Securities analysts covering the foodservice industry largely agreed in research notes written this week that moderately improving macroeconomic conditions would likely favor fast-casual restaurants and other brands with higher-income customers as those companies report second-quarter results.

Industry watchers also indicated that second-quarter sales and profit would likely improve sequentially from a more difficult first quarter, and that food and labor cost pressures would be more favorable than originally thought for the quarter and the second half of 2013.


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With nearly all restaurant companies but Darden Restaurants, Del Frisco’s Restaurant Group and Yum! Brands yet to report, industry watchers expected second-quarter results to reflect “choppy” macroeconomic conditions. They generally agreed that the specialty-coffee and fast-casual segments would likely hold up the best if consumer demand for eating out stays flat or improves slightly, as expected.

David Tarantino of Robert W. Baird & Co. projected demand for restaurants to be similar in 2013 to what it was in 2012, with full-year traffic about flat and same-store sales slightly positive.

“All five macroeconomic factors in our proprietary industry traffic model — consumer confidence, gasoline prices, consumer credit, housing conditions and stock market volatility — are trending neutral to favorable on a year-over-year basis,” he wrote, “suggesting prospects for healthy demand trends, all else equal. Based on the positive trends … demand can hold up well in the balance of 2013, excluding any potential impact from higher payroll taxes.”

Chains catering to lower-income customers, who still report lower levels of consumer confidence and employment, likely would have a harder time growing sales and earnings in such a low-growth environment, he wrote.

“Based on this data,” Tarantino wrote, “we generally are more optimistic about top-line fundamentals for specialty-coffee concepts like Starbucks and fast-casual brands like Chipotle Mexican Grill and Panera Bread than we are for QSR chains and certain casual-dining concepts.”

Panera, Chipotle among analyst favorites

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Analysts from Jefferies Equity Research, Sterne Agee and Barclays Capital largely agreed with Tarantino’s assessment of fair to moderately improving demand for restaurants in the second quarter, which likely would favor fast-casual brands and certain chains pitched toward more affluent customers.

Jeffrey Bernstein of Barclays noted that second-quarter sales for restaurants he covers generally were better than those in the more volatile first quarter, though performance at most brands decelerated in June compared with stronger sales in April and May.

“Importantly,” he wrote, “while underlying macro data support modest improvement in consumer spending — for example, employment, sentiment and housing — we expect commentary to be cautious and valuations to ease through earnings, not unlike the broader market.”

Andy Barish of Jefferies wrote that “top-line uncertainty makes us cautious heading into the second quarter,” especially since many chains have indicated sales are more likely to pick up in the second half of the year. With all segments currently pitched in a “haves-and-have-nots market share battle, upside opportunity is relatively limited at current valuations, and we would prefer to stick with the ‘haves,’” he added.

As such, Jefferies is more upbeat about coffee and upscale chains as well, he wrote. The company is predicting Starbucks’ momentum, seen in last quarter’s 7-percent increase in domestic same-store sales, continued into its fiscal third quarter, Barish noted.

He similarly projected Dunkin’ Donuts’ same-store sales strength from the first quarter, which rose 1.7 percent despite inclement weather, carried over to the second quarter. “The company continues to drive check and margin with its innovative breakfast sandwiches, and we see incremental traffic growth via more menu and daypart innovation, marketing, remodels and the upcoming DD Perks upgrade,” Barish wrote.

He predicts Panera Bread’s likely success in the second quarter due to a national cable-TV launch and 30-percent increase in media spending, in addition to new-unit growth in more urban and drive-thru locations.

“Margins look solid,” he added, as Panera’s food costs are locked for 2013 at inflation of 2 percent to 3 percent, which could be covered with modest price increases. “This profile compares favorably to its peers that generally have only a modest ability to contract input needs (like Chipotle) and will likely see inflation that is double Panera’s.”

But “Chipotle is one of our top picks,” Lynne Collier of Sterne Agee wrote, “as the company boasts one of the best operating models in the industry, leading unit economics, quality management, and near-term top-line catalysts like catering and increased marketing.”

Collier noted that Chipotle would benefit in the second quarter from a calendar shift involving Easter that negatively affected its first-quarter results, and she added that two of Chipotle’s larger markets, California and Texas, outperformed the national restaurant sales average through May, according to Knapp-Track.

Collier also viewed The Cheesecake Factory as a top pick in her second-quarter preview.

“The company is currently our favorite name in the casual-dining space,” she wrote. “Its model does not rely on aggressive promotional activity that is now more prevalent among causal-dining peers. In addition, we continue to view international expansion as an attractive opportunity, as currently international units (three opened to date) have shown very strong performance.”

Over-inflated worries about costs

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Collier also wrote that food and labor cost pressures likely would not be the roadblock to earnings growth seen in previous years, as commodity inflation and effects of the now-delayed implementation of the Affordable Care Act “appear mostly benign.”

She projected food cost inflation for fiscal 2013 to be between 2 percent and 3 percent, slightly below Bernstein of Barclays Capital’s 3-percent-to-5-percent forecast.

Tarantino added that upside from the commodities market would not be realized in the second quarter because spot prices and futures prices for corn and grains are not particularly favorable. “But we think a continuation of lower prices has potential to aid the earnings outlook for some in the second half of 2013 and into 2014, given the timing of contracting for many key protein prices by most restaurant chains,” he wrote.

The big concern for restaurants on their labor line the past few years has been the Affordable Care Act’s mandate that large employers cover their workers’ health insurance, but with that requirement delayed until 2015, companies’ upfront costs would be “fairly minimal” and their cost visibility would improve, Sterne Agee’s Collier wrote.

“It seems that the Affordable Care Act may not be as costly as initially anticipated,” Barish of Jefferies wrote in agreement. “It is still too early for most companies to determine their specific financial burden, but the employer penalties will now be delayed until 2015, and many employees may ultimately end up opting out of coverage.”

He also noted that many chains might opt to roll out their health insurance plans in 2014 anyway, ultimately adding an estimated 0.2 percent to 0.4 percent to their labor costs.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN