We remain cautious on select names in the casual dining sector as we believe sluggish sales trends, decelerating consumer spending and accelerating inflation will continue to pressure margins and, ultimately, stock prices. This raises the question: does the casual dining industry have pricing power?
We continue to like CAKE, PBPB, BLMN and PNRA on the short side and DRI on the long side in the casual dining space. We will be publishing brief updates on all of our favorite ideas – both long and short – in the coming days.
Black Box Intelligence reported that same-store sales grew +0.7% in March 2014, a 140 bps sequential improvement from the -0.7% reported in February 2014. On a two-year basis, sales were positive (+0.6%) for the first time since November 2013. For 1Q14, same-store sales were down -0.3%, a 20 bps sequential deceleration from the -0.1% reported in 4Q13. On a two-year basis, same-store sales declined -0.8% in 1Q14.
Same-store traffic declined -1.2% in March 2014. This represents a significant 200 bps sequential improvement from February, but continues to confirm that casual dining traffic is in secular decline. On a two-year basis, same-store traffic declined -1.6% in March. For 1Q14, same-store traffic was down -2.2%, a 10 bps sequential improvement from the -2.3% reported in 4Q13. On a two-year basis, same-store traffic declined -3.0% in 1Q14.
Food Inflation And Limited Pricing Power
Given the secular decline in traffic, the casual dining industry has limited pricing power to protect against food inflation. With the CRB Foodstuffs Index up +18.6% YTD, we believe the casual dining will experience significant food inflation over the next twelve months, particularly when current contracts expire. How will the industry manage the pressure?
According to Black Box, the per person average check was up +1.8% in March and up +2.0% in 1Q14. This is slightly less than the CPI for food away from home, which is running up +2.25% in 2Q14 and significantly higher than the CPI for food at home, which is running up +0.55% in 2Q14.
As we head into the later stages of 2Q14 and into the fall, we expect to see more companies talk about price increases. We believe raising prices is risky for the industry given the secular decline in traffic and knowing the consumer can find better value at the supermarket.