2 Stocks to Play the Rebound in the Restaurant Sector

It’s been a solid quarter thus far for the AdvisorShares Restaurant ETF (EATZ) and the restaurant index as a whole, with the ETF and the index up 9% and 17%, respectively, thus far in Q4, a significant outperformance vs. the S&P-500 (SPY).

This outperformance can be attributed to the fact that many restaurant stocks were priced very attractively heading into Q4 after a violent 18-month bear market and because gas prices have been trending lower and inflation looks to have peaked, which both benefit restaurant brands.

The reason? Restaurant food traffic is sensitive to gas prices which impact discretionary budgets, and food costs and labor costs have been rising for two years, pinching the margins of many restaurant brands.

Unfortunately, while some names like Restaurant Brands Intl (QSR) are sitting at 52-week highs, others have remained under pressure, and Jack In The Box (JACK) and Dine Brands (DIN) are two examples of names that haven’t participated much in the recent rally. Given that both are well-run and trading at attractive valuations, I believe both make solid buy-the-dip candidates.

Jack In The Box (JACK)

Jack In The Box is a small-cap stock in the restaurant sector, with two brands, including Jack In The Box and Del Taco, after completing the $585MM acquisition earlier this year.

Unfortunately, the stock has lost over $300MM in market cap since the deal closed in March, with this attributed to weaker restaurant-level margins at both brands of 16.2% and 15.9%, respectively (Jack In The Box/Del Taco). At Jack In The Box, this represented a 390 basis point decline year-over-year, impacted by higher food, labor, electricity, and paper costs.

In the company’s most recent quarter (fiscal Q4), it reported revenue of $402.8MM, up 45% year-over-year, but this was largely due to the new contribution from Del Taco that made the results look much better.

Meanwhile, on a same-store sales basis, same-store sales were up just 4% at Jack In The Box and 5.2% at Del Taco in fiscal Q4, suggesting meaningful traffic declines when factoring in double-digit pricing.

This is not the end of the world, and the rest of the industry is also seeing traffic declines, but it is a little disappointing, given that the quick-service and fast-casual brands have been outperforming casual dining.

Hence, I expected a little stronger results from Jack In The Box. Continue reading "2 Stocks to Play the Rebound in the Restaurant Sector"

Which Is The Better Restaurant Stock?

It's been a volatile year for the restaurant industry group (EATZ), which found itself down over 29% for the year before its recent recovery. This rebound can be attributed to hopes that inflation has peaked combined with short covering, with the small-cap and mid-cap restaurant names having elevated short interest relative to other industry groups.

Following this rally, some investors might be looking for names that haven’t participated in the recovery. However, underperformance is often related to underlying problems with a business, so it's essential to look at industry trends, sales performance, and other key metrics to ensure one isn't buying into a value trap.

In this update, we’ll look at two restaurant brands with above-average short interest and see which is the better stock to own - Restaurant Brands International (QSR) or Red Robin Gourmet (RRGB).

Scale, Business Model & Unit Growth

From a scale standpoint, Restaurant Brands International (“RBI”) and Red Robin differ materially. RBI has more than 29,000 restaurants under four different brands (Burger King, Tim Hortons, Firehouse Subs, Popeyes Chicken), and Red Robin has 525 restaurants under one brand: Red Robin Gourmet Burgers.

Typically, the smaller-scale company would be the more attractive one assuming it was a high-growth concept and a similar business model. However, Red Robin is inferior in both categories.

Not only has Red Robin seen its store count decline by 10% over the past three years while RBI’s store count has increased 15%, but Red Robin operates a casual dining concept, and its brand is nowhere near as iconic as RBI’s top-rated brands in the coffee, burger, and chicken category, which are Tim Hortons, Burger King, and Popeyes, respectively.

Meanwhile, only 20% of Red Robin’s system is franchised vs. 100% for RBI, meaning that Red Robin is much more sensitive to inflationary pressures, seeing a sharp decline in earnings when it's seeing food and labor costs rise. Continue reading "Which Is The Better Restaurant Stock?"