A rising tide lifts all ships: Consumer discretionary stocks are doing well, leading the pack with the highest forward PEs in May, as FactSet reported last week.
Same store sales: Despite some same store sales headwinds caused by the so called 2013 same store sales cliff, the theme noted early this year that sales comps would be down versus mild winter weather in 2012, the industry is doing fine. There are no large publicly traded restaurant companies in real trouble, although one could argue Ruby Tuesday (RT) is, but not any of the major players from a liquidity or default basis.
The industry was at +2.5% SSS (per MillerPulse) in May, almost all driven by ticket. McDonald's (MCD) May sales gains reported Monday were foreseen and no surprise. Yum's (YUM) -19% May China same store sales decline was not moderate but met the Consensus Matrix number.
With many non-casual dining brands, the two year and five year comps trends are solid; if that was the Street metric we'd all be celebrating. See the following trend sales display from RBC's Larry Miller's MillerPulse Survey.
MAY 2013 RESTAURANT TWO YEAR COMPS TREND (MILLER PULSE)
|Restaurant Segment||Industry||Fast Food||Fast Casual||Casual Dining||Fine Dining|
|2 Year Comp||+5.6%||+8.6%||+6.3%||+.9%||+10.4%|
Legend; two year comparables are the May 2013 v May 2011 comparison.
Forward PEs and Earnings Standouts: FACTSET noted Chipotle (CMG) (31.1X), Starbucks (SBUX), (25.3X) and YUM ($21.2X) have the three highest restaurant forward PEs in the consumer discretionary space. Only one of these (SBUX) showed upon my list of earnings standouts, restaurant companies that have all of the following fundamentals going the right direction:
· Positive same store sales and traffic, both, with no major geographies negative.
· Meets or beats on revenue consensus, beats EPS by $.01 or more, with no downgrades within 90 days.
· Positive sequential momentum, early peek SSS current period, if revealed, positive.
· No gimmicks with adjusted, proforma or restated EPS values, and as validated by the operating income beat. A publicly traded track record of one year.
YUM has refranchised so much it's a China story. CMG is a nosebleed story.
Standouts: SBUX, with new product new news every quarter, the only restaurant chain growing traffic at a greater rate than average check. Also, Ruth Chris (RUTH), Texas Roadhouse (TXRH) Domino's (DPZ) and Popeye's (AFCE) are on the standouts list. Both Ruth Chris and Mitchell's in the RUTH house are moving, ahead smartly. AFCE is building company stores, capturing U.S. KFC units and reflagging them, and touting its US stores franchisee 20% EBITDAR margins, in addition to new flavors/new product news. AFCE was the first franchisor ever to report franchisee profitability in a quarterly call that I can recall.
Investor Implications: My number one concern going forward is that the industry not shoot itself in the foot via over discounting. NPD noted that after a time, customers see discounted prices as the new normal. Restaurants that don't play in the ever discounting spiral space are at an advantage. Think: Del Frisco (DFRG), Cheesecake Factory (CAKE), Panera (PNRA) and CMG. Also: the noted Earnings Standouts group above, are fundamentally attractive.
Restaurant marketing tends to be copycat in nature, and like a battleship, takes forever to turn. Darden (DRI) has reset to the $12.99 television price point, doing Red Lobster and Olive Garden $3/$4 off coupons too. US Pizza Hut is doing $5.55 anniversary pizza price (one large) undercutting even Domino's and weaker QSR players are at or under the "my $.99" at Wendy's (WEN).
We wonder what customers must think of the long term pounding on price. NPD presented five year data that shows that restaurant deal sales mix is flat and declining, as follows. This means more discounting is chasing even fewer deal consumers.
RESTAURANT SALES MIX CHANGES ON DEAL TRANSACTIONS (NPD)
|Year:||YE 2008||YE 2009||YE 2010||YE 2011||YE 2012|
|Sales Mix Change,Y/Y||+5.0%||+3%||0||0||-3%|
Legend: Deal Mix" restaurant meals sold at discount, change v. prior year