The sheer amount of competition in the casual dining sector over that past 20 years has been great for the American consumer. The copycat strategies employed by competitors have made it possible for a couple to go to any number of reasonably good restaurants and get two complete meals for as low as $20. However, rising prices and taxes may begin to put a crimp in some of the companies’ earnings.
The analysts at Tampa-based Raymond James Financial Inc. (NYSE: RJF) are reasonably positive on the fourth-quarter results for most of the restaurants on which they have research coverage. In the casual dining arena, they expect comparable sales to be slightly positive and cost pressures to remain modest. With changes coming in the first quarter of 2013, they are starting to temper their expectations.
The first quarter of 2013 begins a period of rising uncertainty for both sales and costs, and elevated uncertainty seems likely to remain in place for some time. The same period last year saw the strongest restaurant sales growth of the entire year, helped by very favorable weather. This fact, when combined with the demand destruction they expect from the recently enacted payroll tax increase, could put first-quarter 2013 comparable sales into the red for some companies they cover. When combined with the rising food inflation outlook for 2013, the potential for negative earnings per share (EPS) revisions is high and continuing to rise.
These factors could result in unusually cautious management commentary and/or disappointing quarter-to-date sales disclosures during the upcoming conference call season. The Raymond James analysts would not be surprised to see consensus sales and EPS forecasts lowered for both the first quarter and the rest of 2013 for the majority of their universe, as a result of conference call commentary over the next four to six weeks. So as a result, they are taking a generally cautious investment stance. The Buy and Outperform ratings are generally characterized by attractive valuations and strong underlying business models.
Buy-rated stocks at Raymond James include DineEquity Inc. (NYSE: DIN), best known for its Applebees and International House of Pancakes restaurants. The Wall St. consensus price target is $68. Ignite Restaurant Group Inc. (NASDAQ: IRG) is known for its Joe’s Crab Shack chain. The consensus target for this name is $18. The third Buy-rated stock is Red Robin Gourmet Burgers Inc. (NASDAQ: RRGB), which has a consensus price target of $40.
Stocks rated Outperform include popular upscale steakhouse operator Del Frisco’s Restaurant Group Inc. (NASDAQ: DFRG); iconic doughnut and coffee shop operator Dunkin’ Brands Group Inc. (NASDAQ: DNKN); fast-food giant McDonald’s Corp. (NYSE: MCD); Ruby Tuesday Inc. (NYSE: RT); steakhouse chain operator Ruth’s Hospitality Group Inc. (NASDAQ: RUTH), which operates the Ruth’s Chris chain; and Carrols Restaurant Group Inc. (NASDAQ: TAST), which owns and operates Burger King, Pollo Tropical and Taco Cabana restaurants. The list is rounded out by Texas Roadhouse Inc. (NASDAQ: TXRH).
The numerous popular names mentioned tend to highlight the tremendous competition in the restaurant industry. With outside factors possibly lowering margins and profits, it may make sense for investors to cautiously take a seat at the restaurant stock table.