Restaurant securities analysts, who generally have been bullish on most restaurant stocks through most of 2011, began to pull back their projections as a result of the stock market’s recent volatility.
Restaurant stocks, often a group that is first in and first out of troubled waters, rode the general market waves up and down this week. The deep stock price dives harkened back to 2008 levels, when the market and economy first entered what is now known as the Great Recession.
The Nation’s Restaurant News Restaurant Stock Index, a market-cap weighted index of all public restaurant companies, fell 93 points, or 5.2 percent on Monday, to close at 1,704. It was the largest one-day drop since late 2008, when stocks saw daily declines of more than 5 percent three times in December.
On Tuesday, the NRN index recovered, rising 5 percent to close at 1,789. It fell again Wednesday, down 50 points, or 3 percent, to close at 1,739.57. The index is still well above its sub-1,000 level, a point around which it had hovered through the end of 2008 and the first half of 2009.
“Recent signs of sluggish economic trends have tempered our enthusiasm about the fundamental outlook [on restaurant stocks],” analyst David Tarantino, at Robert W. Baird & Co., said in a report to investors on Monday. “As such, we are increasing our preference for companies that we believe are capable of sustaining healthy top- and bottom-line trends, even if macro conditions are challenging.”
Tarantino suggested that restaurant industry traffic could maintain its stable levels during the next few months, but may not actually improve.
“Our proprietary model suggests industry traffic can continue to hold up well in upcoming periods,” he said, “although recent indicators — for employment, housing, stock market volatility — make us less optimistic that [same-store sales] can improve on a sequential basis.”
Beyond public restaurant stocks, foodservice operations of all shapes and sizes could feel the sting from recent market volatility, some analysts said, especially if the down trending market leads to depressed consumer confidence and lower levels of spending.
Chris O’Cull, a securities analyst at SunTrust Robinson Humphrey, noted in a Wednesday report that sales at casual-dining chains already may have been affected.
“We surmise the market sell-off coupled with anticipated expiration of fiscal stimulus and a general lack of confidence in government leaders has affected spending at many casual-dining chains,” he said. “After posting positive [same-store sales] results during 10 of the past 12 months, we believe casual-dining segment [same-store sales] results were slightly negative during July and have remained weak to date in August.”
While this week’s market performance casts doubt on the industry fundamentals going forward, securities analyst Larry Miller, at RBC Capital Markets, said it’s too early to tell whether the industry is looking at another beginning of a deep dip.
“Sales are softening, but it doesn’t look like the summer of 2008, where we were seeing solid comps, then all of a sudden we were down a few orders of magnitude,” he said. “While sales are holding up — better than most would believe — the market is fearful that it won’t last.”
Miller is founder of MillerPulse, a monthly restaurant operator survey that gauges sales and sentiment among restaurant chains. Working with Nation’s Restaurant News, Miller’s latest survey is taking place this week.
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Contact Sarah Lockyer at [email protected].
Follow her on Twitter: @slockyerNRN