Hungry for restaurant stocks? MCD is steady, Starbucks volatile
Consumer sentiment has been picking up slowly in the past few quarters, and restaurants have seen traffic increasing. S&P’s restaurant index has gained 54 percent over a two year period. We have seen several restaurant chains grow at a significant pace, but based on the most recently published earnings, growth seems to be slowing down.
The best way to measure how well a restaurant is growing is to compare its same-store sales (SSS) with its peers. Same-store sales are one of the key measures for the industry, defined as the comparison of revenues coming from stores having existed for more than one year. With positive growth in same-store sales, restaurants are increasing revenues without setting up new locations – which is a strong signal.
Looking at a 5-year history of same-store sales for 8 well-established US restaurants (some are located internationally as well) we find several interesting things worth highlighting.
McDonald’s consistency is impressive
With increased competition in the market, you might think McDonald's (NYSE:MCD) would take a hit. Conversely, McDonald’s has shown incredible consistency in growing its same-store sales. For the past 5 years, McDonald’s has grown its same-store sales by 5.5 percent on average, that is pretty impressive! Even in a period where discretionary spending took a significant hit, 2008 and 2009, McDonald’s was still able to grow its same-store sales by 2.3 to 4.3 percent. For comparison, Starbucks’ (NASDAQ:SBUX) same-store sales ranged from negative 9 percent to a positive 4 percent during the same period. The difference is potentially explained by the fact that McDonald's has offered discount menus through different cycles, while Starbucks usually keeps its prices at the same levels over time.
Over the 5 year period, McDonald’s has by far the lowest standard deviation in same-store sales. While McDonald’s standard deviation is 1.5, Starbucks has had the most volatile growth history for the past 5 years.
McDonald’s might not be the fastest growing stock in the industry, but it has grown steadily in the past and is expected to continue going forward. McDonald’s has always made sure to keep its menu ‘fresh’ and keeping up with the changing culture of fast food. Such a stock might be a good choice for those searching for a longer term exposure to the industry.
Starbucks more sensitive to the cycle
As spending on fast (and fast casual) food can be categorized as discretionary spending, we know such spending is likely to decline when times are tough. Some restaurant chains seem to be more sensitive to economic conditions than others. Starbucks for example was massively hit during late 2008 and through most of 2009. People were obviously less willing to spend 5 bucks on a cup of coffee – which is understandable when money is tight!
Since late 2009, early 2010, Starbucks has however regained momentum with growing sales and further expansion of its product offering. Last quarter, however, was a disappointment, with reported earnings came below expectations. Starbucks is obviously a massive brand, but it’s not only their coffee that is thought to be expensive. The stock is priced higher than most of its competitors.
Fast in the past, but slowing down?
Chipotle Mexican Grill (NYSE:CMG), Panera Bread (NASDAQ:PNRA) and Buffalo Wild Wings (NASDAQ:BWLD) are all labeled as ‘high growth’. All three restaurant/bakery chains have grown earnings and revenues at significant pace for the past 4 years (see table 2 below). But is the growth coming to an end?
Based on latest earnings reports from the companies, growth is diminishing. And that holds for the industry in general. Both Chipotle and Buffalo Wild Wings surprised last quarter with lower than expected sales and earnings, respectively. Being a growth stock, missing estimates often leads to a heavy punishment! Both stocks got hammered in the market, on the back of their earning calls – quite possibly an overreaction from the market.
The growth potential is definitely still there as all three companies continue to deliver above average SSS growth. Despite missing sales estimates last quarter, Chipotle did deliver its 8th consecutive quarter of more than 20 percent revenue growth. Similarly, Buffalo Wild Wings is on a hot streak with 5 quarters in-a-row with similar growth in revenues as Chipotle.
So, where to eat/invest?
If you like slow and steady, McDonald’s is your pick. It might seem a bit pricey at 16.4 times FY1 earnings, but you will have a hard time finding a more stable stock within the industry.
If you like fast and furious you should go for Chipotle Mexican Grill or Buffalo Wild Wings. Both stocks have taken a beating from the market following last quarter’s results, where both failed to deliver in line with expectations. Analysts’ expectations for cumulative annual growth, both in revenues and earnings, are high, but be aware that growth comes at a high price per earnings. Table 3 highlights analysts’ expectations of stock price movements over for a twelve month period.