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Restaurant stocks may have a tailwind in their favor to help offset some of the concerns over consumer spending trends.
The Consumer Price Index report for January indicated a 3.9% year-over-year increase in the core rate, compared with the +3.7% expected by economists and the +3.9% pace seen in December. While the food at home category saw just a 1.2% increase from a year ago, the food away from home category outpaced broad inflation with a 5.1% increase for the month. On a two-year basis, food away from home CPI growth decelerated slightly in January from the pace in December, but was still up a bristling 13.7%.
What may be even more relevant to the restaurant sector is that the spread between CPI and the producer price index remains very elevated at 7.3 percentage points (chart below from Bank of America).
A positive CPI-PPI gap is a margin booster for some restaurant companies depending on their pricing power and the commodity hedges in place. Analysts think that if the CPI-PPI spread continues to be relatively wide, there could be some more earnings surprises in the restaurant sector down the road
The restaurant sector has seen some breakout stars this year. Shake Shack (NYSE:SHAK) is up 33% on year-to-date basis. The chain reported system-wide sales rose 21.4% in Q4 to $442.1M. Same-shack sales were up 2.8% from a year ago during the quarter, which was enough to top the consensus expectation of +2%. On the expense side of the ledger, food and paper costs fell to 29.1% of sales from 29.5% a year ago and labor costs fell to 28.5% of sales vs. 28.9% a year ago. Occupancy and related expenses fell back to 7.7% of sales from 7.9%. Total expenses were 100.5% of sales in Q4 vs. 102.6% a year ago. Shack-level operating profit was $54.6M, or 19.8% of Shack sales vs. 19.0% a year ago.
Other big gainers this year in the restaurant sector include FAT Brands (FAT) +48, Kura Sushi (KRUS) +37%, CAVA Group (CAVA) +29%, Wingstop (WING) +26%, First Watch Restaurant Group (FWRG) +22%, Potbelly (PBPB) +20%, and Texas Roadhouse (TXRH) +21%.
Restaurant stocks that Seeking Alpha analysts have been positive on recently include Domino’s Pizza (DPZ) (analysis), Jack in the Box (JACK), Red Robin Gourmet Burgers (RRGB) (analysis), and Yum! Brands (YUM). Based purely on quantitative analysis, Brinker International (EAT) and Darden Restaurants (DRI) top the list of attractive stocks in the restaurant sector.
IPO watch: Fresh off producing one of the Super Bowl commercials that created the most social media buzz, Dunkin’ Donuts could be publicly traded again as part of Inspire Brands, sources tipped Bloomberg. Private equity firm Roark Capital is reported to have held preliminary discussions with potential advisers about a listing of Inspire Brands in late 2024 or 2025. Inspire Brands owns the Dunkin’ Donuts, Arby’s, Baskin-Robbins, Buffalo Wild Wings, Sonic, and Jimmy John’s restaurant chains. Roark Capital also owns Focus Brands, which includes Auntie Anne’s, Cinnabon and Jamba. On top of all those investments, the P-E firm also has a stake in The Cheesecake Factory (CAKE).