6% growth in the first quarter of 2013. The
improvement came from the upside in revenues. On the revenue front,
the sector has seen an increase of 4.2% in the second quarter on
the top of a 2.8% increase in the prior quarter.
Looking at the Consensus earnings expectations for the rest of the
year, we are positive since earnings are expected to grow a modest
3.9% in the third quarter of 2013 and 7.1% in the fourth quarter
thereby registering full-year growth of 7.6%. For the next year,
the sector is poised to expand around 16.5% with 10.9% growth in
the first quarter itself.
While revenue surprises started off on the weak side, the sector is
anticipated to gain momentum from the fourth quarter of this year.
For more details about earnings for this sector and others, please
read our 'Earnings Trends' report.
Cooling Commodity Inflation in the US
The food cost inflation seems to have eased as the nation emerged
out of severe drought in the Midwest growing region last year. Food
costs account for about one-third of restaurant sales, thus making
the industry vulnerable to food cost inflation.
As suggested by the U.S. Department of Agriculture (USDA) report,
price inflation for all food is expected at 1.5-2.5% in 2013 down
from 2.5-3.5% estimated previously. Commodities like fish and
seafood, dairy products, fats and oils, sugar sweets, non-alcoholic
beverages, cereals and bakery products and other foods will likely
witness a decline in prices.
Although USDA expects poultry costs to increase in 2013, feed
prices will likely cool off with a favorable weather in the new
harvest season, leading to lower poultry prices in 2014.
Domestic and International Unit Expansion
Emerging from a lackluster economy from more than three years back,
most of the companies have accelerated their pace of restaurant
openings. A relative recovery in consumer confidence has also
encouraged companies to return to unit expansion.
Besides spreading their wings in the home country, the companies
also aim to test waters in foreign shores. Restaurateurs are
primarily concentrating on emerging markets that provide ample
opportunities for expansion. The burgeoning middle income
population in emerging countries encourages the companies to shift
their spotlight from the somewhat saturated domestic market.
Krispy Kreme Doughnut Inc.
Dunkin' Brands Group Inc.
Darden Restaurants Inc.
) have been quite active on this front.
Digital Ordering & Delivery Gaining Precedence
Digital ordering is in fashion now and restaurateurs are leaving no
stone unturned to capitalize. So far,
Domino's Pizza Inc.
) has been a huge beneficiary of this trend, generating over $2
billion in digital sales globally in 2012. As a matter of fact, the
company's mobile ordering system together with traditional online
ordering accounts for more than 30% of its revenues globally, and
is likely to account for more than 50% of total sales over the long
Industry bellwether McDonald's also looks to tap into the
opportunity as it recently announced various digital schemes like
self-ordering kiosks in Europe, mobile ordering, mobile payments
and other smartphone tie-ins.
Though delivery was common in the restaurant sector, especially
among pizza chains, it got a boost of late thanks to the busy
lifestyle of consumers. The world's second largest hamburger chain
Burger King Worldwide Inc.
) is the latest to join this bandwagon. Apart from this, catering
initiatives are also doing the trick for companies like
Panera Bread Co.
Jack in the Box Inc.'s
) Qdoba Mexican Grill chain.
Some other initiatives that have been undertaken to boost sales
across the wide spectrum of operators are renovation of restaurants
and continued reinvigoration of menu options.
Red Robin Gourmet Burgers Inc.
) carries a Zacks Rank #1 (Strong Buy). Companies with a Zacks #2
Rank (short-term Buy rating) include
CEC Entertainment Inc.
AFC Enterprises Inc.
), Burger King,
The Cheesecake Factory Inc.
), Domino's Pizza Inc., Dunkin' Brands and
). These companies have positive earnings estimate revision trends,
highlighting the favorable momentum in their underlying businesses.
Global Economic Backdrop Yet to Recover at Full-Swing:
Strengths aside, companies are caught up with macroeconomic
tensions like implementation of austerity measures in Europe owing
to the sovereign debt crisis and decelerating growth in Asia.
The big chains have considerable exposure in European nations like
France and Germany and in Asian countries like China. Although
debt-ridden European regions have started witnessing improvements,
they have yet to reach pre-crisis levels. Despite improving
economic data, German customers remain extremely value-sensitive.
Among the emerging nations, China and Brazil have their own share
of problems. Japan also continues to be a dampener as it is still
on the way to recovery from last year's earthquake.
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 operators' margins starting in 2014.
The law entails companies to provide coverage for workers or face
government penalties, though not applicable for employees who log
less than 30 hours per week on average. To avoid these austerities,
most companies are trying out different labor models like involving
more part-timers and cutting work hours ahead of the implementation
of the healthcare reform.
Limited Pricing Power:
As per USDA, the food-away-from-home inflation index in the U.S. is
expected to grow in the range of 2-3% while food-at-home inflation
will likely go up by 1.0% to 2.0%. The scenario leaves less room
for operators to exercise pricing action as the pocket pinch will
be more upon eating away from home. This, coupled with the slight
decline in projected IEO traffic for 2013, might restrict eateries'
pricing in the U.S.
Change in Consumer Preference:
The latest trend in U.S. eateries is to serve a healthy menu, owing
to consumer preference for fresh, organic, nutritious and low
calorie food. Rising health concerns and increasing awareness to
obesity and related diseases have led to the shift in consumer
preference toward healthy and "good for you" products. Focus on
child nutrition is also a priority. However, the fuss about
nutrition poses challenges.
There are some names that induce our cautious outlook. These
Bloomin' Brands Inc.
Cracker Barrel Old Country Store Inc.
), Darden Restaurants,
Buffalo Wild Wings Inc.
), Chipotle Mexican Grill,
Kona Grill Inc.
Brinker International Inc.
), Panera Bread Co., Krispy Kreme, McDonalds and Yum!, all of which
retain the Zacks #3 Rank (Hold).
BJ's Restaurants Inc.
) carry a Zacks Rank #4 (Sell) due to their prolonged struggle on
the earnings front.
In hindsight, the performance of the restaurant sector was
more-or-less satisfactory in the recent times. Cautious consumer
spending in the light of "Taper Hold" along with a reduced growth
outlook for the nation will likely result in sector stagnation for
a short while. The upcoming quarter does not enthuse much optimism,
and faster upward revisions in estimates should be seen fourth
Overall, the restaurant industry is expected to sustain recovery in
the rest of 2013 but at a slower clip as it is at the receiving end
of several global economic concerns. Our proprietary Zacks Ranks
indicates the movement of the stocks over the short term (1 to 3
months). At present, respectively 27% and 51% stocks sport a
positive and neutral outlook and the rest is negative.
AFC ENTERPRISES (AFCE): Free Stock Analysis
BJ'S RESTAURANT (BJRI): Free Stock Analysis
BUFFALO WLD WNG (BWLD): Free Stock Analysis
CHEESECAKE FACT (CAKE): Free Stock Analysis
CRACKER BARREL (CBRL): Free Stock Analysis
CHIPOTLE MEXICN (CMG): Free Stock Analysis
DINEEQUITY INC (DIN): Free Stock Analysis
DUNKIN BRANDS (DNKN): Free Stock Analysis
DOMINOS PIZZA (DPZ): Free Stock Analysis Report
DARDEN RESTRNT (DRI): Free Stock Analysis
BRINKER INTL (EAT): Free Stock Analysis Report
JAMBA INC (JMBA): Free Stock Analysis Report
KRISPY KREME (KKD): Free Stock Analysis Report
MCDONALDS CORP (MCD): Free Stock Analysis
PANERA BREAD CO (PNRA): Free Stock Analysis
RED ROBIN GOURM (RRGB): Free Stock Analysis
YUM! BRANDS INC (YUM): Free Stock Analysis
To read this article on Zacks.com click here.