Casual dining stocks face headwinds.
This year hasn’t been particularly kind to restaurant stock investors, particularly when it comes to casual dining. BMO Capital Markets analyst Andrew Strelzik recently downgraded casual dining stocks across the board and said the widening price gap between what it costs for dining at home compared with eating out will continue to pressure restaurant stocks. To make matters worse, restaurant stocks are facing extremely difficult fourth-quarter comparisons from a year ago, increasing the likelihood of a deceleration in same-store sales and traffic growth. Here’s a look at eight restaurant stocks that could be impacted.
Brinker International (ticker: EAT)
Brinker has about 1,300 domestic Chili’s Bar & Grill and Maggiano’s Little Italy restaurants, as well as roughly 300 international locations. In the most recent quarter, Brinker reported Chili’s same-store sales growth of just 0.6 percent, suggesting cost-cutting efforts may be turning some customers off. Fortunately, the company’s aggressive share repurchases have helped provide some support for EAT stock, but fiscal 2019 same-store sales growth guidance of between 0.75 percent and 1.75 percent may prove difficult in the current environment. BMO has an “underperform” rating and $40 price target for EAT stock.
Texas Roadhouse (TXRH)
Texas Roadhouse reported impressive same-store sales growth of 5.7 percent for company-owned restaurants and 3.9 percent for franchised restaurants in the most recent quarter. Unfortunately, the stock tanked following its report as rising labor and packaging costs ate into profits, resulting in an earnings miss. There’s no sign the trend in packaging costs will change given the shift in the industry toward delivery and carryout. There’s also no sign that wage costs will subside in the current economic environment. BMO has an “underperform” rating and $40 price target for TXRH stock.
Chuy’s Holdings (CHUY)
Tex-Mex restaurant chain Chuy’s has faced growing pains in its efforts to expand its footprint nationwide. The company’s focus on value has some investors concerned about the impact rising costs will have on margins. In the most recent quarter, operating costs were up 2 percent as Chuy’s dealt with rising labor, marketing and rent expenses. Management compensation also drove overhead costs higher by 11 percent. Full-year same-store sales growth guidance of just 1 percent may justify the stock’s recent earnings multiple contraction. BMO has an “underperform” rating and $23 price target for CHUY stock.
Darden Restaurants (DRI)
Darden Restaurants owns and operates about 850 Olive Garden restaurants, 500 LongHorn Steakhouse locations and 350 other restaurant units. Darden has performed relatively well in 2018 when it comes to same-store sales growth, reporting 3.3 percent blended comps growth in the most recent quarter. However, even Darden expects that growth to slow in coming quarters, guiding for full-year same-store sales growth of between 2 and 2.5 percent. Darden’s scale advantages help protect its margins, but it also provides limited potential for earnings growth. BMO has an “underperform” rating and $96 price target for DRI stock.
Bloomin’ Brands (BLMN)
Bloomin’ Brands operates about 1,200 U.S. and 200 international restaurants, including Outback Steakhouse, Carrabba’s and Bonefish Grill. Bloomin’ is facing the same headwinds that the rest of the casual dining group is facing, but Strelzik is slightly more optimistic that Bloomin’ can weather the storm. He says BLMN stock may have less downside than many of its peers simply due to its relatively modest earnings multiple. However, BMO’s projected 2019 same-store sales growth of 0.3 percent will likely limit upside as well. BMO has a “market perform” rating and $21 price target for BLMN stock.
McDonald’s Corp. (MCD)
Fortunately for investors, it’s not all gloom and doom in the restaurant business. Strelzik says highly franchised fast food stocks like McDonald’s, which have performed relatively well in recent quarters, will likely continue to win over casual dining investors. McDonald’s has been working to streamline its operations by closing stores inside malls and Walmart (WMT) superstores and investing in its Experience of the Future technology initiative. McDonald’s has improved its online and mobile ordering systems and emphasized curbside pickup and delivery options via Uber Eats. BMO has an “outperform” rating and $195 price target for MCD stock.
Starbucks Corp. (SBUX)
Starbucks is another highly franchised fast food company which has more than 23,000 locations around the world. In addition to its restaurants, Starbucks has recently been taking advantage of its strong brand and entering the consumer products space with packaged coffee and tea, ready-to-drink beverages and even ice creams. Starbucks’ growth has slowed from where it was a few years ago, but the company appears to be shifting its U.S. strategy from acquiring new customers to increasing customer frequency. BMO has a “market perform” rating and $51 price target for SBUX stock.
Wendy’s Co. (WEN)
Wendy’s recently divested its remaining 12.3 percent ownership in Arby’s parent company Inspire Brands, but Wendy’s is still the third-largest U.S. hamburger fast food chain. Wendy’s has been working to increase its franchise mix and return to growth in the North American market, and it also has a massive international growth opportunity as well. The company has restructured, remodeled and rebranded and has set aggressive 2020 financial goals, such as opening 1,000 new locations and increasing global sales by 20 percent. BMO has an “outperform” rating and $20 price target for WEN stock.
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8 Restaurant Stocks Dealing With a Dining Slowdown originally appeared on usnews.com
