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We just celebrated my oldest daughter’s 14th birthday at Cheesecake Factory (CAKE). It was great to get the whole family together – even if having three generations of Larsons (and more than a dozen people overall) together at the same table can be a little chaotic!
But as delicious as the chocolate bar cheesecake was, the stock has been anything but tasty for investors. I say that because it hasn’t gone anywhere in almost two years. What’s more, CAKE is far from alone in terms of disappointing performance. That raises questions about the health of the restaurant sector in particular, and the U.S. consumer overall.
Take a look at shares of Panera Bread (PNRA), the fast casual restaurant. They’ve fallen off the table since August, hitting a seven-month low on Wednesday. How about Cracker Barrel Old Country Store (CBRL)? The highway-side chain used to be a high-flyer, but its shares have plummeted since early summer. I enjoy having some boneless wings and catching a football game at Buffalo Wild Wings (BWLD). But after a brief spike in late July, the stock has rolled over sharply.
Shake Shack (SHAK) came public to much fanfare in early 2015 … but it has given up all its post-IPO gains and then some. Zoe’s Kitchen (ZOES) is another relatively recent restaurant IPO that has collapsed, losing 35% in the past year. Noodles & Co. (NDLS) has been an absolute disaster, down 64%, while El Pollo Loco Holdings (LOCO) hasn’t done much better, dropping two-thirds from its 2014 post-IPO peak.
For its part, Bloomin’ Brands (BLMN) has taken investors “Outback” for a beating. The stock dropped to a three-year low in February, and has remained near that level ever since. Denny’s (DENN)? It hasn’t served up any grand slams for investors. The stock has been stuck around $10-$11 for 22 months now. And DineEquity (DIN), the owner of Applebee’s and IHOP, has dished out nothing but indigestion. The shares are down 30% from their early-2015 peak.
If you’ve ever been to a Dave & Buster’s Entertainment (PLAY) location, you know it combines food, video games, a sports bar, and other entertainment choices. But there’s nothing fun about the fact its big summer breakout has now completely failed.
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| The single-biggest threat for restaurant stocks is a potential U.S. recession. |
We all know about the food safety struggles at Chipotle Mexican Grill (CMG), so I won’t bag on the burrito chain. But the formerly high-flying drive-in chain Sonic (SONC) is down sharply in recent weeks, and just traded near its lowest level since last October. McDonald’s (MCD) did great in late 2015 and early 2016 … but it has been heading lower since May. The coffee chain Starbucks (SBUX) has been steadily losing ground for the past year, and it is threatening to carve out a massive multi-month top on the chart.
There are a handful of exceptions to the trend, including pizza chains like Papa John’s International (PAPA) and Domino’s Pizza (DPZ). Taco Bell, Pizza Hut, and KFC owner Yum Brands (YUM) has also bounced back after stumbling badly last year. But all in all, I see a lot of lousy charts.
So what gives? I think some of it stems from an erosion in disposable income. The things Americans have to spend money on – health insurance, rent, school tuition, etc. – have generally gotten more expensive, crimping take-home pay.
Lower gas prices help, but apparently not enough based on the stock performance in this sector. Some investors are also worried that higher minimum wages in many parts of the country will put increasing pressure on restaurant profits.
Then there’s the single-biggest threat for restaurant stocks and the U.S. consumer: A potential U.S. recession. Stifel Nicolaus analyst Paul Westra slashed his rating on 11 chains back in late July, saying a “prospective 2017 U.S. recession could be the worst ever for restaurants”. A separate Jefferies analyst named Andy Barish warned of “18 months of challenges ahead” and that it’s time to be “very, very picky and cautious” on industry shares.
My advice? Keep an eye on these stocks to see if they can find their footing again. If not, it could be just one more piece of the puzzle pointing toward deterioration in the U.S. economy.
Until next time,
Mike Larson
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Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 43 comments }
Although I agree that disposable income is a big problem, that has been a constant issue for a long time, and I think this makes it problematic in explaing these more recent results. I think you’re missing the much larger demographic factor/trend. If you appreciate Harry Dent’s views on watching demgraphic patterns/trends, you would note that, like me, a huge cohort of Baby Boomers is passing into their later years. And like me, they need to watch what their eating and eating out less. It would be interesting to compare results of relatively “healthy” brands to results of brands generally considered less healthy choices.
I believe that both you and Mike are correct, but there are more reasons causing the restaurants problems. Although my wife and I came to America 36 years ago we still retain a European habit, that is eating out only on special occasions. Add to that the fact that my wife is truly excellent cook, she grew up in continental Europe, plus the many very good cooking shows on TV, couple this with the knowledge that at home it is much less expensive and you know what you are eating and you have a lot of reasons for the Restaurants problems.
Yes, most restaurants should go down the drain, however, there is one restaurant in Chester County that is getting a lot of good feedback, that is the su tao cafe in Malvern Chester County. Anything you eat there is vegan, and the price is right, $9.50 for lunch.
Chipotle is okay if you know what to eat, forget the meats, chicken, white rice and guacamole, Drink soda water (no charge). That should keep you vegan. You can also go to Panera Bread, They have vegan salads, and many times they have vegan soups. Look it up online.
We have been vegan for 6 years. Those are just about the only restaurants we can go to and get some good food.
I agree with Frank Gomez
I ONLY want non-GMO, Organic, Whole Food Plant Based food. Very hard to find that out except at Veg, Su Tao, Sprig & Vine and similar.
Also as Mr. Kondner said as we are aging and get more health issues, we boomers are fighting back with diet more and more.
I completely agree that restaurant stocks are bell weather indicators but my observation is the trend of natural foods, farm to table preferences, and the younger wiser generations running from processed and fast foods.
Starbucks went from having stores and drive throughs in 63 countries to 72 countries I heard in one year or so . SBUX is the largest coffee house on the planet we call earth at this time. It just split 2 for 1 about a year or so. It has been $44 a share and as high as $64 a share in the last year or so. Three brokers tried to stop my girlfriend from buying SBUX after the 2 for 1 split
great comment Frank – what the hell are you talking about. Do you realize this is an investment commentary
The Dent demographic cliff is one thing, shrinking disposable income another-rela
tive to other mentioned life costs……also, even though your lovely fed govt. says very fractional inflation happened in last few years, remember that that doesn’t include food and fuels…..which we all know can be 20 up to 50+% of average citizen budgets…..and if you buy groceries at all, have you noticed rising price mark-ups and shrinking sizes of product simultaneously? so what do you think restaurants are paying for costs?
I think we are at the matrix cross-over of food costs/returns for chains as people (consumer/customers )are finally getting priced out of eating out….more people are “working” their food budgets out of new-found necessity to manage….and eating out gets chopped to some degree across all price-point sector restaurants……
I agree with Frank and David: Most of the restaurants you speak of are fast food or viewed as “unhealthy” restauraunts. people are looking at what they are eating in a much more carefull way these days and the days of sugar and starch based food menues are on the way out. Myself borderline diabetic, I have decided to control my condition by not eating: Bread, Pasta, Sugar, rice, or potatoes. Just this made me lose a much needed 40 pounds (now weigh only 167lbs) and keeps my blood sugar completely under control, but the point is what on any menu of any “regular” restaurant can I choose something to eat and not violate my new eating rules?..pretty much nothing! it’s all potatoes starch and bread and sugar!..Even their sauces for the meats and dressings for the salads are full of sugar! Combine that with the fact that my girlfriend is a vegetarian and you can imagine how little choices we have where we can go out and eat together… So we go to little mom and pops, (or should I say Hippy and Bohemian) owned restaurants where they cook real food with real ingredients…sorry Mcdonalds and Sonic!…
Mike. Simply put the middle class is the driver of our consumption economy. Both the retired middle class and working middle class have been economically put in a dungeon and are continually losing economic strength under this administration. There is no growth and we have been in a recession for the last eight years. Only one number out of the federal government is worth the time of day. 94 million able-bodied American men and women out of the workforce due to no jobs. And this is all by plan.
And to prove my point: Here in Canada (not sure about in the States) Mcdonalds has now introduced the “Build your own burger” option, where you can pick and choose what options you want on your burger.. One of the options is to replace the buns with slabs of romaine lettuce, eliminating the bread.. A local submarine sandwich chain called Dagwoods has also introduced an option to replace the buns in their submarine sandwiches with romaine lettuce, making it a wrap of sorts rather than a breaded up submarine… I have tried both and find them tasty and always go for that option when stuck somewhere to grab a quick lunch and no other options are available. So even the large chains are waking up to the fact that people no longer want to eat the nutritionless, sugar loaded, starch based gargbage they call food that they have been serving us and poisoning us with for years… On the flip side, I, like many people I know, no longer take french fries with their meals and don’t drink cola anymore, opting for a glass of simple water…and those two items are the biggest profit makers for the restauraunts. So there go their easy money profits…
BIG MISS HERE
The key factor is INCREASED Regulations
and costs to the food sector from the governmental end both state and federally
with a limited ability to raise pricing without losing market share
Most of the restaurant chains you mention, popular in the near past, do not measure up in terms of healthiness of their menus to the more recent requirements outlined by numerous nutritionists who appear on TV(mostly on public television). I have never thought that the food was healthy or tasty at Cheesecake Factory. PFChang has a menu that makes it easy to eat healthy food and more restaurants should follow this model. Panera bread ruins perfectly good food with additions and I have never had anything healthy or tasty in that chain.
as an addendum, yes, indeed, a recession will exacerbate the already deteriorating restaurant scene ……another of my concerns: excepting those Rests that have unique aspects–clientele, superior location, demographics, etc. that enable a level of performance requiring a formally trained staff–most-if not all- fast/chains are staffed by young indifferent t- if not totally disenchanted -cooks who really don’t care about your meal…..as they have been living skateboarders lifestyle themselves and probably grew up on fast food and don’t know any better. I cannot tell you how many times the “back of the house” failed where it used to fail in front service arena……..i can’t even care about good service in front much anymore, as they also don’t know/care about traditional levels of proper service…. i quit expecting that years ago in the aggregate, but please: at least cook/prepare/present something you can be proud to put out!!!
I think the minimum wage increases have hit them hard. One in my neighborhood closed down the day the wage hikes went into effect after 46 years. Others added four or five dollars to many prices overnight.
I think a big part of it is the food is crap at 99% of those places you mentioned and people don’t want it anymore. Buying organic and GMO free is up, people want to know what they are comsuming and our govt is ignoring everything we are doing and trying to shove the bad everything down our throats cause the rest of the world doesn’t want it. This is very easy to change, give clean food and a reasonable price.
Locally, restaurants seem in a frenzy of closing and being replaced by others or something else. It is notable in the old family owned places in Baltimore’s once famous Little Italy, as the current generation is not taking over the old businesses, and they are being replaced by non-Italian places or new apartment houses, extending Harbor East northward.
On a slightly related subject, I just read that a pizza chain in Silicon Valley(!) has decided to slash labor costs by replacing it’s pizzaristas with robots. How long before Mickey D and others do the same thing. So much for the politicians legislating high minimum wages.
We have many of these restaurants here in Massachusetts, and we have eaten at some of them. As I see it, there are SO MANY places to eat in the area now, they are eating each other’s profits. When we go to a smaller restaurant out in the country, they are packed with customers. They serve the same menus , the prices are about the same, so what is the difference? OVER CROWDING !!!! We have TOO many restaurants serving a given square mile. You mentioned Cracker Barrel above; we have one in our area in Sturbridge, MA, and it is always filled with customers no matter the day or time. WHY? Not many in the area not many restaurants.
Wait until the next Recession hits when people cannot afford the high priced restaurants and 18% tips on top of the meal and drinks, then watch Mc Donald’s and similar places take off again.
I believe we should considered the price of being connected to internet via smartphones, smartTVs and tablets. It takes a chuck of money to stay connected via the various services so something else has to go – dining out!
Frank, don’t forget Capriotti’s Sandwich Shop. They have excellent vegan choices, far more than you would expect from an “ordinary” sandwich shop. That said, there may not be one in your geographic location. But if there is, you should try it.
sanjosemike
If you’re on instagram especially you’ll note that people have figured out most of those venues aren’t providing nutritious food. It’s clear there’s a connection with weight our health and what we’re eating. As people understand that returning to the trough that isn’t healthy is counter to one’s production. It makes sense these stocks are lowering guidance. I’m waiting on more healthy truly organic clean non-GMO venues to trade that offer real food not just a plate piled high which appeals to greed. Why not small plates that works with not against your body’s immune response
The restaurant industry has been vastly overbuilt for the last couple decades! At the same time the manufacturing segment of our economy, has been hollowed out. I believe that the coming recession of 2017 will be especially hard on the restaurant segment. I wouldn’t want to be a stockholder in any restaurant stock right now. Hard times ahead for the restaurant segment!
Restaurants are the last leg of the brick and mortar stores. A decent meal out for a family of 4 now runs around $60 to $100, and it is more than most people want to spend in this declining economy. In fact the economy is so bad, the only stores that are surviving are the payday and title loan stores.
Is it possible people are moving in a different direction for their dining experiences partly due to economics and, secondly, realizing the value isn’t there. Lifestyles are more casual and truck food stops seem to be thriving. Quick service and no tipping. Many grocery stores have extensive self-service, take-home items such as roasted chickens, salad/soup bars.
I agree that disposable income is one factor. The other is that the cost of a casual meal has doubled in the past several years. For two, it was about $16.00; now it is more commonly $30.00. Retirees may not be “dining” out as much. I cannot imagine what will happen if minimum wage reaches $15.00/hr.
No rocket science here. High prices relative to expected consumer income and not always consistent good quality. Really.
John Williams’ Shadowstats site tells us that unemployment is running above 20%, and inflation is running over 4%. That’s right up there with the worst years of the 1930s. Today we have EBT cards instead of breadlines, but just like in the 1930s, few of us have disposable income, and fewer still feel secure.
Today, the word “recovery” means “depression,” and the recovery keeps on getting deeper.
We now go to Walmart and cook at the house. Thanks ACA!!!:)))
I am a resident of Plano, TX, one of the suburbs of Dallas. Plano is listed as the third best city in the US. Just recently a myriad of corporations moved into Plano, bringing with them a large group of working people. You would not believe the number of additional cars on the highways and the incredible number of apartments being constructed. This past week there was an alert stating that The Black Eyed Pea restaurants were filing bankruptcy and closing down. This was one of our favorite smaller restaurants, and so we ran down to see if this was true. Sure enough, the place was locked up tight and the newspapers stated that 12 out of 13 Black Eyed Pea restaurants were closing down in North Texas. Many other small businesses are also closing down in this section. They say that most people have stopped eating out and stopped shopping in the various malls of Texas. This is a true indication of the steady collapse of our economy.
I agree with David. In addition, when restaurants got “hot”, everybody jumped on that bandwagon and filled up available space pretty fast. Now the competition for that discretionary, experiential dollar is really fierce. I think some of those diners are beginning to wake up to the fact that they ate out a lot and have nothing to show for it but more fat cells. In some metro markets, rent prices have gone up so much that apartments are almost prohibitively priced and cramping budgets even as gas prices and groceries are down. And let’s face it some of the restaurants you mentioned have poor to average food and don’t compete well in a saturated market.
Expenses rise faster than income and you forgot utilities in your list. Furthermore, the food deflation (all agri prices are strongly down) has not transferred to the price you pay at the restaurant; increase in minimum wage. There is also a quality problem in these “smart casual” chains. I went to Chili’s and ordered a sirloin, it was perfect. I go back for my anniversary order the same and it was not good at all.
Most chain restaurants are very unhealthy. Cheese Cake Factory one of the worst.
I believe it’s not a downturn in the Restsurant field, it’s a sorting of affordable/healthier foods from the field. Specifically the back yard – farmers markets, etc.
I.e. I just traded my peaches for eggs in a semi-urban setting. No tax, no trucks, no Basha’s, no government regulations/fees/fines, etc.
Now, Given selfishness and turf-claiming, I expect all of the above-mentioned entities to cry foul to “re-claim” trade they think is there’s.
Food outlets are merely finding their real customer desired value while the customer is re-eVALUating what he can grow him/herself.
Now the economy just has to “get over it”.
Several restaurant chains in my area seem determined to price themselves out of business. In recent years their menu prices have outstripped published inflation rates by a wide margin. We used to patronize several of them frequently, but now they seem like special occasion venues. Yesterday I looked at a menu which had a pricier lunch menu than the dinner menu of a few years back. It contained a note reminding patrons to not forget the “customary” tip of 15-20%! On the plus side, unlike the old days, the line to get in, is not long!
Not sure I’m buying this. Cbrl for instance is very affordable, building new restaurants, has many healthy dishes. People want entertainment and eating out is it for many. The analysts are dogging out the good and bad restaurants altogether, yet the dividends still roll in along with increases. Fundamental analysis says buy low and enjoy the dividends…hold on for. New cycle upward.
Hello Mike,
This is the 1st time I’ve written to you.
Yes, restaurants & the economy are having tough times and will for 4 to 5 years,
Every 80 to 90 years, we have a DEPRESSION. Yes, nobody likes the “D” word.
The economy will start to improve in 2020 or 2021.
I haven’t eaten out in years, just a waste of cash and most often don’t like how they destroy a very easy burger, or grilled cheese if u can’t cook that CLOSE THE DOORS. I cook all meals at home, can’t miss using my crock pot best meals ever.
Mike: this very simple . There are 94,500,0000 Americans of working age that don’t have jobs! You add the ACA and I’m surprised that there are any restaurants left.
GMOs, hormones & glyphosate in meat, fluoride in water; basically expensive trash!
Just as a side note, the labor force participation rate peaked in 1999 at 67.3%. Even if we were at that level now there would still be 83 million working age people without jobs. That’s because not everyone wants a job. Now at about 63% we are only 1% lower than the LFPR under Reagan in 1984. Also, the current inflation adjusted minimum wage is about 20% lower than in 1968. There are a myriad of reasons the economy is in the condition it is now in. NAFTA, written under George H W Bush by Republicans and signed by Clinton and subsequent job killing trade treaties have gutted the middle class. Illegal immigration has taken what few opportunities there are at the bottom from American citizens and is championed by naïve liberals and unscrupulous corporate Republicans. Obama inherited this disaster and has just kept the economy limping along. His support of the TPP and the ACA using for profit insurance companies clearly shows he is in the pocket of corporate America. He tries to be all things to all people and satisfies no one.
cracker barrel our favorite until they changed the coffee.Then
we did not like when they started to use instant mashed potatoes.We stop elseware.
Papa John’s International is PZZA, not PAPA.
I charted all of these. Looks like pizza has been the way to go since ’08!
I am from the south and I love good southern cooking. Cracker Barrel Restaurants was my first choice when eating out, however that has changed. The restaurant chain has become so expensive for what you get in return. I am a person of average weight and am very careful not to over-eat, but in order to be satisfied appetite-wise, I have to order extra veggies or what ever to feel like I have had a normal meal and wind up spending way more than I ever anticipated. Their portions are so tiny, it’s like eating for a child instead of an adult. The point is; many restaurants are following the same pattern as Cracker Barrel and is forcing many loyal customers to re-evaluate where they choose to eat when they dine out. I have found the best way to get a half way fair deal is to shop around and to my surprise, I have found a few places that offer a much better deal for the money; namely good quality lunch and dinner buffets. Their not cheap, but they are by far much more reasonable and you don’t leave the table hungry. Wake up Cracker Barrel!