For Immediate Release
Chicago, IL – April 4, 2018 – Today, Zacks Equity Research discusses the Industry: Restaurants, Part 3, including Domino's Pizza (DPZ - Free Report) , The Wendy's Company (WEN - Free Report) , Brinker International (EAT - Free Report) , Dave & Buster's Entertainment (PLAY - Free Report) and Cracker Barrel Old Country Store (CBRL - Free Report) .
Industry: Restaurants, Part 3
The restaurant industry has been troubled by soft consumer spending environment over the past few quarters. Although the current economic backdrop is favorable with rise in in wages, jobless claims at a record low and upbeat consumer confidence, the benefits have not trickled down to the restaurant space yet.
The net result is an extended period of negative comps, sluggish traffic along with rising costs. Below we discuss some of the headwinds that restaurant stocks faced and will continue to face in the near and midterm.
These issues have been weighing on the industry’s stock market performance lately as well, which has been a tad below the S&P 500 index’s recent performance. Stocks in the Zacks Restaurants industry are currently down -3.5% this year, compared to the -3.2% decline for the S&P 500 index and the flat performance for the Zacks Retail sector of which the Restaurant industry is a part.
Expenses Continue to Climb
A difficult operating environment has forced restaurant operators to increase comps and sales initiatives, which has led to an increase in costs. Rising costs have been weighing on margins for companies like Domino's Pizza, The Wendy's Company and Brinker International. Though these initiatives offer long-term advantages, related costs are expected to continue in the near term. Additionally, resorting to discounting and value bundling further puts pressure on casual dining operators’ already tight operating margins.
Moreover, restaurants like Dave & Buster's Entertainment and Cracker Barrel Old Country Store intend to make additional unit openings going forward. Thus, higher marketing and pre-opening costs 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 translated into substantial hike in their pay, resulting in strikes for wage hikes. These incidents significantly hurt the reputation of restaurants. As a result, the companies have been 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, increasing cost of turnover poses a serious challenge for restaurant operators. As the economy keeps improving and employment levels rise, there is more competition for qualified employees to fill vacant restaurant positions. Restaurant management turnover is a critical headwind for operators as turnover rates continue to rise, per a report by TDn2K’s. This is further compelling restaurants to either hike wages or provide benefits, at the cost of margins, to retain or attract employees.
Weak Comps and Low Traffic
In the past few quarters, consumer behavior has been volatile and their willingness to spend, especially on eating out, is showing signs of decline. Most of the restaurant companies are thus bearing the brunt of soft comps and traffic trends. Foot traffic declined 3.2% in 2017 and thereafter 3% and 3.1 % in January and February of 2018 respectively.
Same-store sales that account for traffic declined 2.2%, 1.6% and 1%, respectively, in the first three quarters of 2017. Although the fourth quarter witnessed a positive same-store growth of 0.4%, the metric fell 0.3% in January and 0.8% February, per TDn2K’s Black Box Intelligence.
The chief reason for the drop in same-store sales is an increase in the number of new restaurants amid limited growth in eating-out budgets as well as increased pressure from grocery stores. Supply glut and limited demand are hampering traffic as well as stock prices for restaurants. Instead of generating added sales, each new restaurant is eating up share from others. This has resulted in bankruptcy for many public and private restaurants.
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