This post is part of the On the Margin blog.
Wall Street’s enthusiasm for the restaurant industry seems to have waned.
Industry stocks, which began surging just before the election and were seemingly on a nonstop trend upward, have taken a breather recently. Restaurant stocks are down more than 3 percent over the past month, and are now down for the past three months, according to the NRN Restaurant Index.
To be sure, that’s barely made a dent in the index’s year-to-date performance: Industry stocks are up more than 12 percent so far in 2017.
Much of that strength, however, comes from strong performances by some big chains. McDonald’s Corp., for instance, is up 31 percent year to date, making it among the top performers among restaurants on Wall Street. Restaurant Brands International Inc. is up 28 percent. Domino’s Pizza Inc. is up 22 percent. The Wendy’s Co. and Darden Restaurants Inc. are both up 15 percent.
Yet many stocks are down for the year, and a few have stumbled more recently.
Domino’s is one, having fallen nearly 10 percent over the past three weeks, since its second quarter report showed weakness in international markets that spooked investors.
Starbucks Corp., meanwhile, was up for the year in June but has since fallen nearly 18 percent amid fears the chain’s sales in the U.S. are slowing.
Then there’s Chipotle Mexican Grill Inc., which is down more than 34 percent since May, amid concerns about its sales recovery and, more recently, renewed fears of foodborne illness outbreaks.
Wall Street has been pouring money into the restaurant industry lately, in large part because consumer investors believe it’s insulated from the threat of Internet-based competition hammering retail companies.
That’s not entirely true. Amazon and other Internet retailers could well be hurting restaurant traffic, at least indirectly, by reducing retail traffic and giving people one less reason to dine out. I believe that’s a major factor in the decline in traffic in the past few years, especially at casual dining chains.
But the faith in the industry has fueled valuations at a time when restaurant sales and traffic are weak and chains are shuffling through executives in a bid to get back on track.
So, too, has a faith that perhaps the Republican-led Congress and the GOP president could get together on things that could very well help the industry out of its recent doldrums — notably tax reform that puts money into the hands of middle class consumers who need it most.
That faith appears to be waning, however, as sales continue to stumble, Congress continues to not reform the tax code, and the companies themselves report disappointing earnings.
Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.
Contact Jonathan Maze at [email protected]
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