Disappointing Earnings Could Burst Some Stock Bubbles


Chipotle Mexican Grill yesterday reported a surprising increase in same-store sales last quarter of 5.5 percent. The result today is what you’d expect: a zooming stock price that is now over $400 a share. But don’t expect this kind of pleasant surprise much as restaurants report their earnings—at least according to one analyst.

Bryan Elliott, analyst at Raymond James, downgraded a handful of restaurants today, including Chuy’s, Bloomin’ Brands, Cracker Barrel, Ruth’s Chris Steak House, DineEquity and Panera Bread, while trimming Brinker International’s estimates. The reason: he’s less confident in the state of the restaurant industry at the moment, all of these chains are trading at multi-year highs, and resulting quarterly reports could disappoint.

Various restaurant sales indicators have not exactly pointed to an industry that is flourishing right now. To wit: Same-store sales at casual dining restaurants fell 2 percent in June, according to the Knapp Track index. According to Black Box Intelligence, same-store sales were flat last month, but traffic—a better indicator—fell 2.5 percent.

Yet this year, numerous restaurant companies have flourished on Wall Street. Consider this: Of the companies Elliott mentioned, only two, Panera Bread (up 17.7 percent) and DineEquity (up 7 percent) have not bested the 18.5-percent increase by the S&P 500 this year, and both those companies are at all-time highs.

Meanwhile, Chuy’s is up 68.4 percent. Cracker Barrel is up 56 percent. Ruth’s up 33.9 percent, and Bloomin’ Brands is up 59 percent. And if you look beyond the concepts of which Elliott wrote, there’s Krispy Kreme (109.8 percent), Fiesta Restaurant Group (126.7 percent) and even Famous Dave’s (81.6 percent). In short, investors believe restaurants are on the upswing, but if sales start to weaken, that could lead to something of a plunge.

“The combination of deteriorating comp trends coupled with the group’s extended valuations created a more negative near-term risk/reward ratio,” Elliott wrote.

Not every survey we’ve seen points to falling sales, however. Baird’s survey of private restaurant chains have found that their weighted same-store sales were up 2 percent in June, for instance. Still, if the other surveys are right, there could be some disappointments coming.

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