Analysts: 2Q restaurant earnings to be mixed


Slower same-store sales trends reported in March and April seem to have seeped into May and June as well, especially in the casual-dining segment, an industry analyst reported as many companies prepared to release second-quarter earnings.

Quick-service restaurants are showing some resiliency, said Andy Barish, equity analyst at Jefferies & Co. Inc., in a note he and his team issued last week that foreshadowed weakened second-quarter expectations.

“While the full service category is struggling, QSR restaurants appear to be holding up surprisingly well in the face of dwindling consumer confidence,” Barish said.

Quarterly earnings reports in the weeks ahead will reveal much about the first half of the year’s performance. Earnings releases are scheduled presently from such lare foodservice companies as: Yum Brands Inc. on Wednesday; Chipotle Mexican Grill Inc. on Thursday; BJ’s Restaurant Inc., Domino’s Pizza Inc., Frisch’s Restaurants Inc. and McDonald’s Corp. next Monday; and Panera Bread Co. next Tuesday.

Jefferies’ analysts were more optimistic about the quick-service and fast-casual segments than full-service. They cited casual dining’s “lighter top line” and its limits on margin leverage, especially when the industry faced lowered expectations for commodity costs easing and heightened uneasiness about the economy in general.

“While gas prices spiked in March and have since come down, sales trends across the full-service restaurant industry have decelerated,” the Jefferies team noted. They cited Knapp Track same-store sales data being down 0.3 percent in March, up 0.8 percent in April and down 1.3 percent in May. Traffic was down about 4 percent in May as well, the analysts noted.

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“Customers continue to struggle with economic/employment uncertainty, and affordability and value matter more than ever,” the analysts continued. Despite aggressive discount and promotions in casual dining, they added, net traffic is flat to down.

For the rest of the year, Jefferies analysts see "persistent softness across full-service dining for those concepts without strong differentiation and/or solid value platforms," adding that those with "value, service and atmosphere at the forefront should continue to comp positively.”

Quick-service restaurants, however, “appear to be holding up surprisingly well in the face of dwindling consumer confidence,” Barish noted.

“We believe concepts are taking some share via menu innovation,” the Jefferies team said, citing Taco Bell’s Doritos Locos Taco introduction, Dunkin’ Brands’ coffee and breakfast sandwiches, and Burger King’s mix of premium and value offerings.

Although the Plan to Win initiative from McDonald’s has driven growth in the category in the past, the note said, sales for the chain are beginning to slow while smaller, regional players accelerate. “Additionally, we could be seeing some trade down from full-service, as well as some traffic via employment growth in lower-end service/minimum-wage jobs,” the Jefferies team said.

Margins in the second half of the year will likely face pressure as many companies had expressed hope for an easing of commodity cost inflation.

“We fear that prices may not be as favorable as previously expected, given that dry soil conditions and a persistent heat wave (Midwest) are currently threatening the grain complexes and reducing dairy output,” the Jefferies team said. “We knew protein prices would remain high through the year, particularly beef (double-digit inflation), but it now appears unlikely that gross margins will see material relief on the dairy and produce fronts moving forward.”

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