I know I just published this chart, but I wanted to use it to make a point about the Restaurant industry in general.
I’m always thinking about what could be the next leg to take restaurant stocks higher or lower. We are nearing the point where the cost save thesis will be totally played out and food inflation will return – see the chart on the CRB Foodstuffs Index – it’s bottomed and headed higher. One of the best ways to generate ALPHA in the restaurant industry is to find a disconnect between sales trends and margin trends. In the restaurant industry, the relationship between sales and margins is very clear. This is very evident when looking at CKE margins versus same-store sales, until very recently (3Q09). Since then, margins have moved higher despite the continued fall off in sales trends.
While I’m using CKE as a case study, it does not stand alone. As I see it, for CKE and many other restaurant companies forward earnings are at risk. Sales are declining and not likely to rebound until consumer confidence improves and job creation begins again. Food costs are headed higher and the cost savings game has played out.
Just something to think about! Do you get the idea that I’m not a fan of CKE Restaurants right now?