This week brought a series of restaurant earnings reports that generated a slew of headlines — and had a major impact on restaurant stocks. From Chipotle’s massive drop to McDonald’s spike, here’s a breakdown of what we learned from the most recent rash of Q3 2017 restaurant earnings reports.
The news wasn’t all bad — though it would be hard to tell from glancing at recent headlines: “Chipotle’s profit ravaged by hurricanes, hack and high avocado prices,” declared CNN, while Investor’s Business Daily called the company’s recent earnings a “queso reckoning.” The burrito giant’s revenues increased 8.8% versus the same time period in 2016 (a decrease of 3.5% from the previous quarter). Earnings were weaker than expected and the announcement that the chain would open 15 fewer stores this quarter than it had initially planned only added to the disappointment. Not only did Chipotle falter on third-quarter earnings, it also cut its full-year 2017 profit forecast. The only ones who benefited from the news were short sellers, who made more than $260 million as the company’s stock dropped as much as 16%.
This drop translated into a market cap loss of $1.3 billion. This wasn’t the first time the company experienced large drops in stock price, though in previous instances, losses had been attributed to the company’s food safety scandals. In this case, however, investor disappointment was related to flat revenue (i.e. investors were expecting a recovery). Even though revenue recovered, if compared to the same period of 2016 (+8.8% Sep ’17 vs Sep ’16), it dropped 3.5% vs. the previous quarter.
Many analysts are unconvinced that this will be Chipotle’s biggest drop. CNBC’s Jim Cramer still feels Chipotle’s stock is overpriced at $279 a share, saying “The only bright spot in this thing was that avocado prices have come down, but I didn’t need them to tell me that.” Cramer was especially disappointed in statements made by Chipotle executives during the most recent earnings call, in which CEO Steve Ells said the last quarter presented “challenges” but that company leadership was working to “strengthen” it. “There is no time,” Cramer said. “This is America and it’s business. Chipotle is not going to get the time. The stock is going to go lower.”
The competitive landscape in the Fast Casual segment also poses challenges to Chipotle. Though the chain has been growing faster than its peers in terms of sales (comparing fast casuals in the Top QSR50 rank between 2010 and 2016), growth has been based on expansion with very little growth in AUV: the number of locations has doubled between 2010 and 2016, while AUV has grown slower than most competitors (0.6% CAGR).
In its Q3 2017 restaurant earnings report, McDonald’s impressed analysts and investors alike. Analysts expected the Golden Arches to post EPS of $1.77 on revenues of $5.73 billion. Instead, McDonald’s overall comparable sales accelerated 71% in the third quarter (compared to the same quarter a year before). High growth markets lead the, with comparable sales increasing 6.2% globally (4.1 times the growth rate of last year’s Q3 earnings). The US also registered significant growth (4.1% compared to 1.3% in the same period last year), driven by value promotions (like McPick 2) as well as the success of the premium sandwich platform “Signature Crafted.”
The better-than-expected growth appears to have increased investor confidence, leading to a rise in McDonald’s stock. As of October 27, 2017, McDonald’s was trading at $163.44. Meanwhile, investors largely ignored the fact that overall sales were down, while earnings per share missed analysts’ targets by a penny.That drop was largely attributed to the chain’s plan to sell more company-owned stores to franchises, which analysts say will pay off over time, lending a more lucrative stream of royalty payments down the road. Overall, 2017 has been a good year for McDonald’s, which has seen stocks rise 34.4%. During the same period, peer Jack in the Box fell 8.8%, while Wendy’s and Restaurant Brands International stocks have risen 11.7% and 41.4%, respectively.
Buffalo Wild Wings
Buffalo Wild Wings easily bested analyst expectations for Q3 2017 restaurant earnings, despite the fact that the chain is paying more than 25% more for its chicken wings than it did a year ago. The chain reported earnings of $1.36 per share on revenue of $496.7 million. Analysts surveyed expected the company to report earnings of 79 cents per share on sales of $501.1 million. Even with lower same-store sales (which decreased 2.3% at company-owned restaurants and 3.2% at franchised locations during the third quarter), stocks soared on the news. After the company reported its earnings Wednesday, shares surged more than 20% in after-hours trading.
Restaurant Brands International
Restaurant Brands International, the parent of Burger King, Tim Hortons, and Popeyes, beat estimates in its third-quarter results, reporting net income of $91.4 million (or 37 cents per share), up from $86.3 million (or 36 cents per share), from the same period last year. Revenue totaled $1.21 billion, up from $1.08 billion last year and beating the $1.19 billion estimate set by analysts. Same-store sales grew 0.3% at Tim Hortons, were up 3.6% at Burger King, but fell 1.8% at Popeyes. Shares are up 49.5% for the past year, outpacing the S&P 500 index.
How Restaurant Stocks Have Been Faring Overall
Publicly traded restaurant stocks haven’t had a great year thus far. The median stock price increase, year-to-date, was a negative 5.7% (as of October), and more than three-quarters of restaurant company stocks are underperforming the S&P500. Most of those doing better than the market benchmark operate in the QSR segment. Arcos Dorados, operating and franchising McDonald’s stores in Latin America, is the top performer with an 80% gain. The takeaway? Certain segments are doing better than others — but even chains that haven’t been doing well over the past few years (McDonald’s, for instance) are seeing gains. Another thing those doing well seem to have in common is innovation. Continued expansion of delivery, and the rollout of tech-focused restaurant re-designs, have continued to drive results for many in the industry.
About Aaron Allen & Associates
Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion, span all 6 inhabited continents and 100+ countries, with locations totaling tens of thousands.
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