Investors Are Losing Their Appetite for Restaurant Stocks

Not unexpectedly in this environment, restaurant stocks are getting hit fairly hard these days.  A basket of 40-plus restaurant names I track is down more than 19% year to date, worse than the S&P 500 (down 12.9%) and Russell 2000 (down 16.7%) and Russell Microcap Index (down 17.2%). It’s a fairly stark turn of events since my late February restaurant update, when essentially the same group of stocks was down an average of 5.7% but beating the aforementioned indexes.

Just three restaurant stocks are currently in positive territory in 2022; Bloomin’ Brands (BLMN) (up 5.5%), Ruth’s Hospitality Group (RUTH) (up 6%) and Potbelly Corp. (PBPB) (up 15.4%). Potbelly is an unlikely leader given its rough run since late 2018. While sales recovered somewhat in 2021, Potbelly is still in the red and not expected to be profitable at least through 2023 (with just one analyst covering the stock).  

The Big Five — a self-coined group that includes McDonald’s (MCD) (down 7%), Chipotle Mexican Grill (CMG) (down 17%), Yum Brands (YUM) (down 15%), Domino’s Pizza (DPZ) (down 40%) and Darden Restaurants (DRI) (down 11%) – is down an average of about 18% for the year. 

Domino’s has fallen off a cliff since topping out at $567 in early January; shares closed last Friday at $338. Domino’s missed badly on fourth-quarter earnings reported last Thursday, with earnings per share of $2.50 versus the $3.07 consensus. Domino’s put the blame on the usual suspects these days — staff shortages, Omicron and inflation. Expect to hear more about staff shortages and inflation as others report; these will continue to be headwinds. DPZ now trades at 15.5x and 17x earnings estimates for 2023 and 2024, respectively.  

Recent restaurant initial public offerings are not doing well, either, to varying degrees.  These include Portillo’s Inc. (PTLO) (down 45%), BurgerFi International (BFI) (down 40%),  and Sweetgreen Inc. (SG) (down 14%). Dutch Bros Inc.’s (BROS) (down 6%) performance, while negative, still puts it as the 10th best year-to-date restaurant performer.

We are also seeing forward price-to-earnings (P/E) ratios falling, as expected. There is a small handful of restaurant stocks including BLMN, Brinker International (EAT) , One Group Hospitality (STKS) , Noodles & Co. (NDLS) , Dine Brands Global (DIN) and BBQ Holdings (BBQ) trading at 10x or less next year’s consensus estimates. I expect this list will grow, not due rising earnings estimates but because of declining stock prices. 

Restaurant stocks typically get slammed during recessions (I believe we already may be in one), but are typically among the best-performing sectors coming out of recession (that’s putting the cart before the horse, but keep that in the back of your mind). Rising costs, both labor and input costs, will squeeze margins and lead to continued higher menu prices, and ultimately consumers will decide how often they can still afford to eat outside the home.