NEW YORK First-quarter earnings season could bring a reversal of fortunes for restaurant stocks, as casual-dining companies have gained momentum recently and quick-service chains have stumbled.
With more than 14 restaurant companies set to report earnings for the March-ended quarter over the next two weeks, analysts and observers have noted that cost cutting and slowed development plans have helped casual-dining companies post better-than-expected preliminary earnings, despite still-negative sales trends. On the flip side, the once recession-resistant quick-service sector has begun to report sales slowdowns and profit erosion from overseas weakness.
“For the first time in a long time, there is more confidence about casual-dining earnings and more worries about quick-service restaurant earnings as we approach release dates,” Joe Buckley, an analyst at Bank of America-Merrill Lynch, said in a research note Friday. “Positive pre-announcements from Brinker and California Pizza Kitchen ... and Burger King’s more recent disappointing earnings news help set the stage.”
For the week ended April 17, top stock-price gainers in the NRN Restaurant Stock Index included dinnerhouse operators Landry’s Restaurants Inc., Ruby Tuesday Inc. and DineEquity Inc., while stock-price losers included such quick-service companies as Burger King Holdings Inc., Jack in the Box Inc. and McDonald’s Corp.
In the quick-service segment, McDonald’s and Yum! Brands Inc. are on tap to report earnings on Wednesday. Sources said McDonald’s sales momentum should continue, and some point to a same-store sales gain of as much as 5 percent in the United States. Still, the company has said that negative currency exchange rates as well as still-challenging commodity cost pressures could hurt its bottom line.
At Yum Brands, at least one analyst expects the company to post its first negative quarter-to-quarter earnings comparison in about six years. Fitzhugh Taylor at Thomas Weisel pointed toward commodity costs, unfavorable foreign exchange rates and tough comparisons, especially for the company’s China market, as drivers behind a difficult quarter. In addition, some analysts predict negative same-store sales trends for the U.S. division, with positive traction at Taco Bell and negative results at Pizza Hut and KFC.
Casual-dining companies Brinker International Inc., P.F. Chang’s China Bistro Inc., The Cheesecake Factory Inc. and others also are set to report this week. As new unit development has slowed and other cost-cutting measures have taken hold, these companies have been able to drive earnings improvement, analysts said.
In addition, some investors have started to bet on an early casual-dining recovery, as restaurants, particularly sit-down brands, benefit the most and the earliest from an economic recovery.
“We expect ... restaurants will serve as effective short-term trading vehicles as the battle continues between the more resilient quick-service domestic fundamentals and the early cycle recovery into casual-dining,” Jeff Bernstein, an analyst at Barclays Capital, said in a research note last week.
Contact Sarah E. Lockyer at [email protected].
