Analysts cautious on restaurant stocks ahead of earnings
Ahead of a series of results expected for restaurant stocks in the coming weeks, several analysts are advising clients of slowing sales and high inflation impacts.
On Monday, analysts from Baird, Morgan Stanley and RBC Capital Markets each expressed concern about the outlook for upcoming restaurant earnings reports and cut estimates across the space amid persistent macro headwinds.
“Our models assume little food cost relief on the horizon given contraction and geopolitical/commodity volatility concerns,” RBC analyst Christopher Carril wrote on Monday. “On the job front, recent company feedback and BLS data suggest that staffing levels have recently improved, and while we believe this could potentially lead to Y/Y wage pressures easing over the 2H of the year, we always hear about pockets of labor pressures. ”
As for the headwinds hitting consumers, the bank’s research suggests that a slowdown in spending should be more pronounced in dining options as consumers shrink. Additionally, consumer “cheque handling” reduces spending across the space, with low-income consumers also reducing visits even to quick service options like Jack in the Box (JACK).
Amid the unfavorable environment, Carril maintained its ratings on each of the names in its universe, but cut price targets almost everywhere. Notable price target cuts included lowering its Chipotle Mexican Grill (CMG) target from $2,000 to $1,800, Jack in the Box (JACK) from $110 to $84, and Domino’s Pizza (DPZ) from $458 to $440.
Echoing this caution, Morgan Stanley’s John Glass said that while a “trap” in sales trends is unlikely, a recession-related spending slowdown is now expected. As such, it has also reduced its sales estimates and price targets throughout the space.
“Data Indicates Growing Risk to Sales as Inflation Persists; here we are noting numbers of 2H/23 for much of our universe, although the deceleration is likely to be gradual over several quarters,” he told clients.
Glass cited recent economic surveys of consumer sentiment and ongoing inflation issues as key indicators of consumer behavior going forward, with industry traffic already reflecting some setbacks.
“Cracks are appearing, with relatively low industrial traffic and signs of declining commerce in the menus of some concepts, particularly those that cater to the lower end where discretionary income is under pressure,” he said. writing. “We think it’s likely this will continue to happen and consumers will be more constrained in their spending.”
Glass saw the biggest downside for Sweetgreen (NYSE:SG), Chipotle Mexican Grill (CMG), Darden Restaurants (DRI), and Bloomin’ Brands (BLMN), in that order, as part of channel checks and macro forecasts. Each name was screened for a decline of 25% or more.
That said, Glass remained bullish on more defensive names and these were stocks capable of capitalizing on a declining consumer trade. To this end, McDonald’s Corporation (NYSE: MCD) and Yum Brands (YUM) were selected as top picks.
This defensive mentality was also conveyed by Baird, which offered the most bullish analysis among earnings previews on Monday. Stock analyst David Tarantino has told clients that such a posture is especially important in the near term, as earnings reports remain difficult to predict.
“We see potential for mixed results given the aforementioned segment level indications.
discrepancies in comparable store sales trends over the quarter,” he advised. “Specifically, our private channel surveys indicated that multi-year domestic competition trends held up well throughout the quarter for limited service channels (fast service, fast casual), but slowed in May. -June for casual dining.”
As such, Yum Brands (YUM), McDonald’s (MCD), Chipotle Mexican Grill (CMG), Wingstop (WING), Domino’s Pizza (DPZ), Portillo’s (PTLO), and Darden Restaurants (DRI) were selected as top picks.
Read more about Barclays’ best defensive picks ahead of a market downturn.