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7 Restaurant Stocks to Avoid Amid Industry Woes & Harvey Blows

Zacks Equity Research

Hurricane Harvey's devastation has ranged far and wide, with heavy rainfall and flooding continuing to hit parts of Texas — particularly Houston — and Louisiana.

Houston is the fourth most populous city in the United States and represents about 2% of the country’s total restaurant presence. In fact, according to the country’s official website, Houston residents are more likely to eat out than any other city in the country.

Notably, the impact of the storm on restaurant sales could last for a long period now, depending on the severity of property damage. As outlets remain closed for repairs, workers are displaced, or residents focus their funds on rebuilding their homes, restaurant sales will largely suffer.

Per a Canaccord analyst, as reported in a CNBC article, "In some cases, we think the lingering effects will carry well into September and likely into Q4."

Harvey Adds to the Already Soft Industry Backdrop

Over the last few quarters, the U.S. restaurants space has not been too enticing for investors. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out, which resulted in low consumption. This is because along with wage growth inflation is also on the rise, which translates to lower real income and thus less disposable income.

Moreover, as consumers demand high-quality products at lower prices, it is pushing grocery stores to decrease their food prices in order to remain competitive. This, in turn, is resulting in a bigger gap between food-at-home and food-away-from-home indices.

Consequently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative same-store sales for the restaurant industry as a whole, thereby continuing the somber mood.

Thus, the Zacks Restaurants industry ranks in the Bottom 9% out of more than 250 industries. The industry has also underperformed the broader S&P 500 market in the last year, recording a growth of 5.8% while the market grew more than 13.5%.

Moreover, while the industry delivered an EPS growth of negative 2.27% year over year in second-quarter 2017, the same is projected to increase 3.9% in the current quarter, once again less than S&P 500 market’s projected growth of 9.6%.

Stocks You Should Avoid Right Now

The combination of these above mentioned factors is likely to spell trouble for the restaurant stocks listed below:

Jack in the Box, Inc. JACK has 70% of its restaurants in the Texas and California markets and thus is highly prone to damages from Harvey along with ongoing macro woes. The company has witnessed its Zacks Consensus Estimate for current-quarter and current-year earnings revise downward by 7.1% and 3.6%, respectively, over the past month. While analysts were already pessimistic about the stock’s prospects, the recent storm could make it worse. Currently, the company has a Zacks Rank #5 (Strong Sell).

About 41% of Chuy’s Holdings, Inc.’s CHUY restaurants are located in Texas, thus exposing it largely to the region’s conditions. The stock has seen current-quarter and current-year earnings estimates revise downward by 14.3% and 4.6%, respectively, over the past month. It currently has a Zacks Rank #4 (Sell).

As Buffalo Wild Wings, Inc. BWLD continues to grapple with rising chicken-wing costs coupled with higher promotional activity and a soft consumer spending environment, Harvey adds to its list of woes. With around 100 stores around Texas (about 9% of its total system), the stock’s near-term prospects look bleak. As it is, analysts have revised the stock’s current-quarter and current-year earnings downward by 32.5% and 16.1%, respectively, over the past two months. Also, the company currently carries a Zacks Rank #5.

Sonic Corp. SONC is another Zacks Rank #4 company with about 50 locations in Houston itself and more than 960 drive-ins around Texas. Per the company’s fiscal third-quarter conference call, management had already lowered Sonic’s same-store sales expectation to a negative 2.5% in fiscal 2017 and expects its adjusted EPS to decline in the range of 2-5%. Harvey is expected to make matters even worse. Moreover, the Zacks Consensus Estimate for the current fiscal year projects a sales decline of 20.9% from the prior year.

The Cheesecake Factory Inc. CAKE has nearly 9% of its system exposed to Texas markets and that intensifies its already prevailing problems. The company recently slashed its EPS and comps guidance outlook for fiscal 2017, keeping in mind its low traffic trend. The Zacks Consensus Estimate for current-quarter and current-year earnings have also lowered 12.9% and 7.3%, respectively, over the past two months. Cheesecake Factory currently carries a Zacks Rank of 5.

BJ’s Restaurants, Inc. BJRI is another Zacks Rank #5 company with about 18% of its restaurants in Texas. The company already planned to slow down its unit openings in 2017, which is expected to dent sales growth. Moreover, BJRI’s current-quarter and current-year estimates have moved down 7.1% and 11.1%, respectively, over the past two months.

Brinker International, Inc.’s EAT international comps have already been under pressure due to a slowdown in some of the markets it operates in. The situation at domestic lands has been tight too due to a challenging retail environment in the restaurants space. Now, the company’s huge exposure to Texas markets is expected further weigh on its performance. Brinker has a Zacks Rank #4 and its current-quarter and current-year earnings estimates have moved down 10% and 2.5%, respectively, over the past two months.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Bottom Line

The amalgamation of consumer spending uncertainty on dining out, Harvey’s aftermath and increased labor expenses due to Obamacare is expected to pressurize the restaurant industry in general and the aforementioned stocks in particular.

Although by implementing the right strategies the companies can overcome these hurdles to some extent, it would be prudent for investors to steer clear of these as of now.

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The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
Sonic Corp. (SONC) : Free Stock Analysis Report
Buffalo Wild Wings, Inc. (BWLD) : Free Stock Analysis Report
BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
Jack In The Box Inc. (JACK) : Free Stock Analysis Report
Chuy's Holdings, Inc. (CHUY) : Free Stock Analysis Report
Brinker International, Inc. (EAT) : Free Stock Analysis Report
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