On the Margin
Weak sales take a toll on restaurant stocks

Weak sales take a toll on restaurant stocks

This post is part of the On the Margin blog.

Wall Street is worried about weakening restaurant sales, at least judging from stock performances so far this year.

But not that worried.

Restaurant stocks are down about 2 percent over the past month, and about 1.5 percent over the past three months, according to the NRN Restaurant Index.

For the year, however, industry stocks remain in positive territory, up just more than 4 percent so far in 2016. By comparison, the S&P 500 index is up 1.7 percent on the year.

More than half of restaurant stocks are up so far this year.

The index is weighted based on market cap and so tends to follow the performance of the larger companies — notably McDonald’s Corp., which is by far the largest restaurant company in the world.

Since the end of 2014, McDonald’s stock is up more than 34 percent, not counting for dividends, as investors were thrilled with the company’s move into all-day breakfast, its cost cuts and sales improvement.

Investors have been more cautious of late, however. As some analysts have expressed concern about the company’s sales prospects, its stock has fallen more than 2.5 percent since March. Yet it remains up 3.5 percent on the year.

Indeed, McDonald’s performance this year is something of a microcosm for restaurant stocks as a whole.

Restaurant sales indices have underperformed for most of the year, starting in March. That weakness has continued through June, based on all indications. And observers are uncertain why — though it could be competition from grocery stores or independent concepts, or perhaps both. So restaurant stocks’ decline so far this year could be a reflection on overall concern about the industry among investors.

A few other points about the year in stocks:

Investors are turning cold to Chipotle. For some time this year, it appeared that investors were counting on a quick Chipotle comeback. That no longer appears to be the case. The stock is down 14 percent since March, amid some analyst concerns about the pace of the chain’s sales recovery. Maxim Group Analyst Stephen Anderson lowered his Chipotle price target to $285 last week — the stock currently trades at more than $400 — after expressing concern that the company will need to keep using coupons to generate sales.

Family dining remains strong. Earlier this month, Cracker Barrel Old Country Store announced that it beat Wall Street estimates. It also announced plans for a special dividend. Its stock is nearly $170 a share, an all-time high and continuing that chain’s stock rally that dates back to 2008. The rest of the family dining sector is up, too.

Pizza chains are getting punished. Investors are hammering pizza chains that don’t perform right now. Rave Restaurant Group, operator of Pizza Inn and Pie Five, is down more than 42 percent this year. Papa Murphy’s is down 34 percent. Both reported disappointing sales at a time when consumers appear willing to eat more pizza.

Ignite keeps falling. Ignite Restaurant Group went public in 2012. Its stock quietly neared $20 a share in the subsequent months. But it plunged that summer when the company had to restate earnings. And the stock has struggled ever since thanks to weak sales and its failed Macaroni Grill acquisition. Ignite’s stock is down more than 50 percent this year and is trading at about $2.

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

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