On the Margin
In a strong year for stocks, restaurants lag

In a strong year for stocks, restaurants lag

This post is part of the On the Margin blog.

Restaurant sales have been weak in 2016. Unsurprisingly, so have stock prices.

The NRN Restaurant Index has risen just under 3 percent year to date. While that might be considered positive, it’s a much poorer performance than stocks as a whole. For instance, the S&P 500 Index has risen nearly 6 percent this year.

Much of that weakness has come in recent months. The NRN index has fallen 3 percent over the past six months.

This isn’t surprising. In fact, it’s probably a surprise that the industry hasn’t performed worse, given the view among many observers that we’re past “peak restaurant.”

Indeed, industry stocks have fallen more than 2 percent since July, when analysts began predicting a downfall. Jefferies analyst Andy Barish in a note that month called “the top of the restaurant cycle,” and recommended caution. Stifel analyst Paul Westra said around the same time that we are headed for a “restaurant recession.”

Restaurant industry sales have been weak through July, according to MillerPulse and Black Box Intelligence, and early indications are that August wasn’t that strong, either. Same-store traffic fell 2.7 percent in August, which was an improvement over the 3.9-percent decline in July, but was still weak.

According to MillerPulse, traffic has fallen nine of the past 10 months through July, when it hit a multi-year low of down 2.8 percent.

Recent declines in stock have followed suit. Eight restaurant companies now have stock prices below $6 per share.

Struggling casual-dining operators have had particularly bad years on Wall Street.

Ignite Restaurant Group Inc. has lost much of its value this year. Five years after the company neared $20 a share following its initial public offering, the owner of Joe’s Crab Shack is trading at less than $1 per share. It has lost more than 80 percent of its value over the past year. Ignite has struggled with several issues, including its failed purchase and later sale of Macaroni Grill, and weakness at Joe’s.

Meanwhile, Ruby Tuesday and Bravo Brio Restaurant Group, casual-dining companies that have both struggled with weak sales for years, have lost 40 percent of their value so far this year.

Investor ire isn’t just aimed at casual dining. Papa Murphy’s has lost half of its value this year. Fast-casual operator Noodles & Company has lost half of its value since March. Cosi Inc. has lost 60 percent of its value this year.

To be sure, investors are buying into companies with sales and profit growth, like Domino’s Pizza Inc., up 35 percent over the past year, or Jack in the Box, up 24 percent.

But with most companies struggling to generate sales, investors are staying on the sidelines.

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

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