Thursday, in a weak moment, I hit a New Jersey Wendy's (WEN) drive-through. The "Dave's Double" I bought cost me more than 7 bucks, and it was just a burger; no fries no drink.
Talk about inflation.
The only positive (other than that it was delicious) was that they must have erred, and actually gave me a "Triple," because I could have sworn there were three burgers on that bun.
It's rough in restaurant land these days, not only for consumers, but also for investors.
For consumers, not only have prices risen (both input costs and labor costs are up), but restaurants are coming up with other ways to increase revenue. I've seen no refills on soft drinks, despite a $4 price tag, as well as one BYOB that charges 99 cents for the use of a wineglass.
I don't blame them; this is a rough environment. Labor markets are still very tight, and the cost of everything continues to rise.
For restaurant investors, conditions have also worsened since my May update. That is due at least in-part to the overall market direction, but restaurants continue to underperform.
A basket of 40+ restaurant names I follow are down nearly 27% year-to date, considerably worse than the S&P 500 (down 18.6%), Russell 2000 (down 20.7%) and Russell Microcap (down 21.5%).
There's just one restaurant stock -- tiny Ark Restaurants (ARKR) (up 13.1%) in positive territory year-to-date. Rounding out the top-five performers are Flanigan's Enterprises (BDL) (down 1%), Potbelly (PBPB) (down 3%), and Nathan's Famous (NATH) (down 4%), and McDonald's (MCD) (down 5%).
The Big Five -- a self-coined group that includes MCD, Chipotle Mexican Grill (CMG) (down 23%), Yum Brands (YUM) (down 14%), Domino's Pizza (DPZ) (down 28%) and Darden Restaurants (DRI) (down 20%) -- is down an average of about 18% for the year.
The bottom-five performers include Sweetgreen (SG) (down 57%), Portillo's (PTLO) (down 52%), Red Robin Gourmet Burgers (RRGB) (down 50%), Wingstop (WING) (down 45%) and BurgerFi (BFI) (down 44%). I maintain a position in busted-IPO BFI, a special situation, in my view, but one with plenty of risk.
We are seeing forward price earnings ratios in the single and low double-digits for several names (I will go into detail in a future column), but I expect to see more compression. That's what typically happens in a recession (I believe we are already there) when investors are simply not willing to pay large multiples for those in an at-risk industry.
I am not sure yet whether restaurants will suffer as much as they do in a typical recession; what's different now is that consumers that were holed up at home during the pandemic, may not yet be willing to give up on eating out despite rising prices. Time will tell.
This is a sector to continue watching though; coming out of a recession, it has historically been one of the top performers. Typically, during recessions there is a contraction as restaurants close locations, consolidate, or go out of business as demand falls.
Once consumers resume their spending ways, the supply of new restaurants can't keep up with demand, and investors can reap the benefits.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider ARKR, BDL, PBPB and BFI to be a small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)