The bloom is continuing to come off the restaurant sector's rose. Many restaurant stocks are feeling the effects, but it's a mixed bag in terms of which chains are seeing the brunt of the sector's weakness. Let's check things out.
Now, I long believed that restaurants would have a difficult 2016 following what's been a prolonged bull run. But the "Big Five" chains are actually up 10.2% year to date on average on a total return basis as of yesterday's close. That beats the S&P 500 by 160 basis points.
Domino's Pizza (DPZ) has cooked up a stunning 35.7% YTD total return, while Yum Brands (YUM) has offered a yummy 26.8% gain. McDonald's MCD has likewise served shareholders with 1.5% in total returns, while Darden (DRI) is up 0.8%. The only outlier among the group is struggling Chipotle Mexican Grill (CMG) , which is down some 13.7% YTD.
The Big Five's outperformance against the S&P 500 has also narrowed significantly in recent months. The chains were beating the S&P 500 by 600 bps as of late March, but that shrunk to 480 points by mid-May and just 160 points as of yesterday's close (as noted above).
In fact, a basket of all of the publicly traded restaurants without regard to size is actually trailing the S&P 500 on a total-return basis, up just 2.6% for 2016 vs. 8.6% for the SPX. The restaurant segment also lags the Russell 2000's 11.4% year-to-date total returns, as well as the Russell Microcap Index's 7.7% total YTD gains. Given many publicly traded restaurant chains are smaller in size, the latter two indices might be more appropriate benchmarks.
The segment's best year-to-date performer is Wingstop (WING) , one of the newer publicly traded names. It's up 50% YTD on a total-return basis.
But lest you think it's all about wings these days, Buffalo Wild Wings (BWLD) is ahead by just 2%. BWLD yesterday announced a price cut in the form of half-price wings on Tuesday -- a long-needed move for a product whose price has risen far faster than inflation over the 30+ years that I've been addicted to wings. We'll see if that bolsters sales.
On the downside, Shake Shack (SHAK) -- the darling of the burger joints -- is down 8.5% YTD. The stock's "priced-for-perfection valuation" has caught up with the name for now.
Other noteworthy names:
Zoe's Kitchen (ZOES)
Zoe's has tanked by 27% since August 22 on a combination of weaker-than-expected second-quarter revenues and cautious statements by management, which led analysts to cut their price targets.
The stock is off 3% YTD on a total-return basis, but that doesn't tell the whole story. Zoe's is actually one of my favorite newer chains in terms of great fresh and somewhat-different food. Perhaps it's just suffering from the same "priced-for-perfection" syndrome that SHAK is.
I'd actually like to own ZOES, as it might be a great long-term play. I just can't bring myself to pay the stock's current price of 142x next year's projected earnings.
Cracker Barrel (CBRL)
I'm guessing that only two Real Money columnists -- myself and Tim Melvin -- frequent real-estate rich Cracker Barrel, but the chain continues to prosper. In fact, it's up 24% YTD.
The restaurant sector's biggest YTD losers include:
- Ignite (IRG) , which is down 80% so far in 2016. IRG runs Joe's Crab Shack.
- Cosi (COSI) , off 57%.
- Bravo Brio (BBRG) , which has lost 46%.
- Ruby Tuesday (RT) . This struggling chain is at -43%.
- The Habit (HABT) , which has shed 33%.
- Noodles (NDLS) , down 33% YTD.
The Bottom Line
There are more losers than winners among restaurant stocks this year, and we might be on the cusp of some consolidation and/or bankruptcies. Frankly, the sector might have gotten just a bit too crowded.
Also beware if it turns out that we're heading into a U.S. recession or are already in one. There's only so much that low gas prices can do to give consumers the discretionary funds necessary to afford restaurant meals.