Winter storms, higher payroll taxes, tax refund delays and
China's bird flu scare were just a few of the factors working
against restaurants in the first three months of 2013.
But you wouldn't have known it from the customers crowding
into chains likeChipotle Mexican Grill (
) andPanera Bread (
). The same holds true for investors, who crowded into restaurant
stocks, despite a slew of reports out in the past week showing
generally disappointing sales and profit growth.
Some 44 of 53 stocks in IBD's Retail - Restaurant industry
group advanced for the week, despite recent earnings misses
) and Panera, and a profit decline forYum Brands (
"Investors were willing to look through to the easier
comparisons that are now upon us and to the potential for better
news as we move through this year," said analyst Andy Barish of
Jefferies & Co.
Starbucks, for example, reported a 20% EPS gain that met
analysts' estimates, but its 11% sales growth came up short.
Still, U.S. same-store sales bested forecasts. Management lifted
its full-year earnings guidance, and Robert W. Baird raised its
price target on the stock to 70 from 65. Shares fell less than 1%
Friday, but still ended the week with a gain of nearly 3%.
Shares of highflying bakery-cafe operator Panera Bread, which
typically posts same-store sales gains in the high single digits,
fell 2% Wednesday after a weak first-quarter report. Panera lost
4% for the week.
Panera's February store sales showed virtually no growth.
Management at the fast-casual chain blamed winter storms.
Last year, an early spring sent consumers flocking to their
favorite dining spots.
That made for tough comparisons among restaurant operators
this year, as fiercer weather kept consumers home.
The payroll tax kicked in at the start of the year and made
matters worse, dampening consumers' spending plans.
"January and February got off to a difficult start," Barish
But the quarter ended on a positive note, with same-store
sales and traffic picking up in March, according to data from
analyst Larry Miller of RBC Capital Markets.
The outlook for the year is still hazy, but it seems some of
the earlier head winds are weakening.
"We're starting to see people getting accustomed to the
payroll tax. And gas prices are off their peak from a month ago,"
Based on his MillerPulse proprietary research, he says
consumers plan to spend more on dining out in coming months.
Meanwhile, food costs have been backing down after worrying
increases last year. Coffee prices have cooled. Chicken wings
have folded almost 40% from peak levels in mid-January, which is
good news forBuffalo Wild Wings (BWLD). Cheese prices remain a
concern, driven up by a drought in New Zealand, a top dairy
Labor rates are moving up only slightly, says Miller. And
employees deciding to stay put in the normally high-turnover
restaurant industry "have led to better efficiencies," he said.
"The longer store managers are in their jobs, the better service
Also, Miller says it appears that health care costs under the
Affordable Care Act won't rise next year as much as restaurant
operators originally feared.
"We initially thought restaurant margins would be impacted by
1% to 3%, which would have caused a 10% to 30% drop in earnings,"
Instead, the impact will likely be under 0.5%, he says.
Survival Of The Fittest
The economy and employment remain key issues.
"We don't see the environment as strong enough to lift all the
boats," Barish said. "You have to be on your game. The macros are
still choppy and the competitive environment is still very
That's especially true in the mature casual dining segment.
It's been struggling to remain relevant amid newer or
faster-growing concepts such as Tex-Mex-themedChuy's (CHUY),
Buffalo Wild Wings and fast-casual players Panera and Chipotle
"Consumers have found that the experience at most of the
older, traditional casual dining places don't have the appeal
they used to have," said Ron Paul, president of restaurant
research firm Technomic Inc.
"And their audience has gotten older and many are in locations
that have changed significantly over the last 20 years," he
Paul countsDineEquity 's (DIN) Applebee's,Brinker
International 's (EAT) flagship Chili's chain andRuby Tuesday
(RT) among those older concepts fighting to stay vibrant.
"And to some extent you can say the same thing about Red
Lobster and Olive Garden," Paul said, adding that Red Lobster
"usually figures a way to get their customers back" through
aggressive marketing and value pricing.
Red Lobster and Olive Garden are part of Orlando,
Fla.-basedDarden Restaurants (DRI). Its shares have lagged behind
the restaurant group over the past 12 months.
Darden shares did climb more than 4% in the latest week.
After several years of stale sales growth, casual dining
outfits have begun to post modestly better results. But they
still can't keep pace with fast-casual players.
"It's a very tough market in general in casual dining. There
are too many seats," Paul said. "The chains that are doing well
have a point of differentiation and they're also executing well.
Think Chipotle, Panera, Buffalo Wild Wings."
Subway Snags Market Share
Barish sees some warning signals at Chipotle, where same-store
sales growth slowed to 1% in the first quarter vs. 12% a year
Earnings leapt 19% to $2.35 a share and topped Wall Street
views. But the beat was mostly on lower expenses and a lower tax
rate, Barish says.
"We really don't see any drivers moving forward other than
taking menu pricing (higher) later this year," he said of
Chipotle. "That's always a little risky in terms of traffic. You
run the risk you might drive off some traffic."
On the fast-food side, big veterans such as McDonald's and Yum
Brands, which oversees KFC, Taco Bell and Pizza Hut, face tough
competition from sandwich chains such as the fast-growing Subway,
Pizza Hut is taking heat from a host of small, emerging pizza
players.Papa John's (PZZA) andDomino's (DPZ) are so far beating
that challenge. Papa John's earnings are forecast to rise 20%
this year. Analysts see Domino's earnings up 15%.
McDonald's profit grew only 2% in the first quarter, with a 7%
forecast for the year.
"McDonald's did not have a good quarter or March," Paul said,
despite continuing to innovate with new wraps and expanding their
coffee drink offerings.
But he contends that privately held Subway, which opened 1,000
stores in the U.S. last year, has stolen some of McDonald's
burger business, as well as that ofBurger King (BKW) andWendy's
"While burger chains are not growing their stores
dramatically, they're fighting for customers at lunch and they
have not found a good answer on how to get a good dinner
business," Paul said.
Haves Vs. Have-Nots
Most fast-food unit expansion is happening overseas. Yum
Brands garnered about 40% of its operating profit from China
before bird flu scares choked sales at chicken chain KFC.
Yum's same-store sales at its 5,300 China restaurants, most of
them KFC, were down 20% in the first quarter. Overall company
profit fell 8% to 70 cents a share. But it was better than
investors expected. At midday Friday, shares were tracking toward
a 2.7% gain for the week, but were up less than 1% so far this
Barish thinks coffee and snack giants Starbucks andDunkin'
Brands (DNKN) continue to resonate with customers on new products
and sharp marketing.
"Both brands are executing very well," he said.
Krispy Kreme Doughnuts (KKD), which scores high in IBD
metrics, has slimmed down its store base and is apparently
healthier for it. "It closed a lot of underperforming stores and
it's shown good results on a smaller store base," Paul said.
With inflation easing and signs consumers may be willing to
step out to restaurants more could mean better days ahead for
"We're setting the table for earnings increases in the second
half of the year, maybe even in the June quarter," said
"The thing that drives this business higher is more people
going out to eat across the board," he said. "We think there's a
good chance of that happening. We'll know whether or not that
happens in the next few months."
Even if the tide does rise, Barish still prefers to stick with
companies that have growing sales, margins and unit openings, all
of which he says will drive earnings higher.
Barish's top picks are Starbucks, Dunkin' Brands and
"We think all three have noticeable drivers to continue to
move their business forward in both same-store sales growth, unit
growth and margins and that will flow through to earnings," he
"You definitely have the haves and have nots right now," he