Restaurant Space Earnings Standouts

Restaurant Space: 2013 Standouts to Date
 A rising tide lifts all ships: Consumer discretionary stocks are doing well, leading the pack with the highest forward PEs in May, as FactSet reported last week,

Forward PEs and Earnings Standouts: FACTSET noted CMG (31.1X), SBUX, (25.3X) and YUM (21.2X) have the three highest restaurant forward PEs in the consumer discretionary space. Only one of these (SBUX) showed upon my list of earnings standouts, restaurant companies that have all of the following fundamentals going the right direction:

  • Positive same store sales and traffic, both, with no major geographies negative.
  • Meets or beats on revenue consensus, beats EPS by $.01 or more, with no downgrades within 90 days.
  • Positive sequential momentum, early peek SSS current period, if revealed, positive.
  • No gimmicks with adjusted, proforma or restated EPS values, and as validated by the operating income beat.  A publicly traded track record of one year. 

Standouts:  SBUX, with new product new news every quarter, the only restaurant chain growing traffic at a greater rate than average check. Also, Ruth Chris (RUTH), Texas Roadhouse (TXRH) Domino’s (DPZ) and Popeye’s (AFCE) are on the standouts list.  Both Ruth Chris and Mitchell’s in the RUTH house are moving, ahead smartly.  AFCE is building company stores, capturing  US KFC units and reflagging them, and touting its US stores franchisee 20% EBITDAR margins, in addition to new flavors/new product news. AFCE was the first franchisor ever to report franchisee profitability in a quarterly call that I can recall.

Investor Implications:  My number one concern going forward is that the industry not shoot itself in the foot via over discounting. NPD noted that after a time, customers see discounted prices as the new normal. Restaurants that don’t play in the ever discounting spiral space are at an advantage. Think: Del Frisco (DFRG), Cheesecake Factory (CAKE), Panera (PNRA) and Chipotle (CMG).  Also: the noted Earnings Standouts group above, are fundamentally attractive.
Restaurant marketing tends to be copy cat in nature, and like a battleship, takes forever to turn. Darden (DRI) has reset to the $12.99 television price point, doing Red Lobster and Olive Garden $3/$4 off coupons too. US Pizza Hut (YUM) is doing $5.55 anniversary pizza price (one large) undercutting even Domino’s (DPZ) and weaker QSR players are at or under the “my $.99” at Wendy’s (WEN). We wonder what customers must think of the long term pounding on price.  NPD  presented five year data that shows that restaurant deal sales mix is flat and declining, as follows. This means more discounting is chasing even fewer deal consumers.


YE 2008

YE 2009

YE 2010

YE 2011

YE 2012

Sales Mix Change,Y/Y






Legend: Deal Mix” restaurant meals sold at discount, change v. prior year

Date: Quarter 2 End, 2012

Who:  Brinker (EAT), Texas Roadhouse (TXRH), Ruth Chris (RUTH), Popeye’s (AFCE), Panera (PNRA), Papa John’s (PZZA)

    • Criteria 1: Must hit consensus revenue target and beat EPS consensus by $.02 or more
    • Criteria 2: must post positive “early peek” current quarter SSS trend or have improving cadence of SSS gains.
    • Criteria 3: for global multinationals, core geographies must have positive earnings trends.  

Common denominators noted in this group:

    • All posted positive traffic and same store sales trends
    • None were refranchising units and were building company units
    • None had significant debt to EBITDA levels
    • All had consensus EPS estimates move up $.02 or more over quarter.