The 3Q13 earnings season has largely been highlighted by disappointing results across the board in the restaurant industry. The Casual Dining EPS Beat/Miss Index is currently running at 33% and the Quick Service EPS Beat/Miss index is running at 43%, both of which are very low percentages, historically.
- The Hedgeye Casual Dining EPS Beat/Miss Index has only been below 50% in 1 of the past 26 quarters – 3Q08.
- The Hedgeye Quick Service EPS Beat/Miss Index has only been below 50% in 3 of the past 26 quarters – 1Q07, 2Q08 and 3Q08.
It is interesting to note that, despite poor earnings, the Bloomberg Full Service Casual Dining Index has outperformed the S&P 500 by +2.6%, +4.9% and +18.3% over the past week, past three months and year-to-date, respectively. On the other hand, the Bloomberg QSR Index has underperformed the S&P 500 by -0.4% and -1.3% over the past week and past three months, respectively, and has outperformed by the S&P 500 by +11.8% year-to-date.
This outperformance has come amidst a sluggish top line environment. Although sales trends continue to slow on a 2-year basis, we suspect they will begin to accelerate in 4Q13 and continue into 1Q14. In our opinion, lower gas prices year-over-year will support this stronger sales environment.
As always, there will be winners and losers in each respective segment, as some companies are better positioned to benefit from an improving top line environment than others.
In the QSR space, we continue to like SBUX, YUM, KKD, CMG & JACK on the long side and PNRA & MCD on the short side.
In the Casual Dining space, we continue like EAT, CAKE & DRI on the long side and RRGB, BLMN & RT on the short side.