Several Standouts Still ‘Buys’ in Shaky Third Quarter
The third quarter results have thus far been more of the same, but there are still plenty of restaurant stocks that have the analysts excited.
Through the quarter research firms reported more unsteady performance and ugly numbers. TDn2K reported a 2.2% same-store sales decline overall with traffic down 4.1%. The one-two punch from a pair of devastating hurricanes pushed things further into the negative.
“Hurricanes Harvey and Irma affected millions of people in two of the country’s largest economies during the quarter. On the other hand, there were some signs of improvement throughout the quarter, especially when removing the effect of Texas and Florida on the national sales results,” said Victor Fernandez, Executive Director of Insights and Knowledge for TDn2K.
The larger industry trends continue to drag on public companies beyond those one-time effects. Easy capital is still allowing unwise growth into an oversupplied market. The New York Times recently blamed Wall Street for seeking offline safe harbor, but still expecting perpetual growth. But brands and private equity firms are playing along as well; the latter pouring money into M&A and the former provisioning aggressive development plans into the deals.
The standouts are the same as they have been through the year, but even the “buy” rated stocks had some difficulties. Analysts form across the restaurant industry, however, are looking beyond those shaky results.
Chuy’s had a choppy quarter, it saw same-store sales decline 2.1%. Raymond James analyst Brian Vaccaro said hurricanes were a 90 basis point bump in the road as new units are beating expectations.
“We also believe the stock’s valuation is attractive at current levels (2018 EV/EBITDA in low 7’s) relative to the company’s intact long-term growth opportunity (~90 today vs. 350+ potential), noting that the company’s new $30 million share repurchase authorization equates to ~8% of its current market cap,” wrote Vaccaro.
Comps stabilized late in the quarter and have been positive through October.
Denny’s had a slight same-store sales miss but still saw a little growth, reporting .6% same-store sales growth compared to estimates of 1% growth. Analyst Nick Seytan at Wedbush said it was another steady quarter for one of the few brands bucking the casual-dining trend.
He said expectations for the full year were “realistic, driven by expense control, opportunistic purchases of franchised units, and share repurchases.”
The brand guided to EBITDA of $101-103 million and 0-2% same-store sales growth as well as strategic buybacks and franchisee buyouts.
“Even without SSS growth outperformance, we believe enough flexibility exists on G&A and potential accretive franchisee acquisitions to achieve the midpoint of guidance,” wrote Seytan.
The company is set to raise prices incrementally for a 2.5% addition to the comp base in Q4, but there are other drivers as well.
“Transaction drivers include ongoing remodels, additional compelling menu innovation, online ordering, third-party delivery, easier comparisons, and a customer demographic benefiting from increased employment and wage growth. We also note the beneficial Christmas shift out of the weekend in Q4,” wrote Seytan.
In it’s first month of coverage Stifel’s new restaurant analyst Chris O’Cull looked at third-quarter results for Domino’s Pizza.
The brand reported a better quarter than most, seeing same-store sales rise 8.4% and growing units by 4.1%. International revenue jumped 20.1% to $48.4 million and supply-chain profits rose in line with sales growth, ticking up 13% year-over-year. But the stock dipped as investors were expecting even better numbers—an opportunity for buyers.
“DPZ's stock has been earning most of its appreciation intra-quarter, so buying the pullback over concerns about recent SSS weakness could prove profitable,” wrote O’Cull.
One of the keys to success may be the growing loyalty program. The Piece of the Pie awards program which drove frequency and check averages up.
“The program has been a meaningful contributor to transaction growth every quarter this year. The company has been reluctant to give any metrics around the program, but we believe it could represent roughly 25% of transaction dollars,” wrote O’Cull.
El Pollo Loco
Restaurant analyst Andy Barish at Jefferies has a buy rating on El Pollo Loco, which saw 1.7% same-store sales growth.
It did miss expectations of 2.2% growth, but management “noted “softening” in Sep coinciding with heavy discount push in QSR category,” wrote Barish. “Despite the tough environment, we remain optimistic that marketing, tech & remodel initiatives will be enough to turn trends again and re-stabilize traffic.”
He said digital and delivery was a strong driver for the brand and paint an encouraging picture for 2018.
“Digital in particular appears at inflection point, with mobile ordering 1.5% of sales, Loco Rewards already at impressive 4.7%, and potential to unlock delivery to 80% of the system in early’18,” wrote Barish.
Papa John’s International
Papa John’s reported 1% same-stores sales growth, just missing 1.4% growth estimates and improving on a two-year average to 3.3%. The brand performed better internationally, where it reported 5.3% same-store sales growth.
While the performance sent the stock down after the report, Citi analyst Gregory R Badishkanian said Papa John’s performance wasn’t surprising.
“We think most investors already viewed the 2017 targets as somewhat aggressive (recall, prior guidance was implying accelerating 2H trends despite tougher compares). We therefore aren't surprised by the aftermarket stock reaction of down 2%-3% on tonight's release,” wrote Badishkanian.
The brand expects 1.5% comp growth in Q4 and aims for a Debt/EBITDA ratio of 2.5-3.5 times and is buying back shares in order to reach 3-4 times leverage via a $485 million buyback authorization that goes through 2019.
Starbucks continues to meet expectations and the brand has plans to push the stock and drive down costs in 2018. The company reported a 3% comp growth (1% traffic 2% check) in line with expectations.
Restaurant analyst Andrew Charles at Cowen said it should continue to outperform peers.
“We continue to find SBUX attractive on a total return basis of 14%+, driven by 12-17% EPS growth and 2% dividend yield. SBUX is looking to enlist more aggressive costs cuts + share repurchase to help EPS amid stalled Americas comps, potentially setting up to beat in 2H18,” wrote Charles.
The brand unveiled a major three-year plan to return $15 billion to shareholders by spending cash and more debt on share buybacks.
At the store level, the brand looks to get G&A spending in line by managing food waste and labor. Charles expects the results to be reflected on the market in the back half of 2018.
Beverage comps are slowing, but innovation may spur traffic.
“Starbucks is working to rectify [slowing beverage sales] by improving morning thru-put, broadening mobile ordering (10% of 4Q17 sales) payment capabilities beyond using a SBUX gift card, and innovation around cold brew, including Nitro,” wrote Charles. “Alternatively food sales continue to find success, driven by the addition of suggestive selling within mobile orders.”
Goldman Sachs restaurant analyst Karen Holthouse said it’s more of the same from Wingstop—and that’s a good thing.
“3Q17 came with positive updates across a number of key drivers, including: national advertising (momentum continuing to build and system sales growth supporting a growing budget), delivery (rolling to a second market and Las Vegas holding a ~10% sales lift), and split boneless/bone-in pricing (fully rolled by year end and no commentary suggesting broad pushback),” wrote Holthouse.
Delivery was a notable driver for the quarter and future growth. Management believes Doordash can service 60% of the restaurant base and would be a significant opportunity if each restaurant sees that 10% sales lift. All the chicken players are benefitting from wing price normalization as well.