The restaurant sector heads into 2017 with plenty of uncertainty as the impact of a new administration is hard to quantify. In general, operators in the U.S. have felt pressure from higher labor costs and soft traffic trends, although a post-election surge in consumer confidence bodes well.
A few restaurant sector morsels are posted below.
Top performers of 2016: RCI Hospitality Holdings (NASDAQ:RICK) +79%, Arco Dorados (NYSE:ARCO) +73%, Jack in the Box (NASDAQ:JACK) +49%, Domino's Pizza (NYSE:DPZ) +48%, Biglari Holdings (NYSE:BH) +48%.
Worst performers of 2016: Bravo Brio Restaurant Group (NASDAQ:BBRG) -58%, Noodles (NASDAQ:NDLS) -56%, Ruby Tuesday (NYSE:RT) -40%, One Group Hospitality (NASDAQ:STKS) -26%, Habit Restaurants (NASDAQ:HABT) -25%.
Lowest forward P/E ratios: One Group Hospitality 8.50, RCI Hospitality 10.24, DineEquity (NYSE:DIN) 12.30, Bloomin' Brands (NASDAQ:BLMN) 12.57, Brinker International (NYSE:EAT) 13.21.
Darden Restaurants (NYSE:DRI) reports same-restaurant sales increased 1.7% in FQ2 to improve 40 bps sequentially. Six out of seven of the company's chains recorded positive same-store sales growth for the quarter.
Same-restaurants sales by brand: Olive Garden +2.6%, Longhorn Steakhouse +0.1%, Capital Grille +1.2%, Yard Hosue 0.7%, Eddie V's +2.7%, Seasons 52 -0.3%, Bahama Breeze +2.6%.
Darden reaffirmed FY17 EPS guidance of $3.87 to $3.97.. The company expects FY17 same-restaurant sales growth of 1% to 2%.
Fitch expects market share to shift in the restaurant sector in 2017.
The research firms forecasts food away from home sales to increase 4% next year vs. 5% growth in 2016.
"Even as the job market improves, consumers are looking for relatively low price points and the convenience to order online when they eat away from home," says Fitch director Carla Norfleet Taylor.
"With persistent food price deflation, deal promotions will likely be a tactic restaurants use to get people in the door," she adds.
Fitch thinks Starbucks (SBUX -0.4%) and Darden Restaurants (DRI -0.8%) will gain market share due to their strong positions in coffee and to-go, respectively. McDonald's (MCD +0.1%) is seen losing U.S. market share as specialty burger competitors continue to rise and Brinker International's (EAT -1.6%) high exposure to energy-dependent markets is seen as a negative.
It's been a frisky few weeks for restaurant stocks as 41 out of 51 companies with a market cap of over $50M are in positive territory for the period. Some pleasing reports during the earnings season and a positive read on the sector post-election have factored in to the gains for the previously beaten-down sector.
+20% gainers over the last month include Red Robin Gourmet Burgers (NASDAQ:RRGB), Fogo De Chao (NASDAQ:FOGO) and Texas Roadhouse (NASDAQ:TXRH).
+10% risers include Denny's (NASDAQ:DENN), Buffalo Wild Wings (NASDAQ:BWLD), Cracker Barrel (NASDAQ:CBRL), Chuy's Holdings (NASDAQ:CHUY), Ruth's Hospitality (NASDAQ:RUTH), Popeyes Louisiana Kitchen (NASDAQ:PLKI), Darden Restaurants (NYSE:DRI), Bojangles (NASDAQ:BOJA), Del Frisco's Restaurant Group (NASDAQ:DFRG), Cheesecake Factory (NASDAQ:CAKE) and Wendy's (NYSE:WEN).
A piece in the WSJ today argues that investors may want to consider selling out of restaurant names after the recent rally.
Amazon (AMZN +2.6%) announced today that it launched its one-hour restaurant delivery service in Irvine, California. More than 50 restaurants are included in the program, with most appearing to be independent operators.
Amazon Restaurants is now active in six California cities. The program is for Prime members only and includes no mark-ups from the pricing listed on the restaurants' menus.
A broader roll-out of Amazon Restaurants could eventually threaten InstaCart, GrubHub (NYSE:GRUB), HelloFresh and Blue Apron - as well as nip at after work takeout traffic at Whole Foods Market (NASDAQ:WFM). It could also be a concern for operators such as DineEquity (NYSE:DIN), Darden Restaurants (NYSE:DRI) and Brinker International (NYSE:EAT) as it gives independent restaurants a formidable partner.
Voters in Arizona, Colorado and Maine voters approved boosting the minimum wage in their states to $12 per hour. Each state will see the hikes make their way to the $12 level after a series of graduated increases.
The state of Washington approved increasing the minimum wage to $13.50 by 2020.
The restaurant industry has already been under pressure, with labor costs as a percentage of sales on the rise. Other pockets of retail will also feel a sting from the higher minimum wage boost.
In just one recent week alone, three restaurant companies filed for chapter 11 bankruptcy protection - Cosi (OTCPK:COSIQ), Rita Restaurant (Don Pablo), and Garden Fresh Corp. (Souplantation, Sweet Tomatoes). At least five other operators have done the same this year.
Rattled by so many filings in such a short time frame, industry experts now say to expect more bankruptcies, closings, consolidations, and management shake-ups. Famous Dave's of America (NASDAQ:DAVE) is in the midst of closing many of its barbecue restaurants and last week named its fourth new CEO in four years.
Late this summer, Ruby Tuesday (NYSE:RT) announced plans to close almost 100 locations, and Bob Evans (NASDAQ:BOBE) in April shuttered 27 restaurants on top of 20 closed last year.
Behind the problems: Restaurant supply for years up until 2014 had been growing even as foot traffic hadn't. While restaurants have seen net closings since, other options have been drawing away even more customers - think meal-kit delivery services like Blue Apron, better prepared meal choices at supermarkets, and improved offerings at convenience stores.
"Restaurants are competing against a lot of those other choices, not just restaurants,” Darden (NYSE:DRI) CEO Eugene Lee told investors earlier this month.