There’s a lot of talk about how millennials are changing the consumer marketplace. They’re shopping online, buying quality over quantity, getting everything delivered and even dating online. One industry that is really feeling the pain? The restaurant biz.
We’ve seen it take its toll on McDonald’s Corporation (NYSE:MCD) stock and Chipotle Mexican Grill Inc (NYSE:CMG) stock, as well as others. But these chains are so big that they have the wherewithal to endure the tough times. It’s simply a question of whether they can make the necessary decisions to turn these ships around.
Here we look at seven restaurant stocks to sell that will ruin your appetite because they don’t have the size to sustain a highly competitive and dynamic period in the restaurant sector.
These companies have a number of fundamental and technical challenges to get moving in the right direction. They may well succeed, but now is not the time to go looking for diamonds in the rough.
Restaurant Stocks to Sell: Buffalo Wild Wings (BWLD)
Buffalo Wild Wings (NASDAQ:BWLD) is one of the leading sports-themed restaurant franchises focused on chicken wings. It certainly was a great idea since its launch in Columbus, OH in 1982.
But back then, chicken wings were a poor man’s food — scraps from the birds, so they were very cheap. That meant slapping some sauce on them was easy and made for a great high-margin business. Add beer (and other drinks) to that — another high-margin item — and you have yourself a compelling business model.
The problem now is, wing prices are now at all-time highs due to their massive popularity. And there’s increasing local and national competition.
In late July all this came to a head when BWLD posted bad earnings and lowered guidance for the rest of the year. For a company built on expansion, this is not the kind of news you want to buy into. The recent management tumult does is another short-term factor that hurts BWLD stock as well.
Restaurant Stocks to Sell: Zoe’s (ZOES)
Zoe’s Kitchen Inc (NYSE:ZOES) is a relatively new entrant into the new national trend of fast-casual. Its healthy alternative menu had its high watermark, but is now trying to keep its footing amid a surge of competitors trying to dislodge ZOES stock.
Last week it reported second-quarter earnings, and they were not encouraging. Same-store sales continue to decline. Sales dropped and wages grew. These challenges aren’t unique to ZOES, but they aren’t comforting either.
Management also announced it was slowing expansion of the franchise, which is one of the worst things you can tell Wall Street as a young, growing business.
The culmination of these woes explains why the stock is off 44% year to date. Don’t let the past few weeks of buying fool you, there is more trouble here than you need.
Restaurant Stocks to Sell: Red Rock (RRR)
Red Rock Resorts Inc (NYSE:RRR) is a $2.6 billion (by market capitalization) gaming and resort company with operations in Las Vegas, Reno and on Native American lands. OK, it’s not a pure-play on the restaurant business, but the company offers up everything from Italian to Japanese to Mexican restaurants in casual, buffet and fine-dining settings.
And while it’s food-and-beverage business isn’t on the decline, investors can’t help but notice that the once-sterling casino industry looks a bit dingy of late. Indeed, many casinos in the U.S. have found it a bit slower going in recent years, and 13% growth in Red Rock’s food segment isn’t enough to offset the risk of operating a casino stateside. The casino companies that are still making money now generally have operations in Macau and other Asian cities, in addition to their U.S. presence.
In early August, RRR announced second-quarter earnings. While revenue was decent, it reported a net loss for the quarter, which isn’t good. Supposedly it had to do with land-lease deals. There is a lawsuit regarding these deals that have been initiated as well.
Regardless, RRR stock is off 10% in the past month and the timing is not looking good right now.
Restaurant Stocks to Sell: Brinker (EAT)
Brinker International, Inc. (NYSE:EAT) stock has one thing going for it, a 4.7% dividend yield. Unfortunately, it’s so high because the stock has dropped 35% so far this year. EAT owns Chili’s and Maggiano’s franchises.
And both are stuck in the no-man’s land of mid-size chains. They have menus that are built on a demographic that is making different choices but they can’t pivot to a younger demographic yet because they aren’t spending a lot of money in their restaurants yet.
Both Chili’s and Maggiano’s are seeing traffic slow, quarter after quarter. And shifting from a “plenty of food cheap” concept to a “less food, more quality” menu is a tough sell.
Until EAT figures out how to manage this transition, it’s better to stay away.
Restaurant Stocks to Sell: Sonic (SONC)
Sonic Corporation (NASDAQ:SONC) stock is off about 18% in the past 3 months. That’s not great, but given some of the other stocks in the sector, it’s more disappointing than tragic.
While its larger competitors like McDonald’s and Burger King have found a way to pivot in recent quarters, the challenge is now on SONC to do the same.
It’s drive thru format is interesting, and its menu selection is different from the big burger joints. But the question is, whether it can continue down the same road and still make it work.
For now, the answer isn’t positive. And its competition in the unique burger joint space is getting more and more crowded.
Restaurant Stocks to Sell: Chuy’s Holdings (CHUY)
Chuy’s Holdings Inc (NASDAQ:CHUY) is a chain of Tex-Mex restaurant serving up its own unique slice of Austin, TX in 19 states now. Unfortunately, CHUY stock is off nearly 40% year to date and things don’t look good.
But it’s not mismanagement or bad business decisions. It’s simply that the hot Tex Mex trend of huge burritos and bowls of meat are no longer as in demand as they used to be.
CHUY reported earnings in early August and the numbers confirm it. So did CHUY management when it tempered guidance for the rest of the year. This is a tough game, expanding its footprint while trying to maintain and grow sales at existing locations.
If it succeeds, there will be plenty of time to jump in, but not now.
Restaurant Stocks to Sell: Luby’s (LUB)
Luby’s, Inc. (NYSE:LUB) is the owner of burger restaurants Cheeseburger In Paradise and Fuddrucker’s as well as Luby’s cafeterias. Luby’s has been around since its start in San Antonio in 1947. Its two newer brands were on the boutique burger fad long before it got to the fever pitch it’s at now.
But weakening same-store sales and lower revenue in its FYQ3 numbers released in July are evidence that even niche brands that have been around a long time are not immune to broader market forces.
LUB stock is off almost 35% year to date. While LUB has seen worse over its long history, this sector needs to put in a bottom before you consider stepping in.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
