For Immediate Release
Chicago, IL – August 17, 2017 – Today, Zacks Equity Research discusses the Industry: Restaurants, part 3, including Domino's Pizza, Inc. (NYSE:DPZ – Free Report), The Wendy's Company (NASDAQ:WEN – Free Report), Brinker International, Inc. (NYSE:EAT – Free Report),Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL – Free Report) and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY – Free Report).
Industry: Restaurants, part 3
The restaurant industry’s sales trends in recent quarters have been strained given the soft consumer spending environment. This makes it prudent for investors to take a closer look at the dampeners threatening growth in the restaurant industry. Particularly, negative comps, given sluggish traffic along with rising costs, are taking the sheen out of restaurateurs.
These headwinds are a major reason for the industry’s sub-par stock market performance lately, with stocks in the Zacks Restaurant Industry up 5% over the past year, underperforming the S&P 500 index’s +12.8% gain.
Below we discuss some of the downsides hampering the restaurant industry:
High Expenses: Costs related to various comps and sales boosting initiatives along with restaurant re-imaging expenses are hurting margins for companies like Domino's Pizza, Inc. (NYSE:DPZ – Free Report), The Wendy's Company (NASDAQ:WEN – Free Report) and Brinker International, Inc. (NYSE:EAT – Free Report). Though these initiatives offer long-term advantages, the costs related to them are expected to continue to dampen margins in the near term. Additionally, resorting to more discounting and value bundling might further put pressure on casual dining operators’ already tight operating margins.
Moreover, restaurants like Cracker Barrel Old Country Store, Inc. (NASDAQ:(CBRL - Free Report) – Free Report) and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY – Free Report) intend to make additional unit openings going forward. Thus, higher marketing and pre-opening costs associated with the same are expected to hurt profits.
Also, there has been considerable debate in the recent past over restaurant workers’ wages. Workers at quick-service restaurants claim that their employers' profits have not trickled down to them proportionately, which is leading to strikes for wage hikes. These incidents significantly hurt the reputation of restaurants. As a result, the companies are compelled to make minimum wage increases, which again lead to narrower margins. Moreover, higher labor costs due to a competitive labor market are expected to continue to keep profits under pressure.
Meanwhile, recruitment and retention of employees has emerged as a top challenge for restaurant operators in 2017. As the economy keeps improving and employment levels rise, there is more competition for qualified employees to fill vacant restaurant positions. Meanwhile, restaurant management turnover is a critical headwind for operators as turnover rates are now nearing a 10-year high, as per TDn2K’s People Report. This is further compelling restaurants to either hike wages or provide benefits, at the cost of margins, to retain or attract employees.
Soft Comps & Traffic Trends: Over the past few quarters, consumer behavior has been volatile and their willingness to spend on most goods, especially eating out, is showing signs of decline. Most of the restaurateurs are thus bearing the brunt of soft comps and traffic trends. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative comparable sales for the restaurant industry as a whole, per a report by TDn2K’s Black Box Intelligence. Given the persistent negative comps trend, there has been a lot of buzz about the restaurant industry hitting recession.
But it is to be noted that the chief reason for the drop in same-store sales is an increased number of new restaurants amid limited growth in eating-out budgets as well as increased pressure from grocery stores. Moreover, per market analysts, diners are spending more per visit instead of visiting chain restaurants more often, which is hurting traffic. Also, increase in menu prices is at times preventing them from dining out. This unwillingness of Americans to dine out is thus pulling down restaurateurs’ sales.
Slowdown in New Restaurant Openings: As the operating environment has become increasingly challenging, the decline in sales volumes have begun to impact the returns on new restaurant openings. As a result, some of the restaurants are slowing down their development plans for 2017.
Zacks Industry Rank
Within the Zacks Industry classification, health insurers are broadly grouped in the Medical sector (one of the 16 Zacks sectors).
We rank 265 industries into 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank is #177 (bottom 34%). The ranking is available on the Zacks Industry Rank page.
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