The second half of fiscal 2014 is looking more favorable for the restaurant industry, despite share price volatility within the sector, according to a Wall Street analyst report issued Thursday.
Stephen Anderson, senior restaurant analyst for Miller Tabak + Co. LLC, offered his outlook for the third-quarter results and a preview of the fourth quarter, saying the restaurant sector could rally in the near term, with macroeconomic indicators on the upswing.
Restaurant stocks retreated nearly 5 percent in September amid unremarkable same-store sales performance in recent quarters, anemic wage growth, a rise in commodity costs and supply chain concerns in China that have hurt large multinational operators like McDonald’s and Yum! Brands Inc.
Though the consumer discretionary sectors remain “lackluster,” Anderson said, “We argue the environment remains conductive to a rebound for select restaurant stocks.”
He pointed to payroll gains and real wage growth, higher relative affordability for restaurants compared with eating at home, and a four-year low in gasoline prices as positive indicators.
Using the index of 41 publicly traded restaurant companies tracked by Nation’s Restaurant News as a proxy for stock performance in the sector, Anderson noted that the NRN Index posted a 4.8-percent decline in the third quarter, underperforming both the Global Consumer Discretionary iShares by 70 basis points and the broader S&P 500 Index by 590 basis points.
For 2014 to date, the NRN Index has fallen 4.1 percent, he noted.
Nevertheless, Anderson argued that for the rest of 2014 and into early 2015, restaurant chains face easier year-over-year sales comparisons.
Casual-dining trends — which generated negative same-store sales in the first half of the year, averaging a decline of 1.2 percent, according to Knapp Track — will rise about 1 percent, Anderson predicted.
Quick-service restaurants will see a same-store sales increase of between 1 percent and 2 percent. Fast casual will comps will rise between 2.5 percent to 3.5 percent, he said.
“For the full year, we still project flat year-over-year comps for casual dining, about 1 percent for quick-service chains, and about 2 percent to 2.5 percent for fast-casual chains,” the report said.
In addition, the “pendulum of affordability” has shifted back to restaurants, Anderson said.
Looking at the difference between the Consumer Price Index, or CPI, for food away from home versus the CPI for food at home, the average has been roughly flat since 1991, meaning there was not much difference. Over the past two years, the difference has been mostly negative, favoring food at home.
In May, however, that indicator turned positive and has stayed so for four months, indicating that inflation for food purchased from restaurants is rising at a slower rate than food bought at supermarkets, the report said.
Anderson singled out Panera Bread as a top stock pick for the rest of the year, saying the chain is likely to see gains from management-driven initiatives to boost sales and margins and more amenable commodity costs ahead.
Arguing that protein costs will plateau soon, he also pointed to Bob Evans Farms, Buffalo Wild Wings, Red Robin Gourmet Burgers and Texas Roadhouse as beneficiaries of lower protein costs.
Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout
