PTLO - Analysts cautious on restaurant stocks ahead of earnings

Ahead of a slate of earnings results due in for restaurant stocks in coming weeks, multiple analysts are advising clients of a sales slowdown and elevated inflation impacts.

On Monday, analysts at Baird, Morgan Stanley, and RBC Capital Markets each voiced concern on the prospects for upcoming earnings reports from restaurant operators and cut estimates across the space amid persistent macro headwinds.

“Our models assume little relief from food costs on the horizon given contracting and

still ongoing geopolitical concerns/commodity volatility,” RBC analyst Christopher Carril wrote on Monday. “On labor, recent company commentary and BLS data suggest that staffing levels have recently improved, and while we think this could potentially result in easing Y/Y wage pressures in the 2H of the year, we are still hearing of pockets of labor pressures.”

In terms of headwinds hitting consumers, the bank’s research suggests a slowdown in spending should be most pronounced in dine-in options as consumers trade-down. Additionally, “check management” by consumers is lessening spending across the space, with lower income consumers also reducing visits to even quick service options like Jack in the Box ( JACK ).

Amid the adverse environment, Carill maintained his ratings on each of the names in his universe, but reduced price targets nearly across the board. Notable price target cuts included the a reduction of his Chipotle Mexican Grill ( CMG ) target from $2000 to $1800, Jack in the Box ( JACK ) from $110 to $84, and Domino’s Pizza from $458 to $440.

Echoing this caution, Morgan Stanley’s John Glass advised that while a “trap door” to sales trends is unlikely, a recessionary spending slowdown is now anticipated. As such, he also trimmed his sales estimates and price targets across the space.

“Data points to increasing risk to sales while inflation persists; here we mark down 2H/23 numbers for much of our universe, though deceleration is likely gradual over several quarters,” he told clients.

Glass cited recent economic surveys on consumer sentiment and persistent inflation issues as key indicators of consumer behavior moving forward, with industry traffic already reflecting some pullbacks.

“Cracks are emerging, with industry traffic relatively soft, and signs of trade down within the menus of certain concepts, particularly those catering to the lower end where discretionary income is under pressure,” he wrote. “We think it's likely this will continue to play out, and consumers will be more restrained in their spending.”

Glass saw the most significant downside for Sweetgreen ( NYSE: SG ), Chipotle Mexican Grill ( CMG ), Darden Restaurants ( DRI ), and Bloomin’ Brands ( BLMN ), in that order, in context of channel checks and macro forecasts. Each names was projected for a 25% or greater decline.

That said, Glass remained optimistic on more defensive names and those stocks able to capitalize on a consumer trade down. To this end, McDonald's Corporation ( NYSE: MCD ) and Yum Brands ( YUM ) were selected as top picks.

That defensive mentality was also forwarded by Baird, which offered the most bullish analysis among earnings previews on Monday. Equity analyst David Tarantino told clients such a posture is particularly important in the near term as earnings reports remain hard to predict.

“We see potential for varied outcomes given the aforementioned indications of segment-level

divergences in same-store sales trends as the quarter progressed,” he advised. “Specifically, our private chain surveys indicated multi-year domestic comp trends held up well throughout the quarter for limited-service chains (quick-service, fastcasual), but decelerated in May-June for casual dining.”

As such, Yum Brands ( YUM ), McDonald’s ( MCD ), Chipotle Mexican Grill ( CMG ), Wingstop  ( WING ) WING, Domino's Pizza ( DPZ ), Portillo’s ( PTLO ), and Darden Restaurants ( DRI ) selected as top picks.

Read more on Barclays’ top defensive picks ahead of a market pullback .

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