We just celebrated my oldest daughter’s 14th birthday at Cheesecake Factory (CAKE). It was great to get the whole family together – even if having three generations of Larsons (and more than a dozen people overall) together at the same table can be a little chaotic!
But as delicious as the chocolate bar cheesecake was, the stock has been anything but tasty for investors. I say that because it hasn’t gone anywhere in almost two years. What’s more, CAKE is far from alone in terms of disappointing performance. That raises questions about the health of the restaurant sector in particular, and the U.S. consumer overall.
Take a look at shares of Panera Bread (PNRA), the fast casual restaurant. They’ve fallen off the table since August, hitting a seven-month low on Wednesday. How about Cracker Barrel Old Country Store (CBRL)? The highway-side chain used to be a high-flyer, but its shares have plummeted since early summer. I enjoy having some boneless wings and catching a football game at Buffalo Wild Wings (BWLD). But after a brief spike in late July, the stock has rolled over sharply.
Shake Shack (SHAK) came public to much fanfare in early 2015 … but it has given up all its post-IPO gains and then some. Zoe’s Kitchen (ZOES) is another relatively recent restaurant IPO that has collapsed, losing 35% in the past year. Noodles & Co. (NDLS) has been an absolute disaster, down 64%, while El Pollo Loco Holdings (LOCO) hasn’t done much better, dropping two-thirds from its 2014 post-IPO peak.
For its part, Bloomin’ Brands (BLMN) has taken investors “Outback” for a beating. The stock dropped to a three-year low in February, and has remained near that level ever since. Denny’s (DENN)? It hasn’t served up any grand slams for investors. The stock has been stuck around $10-$11 for 22 months now. And DineEquity (DIN), the owner of Applebee’s and IHOP, has dished out nothing but indigestion. The shares are down 30% from their early-2015 peak.
If you’ve ever been to a Dave & Buster’s Entertainment (PLAY) location, you know it combines food, video games, a sports bar, and other entertainment choices. But there’s nothing fun about the fact its big summer breakout has now completely failed.
|The single-biggest threat for restaurant stocks is a potential U.S. recession.|
We all know about the food safety struggles at Chipotle Mexican Grill (CMG), so I won’t bag on the burrito chain. But the formerly high-flying drive-in chain Sonic (SONC) is down sharply in recent weeks, and just traded near its lowest level since last October. McDonald’s (MCD) did great in late 2015 and early 2016 … but it has been heading lower since May. The coffee chain Starbucks (SBUX) has been steadily losing ground for the past year, and it is threatening to carve out a massive multi-month top on the chart.
There are a handful of exceptions to the trend, including pizza chains like Papa John’s International (PAPA) and Domino’s Pizza (DPZ). Taco Bell, Pizza Hut, and KFC owner Yum Brands (YUM) has also bounced back after stumbling badly last year. But all in all, I see a lot of lousy charts.
So what gives? I think some of it stems from an erosion in disposable income. The things Americans have to spend money on – health insurance, rent, school tuition, etc. – have generally gotten more expensive, crimping take-home pay.
Lower gas prices help, but apparently not enough based on the stock performance in this sector. Some investors are also worried that higher minimum wages in many parts of the country will put increasing pressure on restaurant profits.
Then there’s the single-biggest threat for restaurant stocks and the U.S. consumer: A potential U.S. recession. Stifel Nicolaus analyst Paul Westra slashed his rating on 11 chains back in late July, saying a “prospective 2017 U.S. recession could be the worst ever for restaurants”. A separate Jefferies analyst named Andy Barish warned of “18 months of challenges ahead” and that it’s time to be “very, very picky and cautious” on industry shares.
My advice? Keep an eye on these stocks to see if they can find their footing again. If not, it could be just one more piece of the puzzle pointing toward deterioration in the U.S. economy.
Until next time,
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