It Will Be A Busy Week for Restaurant Stocks

This week we get a slew of earnings from the casual dining sector with stocks such as Brinker International (EAT), Cheesecake Factory (CAKE), IHOP (IHP), Panera Bread (PNRA), Wendy’s (WEN), Burger King (BK), PF Chang’s Bistro (PFCB), Rare Hospitality (RARE), Famous Dave’s (DAVE), BJ’s Restaurants (BJRI) and Burger King (BK) all set to report. There are certain to be winners and losers amongst them. However, there are some themes worth noting before the multi-course earnings meals are delivered:

1. The casual dining segment has been hurt by the weather and declining traffic as evidenced by low positive or negative same store comp sales.
2. The substitution effect is kicking into high gear again as energy prices push diners down from the casual dining segment into the quick casual segment. McDonald’s (MCD) which reported last week and WEN and BK which report this week should benefit.
3. Chicken prices rose last quarter while beef prices were flat to slightly up or down depending on how purchasing and hedging strategies were executed by the chains. The creeping effect of increasing state minimum wages are beginning to take hold in the casual dining restaurant chains which derive all or most of their earnings in the US.
4. As with specialty retail, the high end specialty restaurants continue to grow and attract diners despite menu price increases which are being passed on to diners.

So what do you do? It’s time to get back to a barbell approach to investing in this sector. The strategy is to own a quick service and high end restaurant in the portfolio. My picks are MCD and Ruth’s Chris Steakhouse (RUTH). The only exceptions in the middle would be casual dining outliers like Benihana (BNHN) which are exhibiting strong traffic, comps and growth. BNHN might be worth a look on a dip if the stock sells off in sympathy with the rest of the sector.

At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of MCD, and RUTH --- although positions can change at any time.