On the Margin
Analyst says restaurants are in a recession

Analyst says restaurants are in a recession

This post is part of the On the Margin blog.

Restaurant industry same-store sales are falling at such a meaningful rate that they’re signaling not just an industry-wide problem, but could be a “harbinger” for a full-blown recession next year.

So says Stifel analyst Paul Westra, who greeted us this morning with a downgrade of the entire restaurant industry, with five companies downgraded to Sell.

Westra cited a “simultaneous” deceleration of industry same-store sales by 150 to 200 basis points across all categories, according to his firm’s sales survey.

Westra doesn’t like the look of that. The analyst says the deceleration “reflects the start of a U.S. restaurant recession.” And, he says, it “may also represent a harbinger to a U.S. recession in early 2017.”

“Restaurants have historically led the market lower during the three-to-six-month periods prior to the start of the prior three U.S. recessions.” He believes U.S. and global politics, terrorism, social unrest and economic uncertainty could all contribute to an economic slowdown.

There’s little question that industry same-store sales have been on a downward slide this year, and that this trend is hitting both quick-service restaurants and casual-dining concepts. The only decent month from a sales standpoint was February, and that month had an extra day.

The decline appears to be a reaction from consumers to lower grocery prices. But it may also be a signal that the industry has overbuilt in recent years, outpacing demand for dining out. 

Westra doesn’t believe the slowdown will end anytime soon, and has turned bearish on the industry as a whole. He downgraded 11 restaurant chains to either Hold or Sell. That includes two companies, The Cheesecake Factory Inc. and BJ’s Restaurants Inc., all the way from Buy to Sell.

Westra downgraded three other companies from Hold to Sell: Chipotle Mexican Grill Inc., Darden Restaurants Inc. and Panera Bread Co.

Westra downgraded six others to Hold from Buy, including El Pollo Loco, Dave & Buster’s Entertainment Inc., Chuy’s Holdings Inc., Texas Roadhouse Inc., Del Frisco’s Restaurant Group Inc. and Zoe’s Kitchen Inc.

The downgrades come as restaurant earnings season begins. Westra suggested that the average restaurant company would report same-store sales that are 30 basis points lower than expectations.

And he believes that, traditionally, mass declines in same-store sales, such as in the last two years, or the year before and the year of a U.S. recession. And he believes restaurants have less pricing power, “as price wars typically ensue during dining-out slowdowns.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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