For families making less than $70,000 ayear , the mood is
Social Security taxes just went up. Gas prices have spiked.
Theunemployment situation is still iffy at best.
Add it all up and you can see why America's middle class is
still feeling insecure about their finances and why they've
sharply cut back on non-essential spending.
A January Goldman Sachs survey showed increasing fiscal
concern among suburbanbaby boomers . That should be troubling to
many types of businesses. However, when it comes to one
particular type of business that's popular with thebaby boomer
crowd, the numbers are a signal for the astute investor to
In this survey, 72% of consumers expected an increase in their
taxes. Of that group, 44% are planning to reduce spending, while
28% are not.
And according to Goldman Sachs, one sector is particularly at
risk: casual dining.
Companies such as
Brinker International (
Cracker Barrel (Nasdaq: CBRL)
are seeing the effects of slower spending, and the fact that
their share prices have been boosted in thisbull market should
give you pause. Thesegains can reverse in a hurry ifsales trends
don't soon improve.
Sure enough, the Knapp-TrackIndex of monthly restaurant sales
showed thatsame-store sales at casual-dining establishments fell
5.4% in February. That's the biggest monthly year-over-year drop
Notably, other restaurant categories such as fast-food and
high-end dining are seeing only small same-store sales declines.
The upcoming Knapp-Track data for March may actually turn
positive, but only because March 2012 sales trends were weak.
Don't take a positive reading tomean that this industry's woes
The especially sharp drops in same-store sales aren't solely due
to the beleaguered middle-income U.S. consumer. The companies
themselves share some of the blame, as key franchises such as
Olive Garden, Ruby Tuesday and Chili's have grown tired in the
eyes of consumers.
For example, Olive Garden posted a monthly drop of 9.1% in
year-over-year same-store sales in February. That metric has been
negative in 17 of the past 22 months.
Longhorn Steaks and Red Lobster had healthier same-store sales
trends during the past few years, but each chain has been
experiencing negative sales comparisons during the past six
These firms also face higher expenses.
First, beef prices are expected to spike this year as farmers
cull their herds in the face of the ongoing drought. This
initially lowered beef costs -- alot of cattle were brought
tomarket in late 2012.
Second, the next phases of the Affordable Health Care Act are
expected to lead these restaurant chains tooffer health insurance
to more employees, which is another cost that must be accounted
for, andwill reduce thebottom line .
In the past 60 days, consensusprofit forecasts for Darden have
moved 5% to 15% lower (on 2013 and 2014 forecasts, respectively),
yet the surgingstock market has pushedshares up anyway.
Investors have also boosted shares of Brinker International to
an all-time high, even as sales trends remain weak. Despite the
recent move to $37,analysts at Merrill Lynch predict shares will
fall to $28. They think shares should trade for about 12
timesforward earnings , which is a 20% discount to the peer
group. "EAT shares merit a discount valuation, in our view, based
on the long-term sales record at Chili's and concerns about the
risks of aggressive cost cutting," noted Merrill Lynch analysts.
Cracker Barrel also looks frothy
Shares of Cracker Barrel have also traded up sharply, doubling
since the summer of 2011.
The company's same-store sales trends have been perkier, (up
3.3% year-over-year in the most recent quarter), and the stock
has also been boosted by the agitation of a shareholder activist.
Yet it's hard to ignore that shares now trade for about 17 times
projected 2013earnings per share forecasts. That's much higher
than the forwardmultiple of 13.5 this stock has traditionally
garnered in the past 10 years, implying that profit-taking lies
Risks to Consider:
A robust drop in the nationalunemployment rate for the rest
of 2013 could provide a meaningful boost to consumer sentiment,
though a lack of payroll gains would likely lead to sharp drops
for many of thesestocks .
Action to Take -->
These are the perfect types of stocks you should be selling in
this bull market. Their operations remain challenged, their
price-to-earningsmultiples are getting stretched, and they are
faced with rising costs. Although they're among the top
performers of 2013, that outperformance appears unlikely to
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