OVERALL: The restaurants space welcomed the disclosure of some key metrics this week with Conference Board Consumer Confidence figures released on Tuesday, and Chipotle reporting 4Q16 earnings on Thursday evening. Our CMG note can be found below in the “Recent Notes” section and we dive deeper into the Consumer Confidence data in our “Highlight of the Week” section below.
Last week was a less than stellar week for Restaurants companies that we follow, as all but two of the sub-sectors finished the week in the red. The final tally was as follows: Fast Casual -1.50%, Coffee -0.44%, Casual Dining -0.43%, Pizza 0.00%, Family Dining +0.20%, and QSR +1.12%. With earnings season underway, the figures continue to reflect the bleak landscape of the restaurants space, as sales and traffic continue to lag, despite aggressive discounting and promotional.
HIGHLIGHT OF THE WEEK: Conference Board Consumer Confidence (January)
- January consumer confidence numbers were released early this week, and after reaching a 15-year high in December, consumer confidence decreased to 111.80, down from 113.3 in the previous month.
- The figures show a sequential decline of -1.5, and a YoY change of +14.0.
- Despite the pullback, consumer confidence is still trending upward, as seen in the chart below.
- According to Lynn Franco, Director of Economic indicators at the Conference Board, “the decline in confidence was driven solely by a less optimistic outlook for business conditions, jobs, and especially consumers’ income prospects.”
- However, it is worth noting that the Present Situation Index increased from 123.7 to 129.7 in January, with those saying that business conditions are “good” increasing slightly from 28.6% to 29.3%, while those saying that business conditions are “bad” decreased from 17.8% to 16.1%.
Restaurants Rundown…
- After taking the top spot in last week’s Restaurant’s Roundup report, the Fast Casual sub-sector found itself at the bottom of the leader board, as its stocks were the worst performing sub-sector, finishing the week down -1.50%. More than half of the companies that we track in this space finished the week in the red, with sub-sector performance as follows: HABT -4.38%, PBPB -4.18%, CMG -3.01%, NDLS 0.00%, ZOES +0.14%, and SHAK finished the week up +1.00%. CMG reported 4Q16 earnings figures earlier this week; the fast-casual chain is recovering from its food-safety issues and faces easy comparisons in the quarters ahead, but higher food and marketing costs will eat into the company’s expected earnings. For this reason, company stock took a hit this week. Please refer to our CMG located in the “Recent Notes” section below for more on this.
- Family Dining stocks moved up the leader board this week, finishing as the second-best sub-sector with +0.20% after taking the fourth spot last week. Two of the companies we follow in the space finished in the green: DENN +0.20% and BOBE +2.41. CBRL was the lone company to finish the week in the red, down -0.09%, after being initiated neutral at Buckingham. BOBE continues to ride the wave from the optimism generated by selling its restaurant group and acquiring Pineland Farms Potato Company, making the company a pure-play packaged food company. BOBE performance for the last month now stands at +7.92%.
- The Pizza sub-sector finished the week flat, after a very positive performance in last week’s Restaurants Roundup report. Performance for the sub-sector was as follows: PZZA -3.44%, FRSH 0.00%, and DPZ +2.25%. Looking ahead, DPZ is scheduled to report 4Q16 earnings on 2/28/17, and PZZA is scheduled for 2/22/17.
- After finishing in the middle of the pack in last week’s Restaurant Roundup, QSR took the top spot this week, up +1.12%. All but two of the companies we follow in this subsector finished in the green. ARCO and FRGI were notable gainers with performances of +13.04% and +4.25%, respectively. ARCO’s strong performance can be attributed to Emerald Acquisition Ltd., and numerous other institutional investors increasing their stakes in ARCO, but Emerald led the pack, increasing its stake to 16.9%. The only decliners in the sub-sector were QSR -0.68% and SONC -0.55%. Overall, the decline in the casual dining and quick service spaces continues, with no reversal in sight. Both casual dining and quick service brands are pushing aggressive discounting and promotions as a way to draw in traffic, but as seen by CMG’s most recent earnings presentation, such activity does not translate to consistent/dependable restaurant traffic.
COFFEE
- After finishing in the bottom spot in our last Roundup, Coffee did not see much improvement, taking the second to last spot this week, and finishing the week down -0.44%, but reflecting a 227bps improvement from its performance in our previous Restaurants Roundup report.
- After drawing the most attention last week post-earnings, and finishing last amongst the companies we follow in the sub-sector, SBUX once again found itself bringing up the rear this week, down -1.89%, bringing its monthly performance to -0.52%.
- After a poor showing in our last Restaurants Roundup report, PNRA bounced back this week, finishing the week up +1.59%.
- DNKN gave back some of last week’s gains, finishing the week in the red, down -0.44%.
- Coffee prices fell, under pressure from a weak Brazilian currency and evidence of rising exports at the end of last year. According to the International Coffee Organization, global coffee exports rose 8.3% in the first 3 months of the 2016-2017 crop year. Exports of both Arabica and robusta coffee rose, with Arabica exports rising 7.4% YoY and robusta up 6.3%.
- From a trading perspective, Coffee pulled back to a three-week low last Thursday as the market weighed the potential for Brazil to begin exports, but moved higher by end of trading on Friday to finish the week on a high note.
MACRO
- As many have stated before, the continued traffic issue facing the restaurants space can be linked to numerous causes, among which is increasing healthcare costs. Repealing the Affordable Care Act (ACA) has been top of mind for President Trump and his administration, but according to an article by the Washington Post, the President’s vision may have hit a roadblock. According to the article, two top Senate Republicans, Orrin Hatch and Lamar Alexander, publicly stated that they were open to the idea of repairing the ACA ahead of a wholesale repeal. With consumer dollars already stretched thin, the thought of increased healthcare costs for many as a result of a repeal of the ACA may leave even less disposable income for restaurant visits. The full article can be found here: CLICK HERE
CASUAL DINING
- Casual Dining was down -0.43%, as the majority of the casual dining companies we track finished the week in the red; this brings the space’s performance to -4.04% for the month. Once again, RT finished the week in the red, down -9.45%, after a performance of -4.31% in last week’s Restaurants Roundup report. This brings its monthly performance to an abysmal -44.00%.
- Other notable decliners were DFRG, BWLD, and DRI, each finishing the week down -4.57%, -3.35%, and -2.37%, respectively. BWLD is scheduled to report earnings on 2/7/17.
- A notable gainer for this week was BBRG, which finished the week up +5.95%, on news that the Company’s board of directors is in the process of engaging investments bankers to explore alternatives to further enhance shareholder value. Also, the board has recently initiated discussions with TAC Capital LLC (TAC) and offered to afford them immediate representation of two directors on the board so they can be part of this process. However, TAC rejected the board’s offer.
ARTICLES OF INTEREST
ACTIVIST ACTIVITY AT FIESTA RESTAURANT GROUP (FRGI)
In a report released earlier this week, JCP Investment Management LLC has nominated three people to FRGI’s board. According to JCP, which owns an ~7% stake in FRGI, the Company needs new board members before it can sell the brand or hire a new CEO. Additionally, JCP has disclosed that they have tried to come to a solution with FRGI, but the board and management team “has refused to engage meaningfully” with them.
RECENT NOTES
2/3/17 MCD | IR MEET AND GREET IN NYC
2/3/17 CMG | IS 24.6% ALL YOU GOT FOR US?
1/31/17 CONSUMER SURVEY RESULTS (CMG, PNRA, RRGB and Democrats love SBUX?!)
1/27/17 SHIFTING THE BOTTLENECK
1/25/17 EAT | INSULT TO INJURY
1/23/17 MCD | MORE MOUNTAIN TO CLIMB
1/17/17 CMG | THA CROSSROADS
1/13/17 RESTAURANTS MACRO NOTE | LOOKING INTO OUR CRYSTAL BALL…
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
