How Skyrocketing Inflation is Affecting the Restaurant Industry
There is no escape from the inflationary environment right now. Inflation has reached a 40-year high due to continued rises in the prices of essentials like gas, food and rent. March the consumer price index rose 8.5% year-on-yearshowing the fastest pace since the end of 1981. Even after excluding volatile food and energy prices, underlying prices rose 6.5% in March.
Inflation is undoubtedly impacting the restaurant industry due to the basic food costs that restaurants incur. From February 2021 to February 2022, food prices jumped 7.9%which was its biggest annual jump since 1981. In the current inflationary environment and labor shortages, the restaurant industry’s current position and strategies might be interesting to examine.
I will be analyzing the top Dine Brands Global, Inc. restaurant stocks (DIN), Bloomin’ Brands, Inc. (BLMN) and Chuy’s Holdings, Inc. (CHUY) in this regard.
Inflation: a disaster for the restaurant industry
The COVID-19 pandemic has resulted in the closure of restaurants to combat the spread of the virus. However, after the easing of restrictions, the the industry has made a comeback. Out-of-home food spending reached pre-pandemic levels in March 2021 and a record high in July 2021. Additionally, out-of-home food spending remained strong in December, 4.4% above December 2019.
As food and labor costs hit record highs, restaurants are under pressure on already thin margins. However, frequent price increases have steered them towards menu engineering to stay profitable. Large restaurant chains are better placed to strategically raise prices. Additionally, hedging with futures allows them to buy ingredients before their prices rise further.
The USDA expects menu prices for out-of-home catering will increase from 5.5% to 6.5% This year. Restaurants are fighting this by streamlining their menus and highlighting the dishes that help them stand out better.
Performance of industry leaders
The catering giant McDonald’s Corporation (MCD) has a market cap of $182.77 billion. Its stock has gained 2.3% over the past month, while the S&P 500 has fallen 7.9% over the same period. Chipotle Mexican Grill, Inc. (GCM), with a market cap of $41.29 billion. CMG’s stock has gained 9.7% in the past three months compared to the broader market’s 3.3% decline.
While discussing the company’s current economic situation, CMG Chief Financial Officer Jack Hartung said that despite inflation, the company still has pricing power. He said: “I would say that over the years we’ve lagged a bit in raising prices, and now we’ve done it intentionally.”
Best Restaurant Stocks to Buy Now
As the American restaurant industry is expected to reach $898 billion in sales this year and back to the pre-COVID trajectory, we think the following restaurant stocks are solid bets.
Dine Brands Global, Inc. (DIN)
DIN operates, owns and franchises full-service restaurants. The company operates through the five major segments of Applebee’s franchise operations; Franchise operations of the International House of Pancakes (IHOP); rental operations; financing operations; and Operation of company-operated restaurants.
For the fiscal fourth quarter ended Dec. 31, DIN’s total revenue increased 17.1% year-over-year to $229.63 million. Adjusted net earnings available to common shareholders increased 251.2% from the prior year quarter to $22.50 million. Adjusted net earnings available to common shareholders per share improved 238.5% over the same period a year earlier to $1.32.
The consensus EPS estimate of $7.13 for fiscal 2023 indicates a 16.1% year-over-year increase. Similarly, the consensus revenue estimate for the same year of $979.33 million reflects a 4% improvement over the prior year. Additionally, DIN has an impressive surprise earnings history, as it has exceeded consensus EPS estimates in each of the past four quarters.
Over the past three months, the stock has gained 11.9% to close yesterday’s trading session at $72.43.
DIN’s strong fundamentals are reflected in its POWR Rankings. The stock has a value rating of B, in line with its forward non-GAAP C/E multiple of 11.82, 4.2% lower than the sector multiple of 12.34. The stock also has a B rating for quality, consistent with its trailing 12-month EBITDA and Leveraged FCF margin of 26.57% and 20.59%, 110.34% and 326.21% higher than their respective industry averages of 12.63% and 4.83%. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
In stock 45 Restaurants industry, it is ranked #13. The industry is rated B.
Click here to see additional POWR ratings for DIN (Growth, Momentum, Stability, and Sentiment).
Bloomin’ Brands, Inc. (BLMN)
BLMN has casual, upscale and fine dining restaurants, operating in both major US and international segments. The restaurant portfolio includes four main concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar.
BLMN’s total revenue increased 28.9% year over year to $1.05 billion in the fourth fiscal quarter ended Dec. 26. Adjusted net profit and adjusted EPS were $56.88 million and $0.60, up 2,845.4% and 2,900% from the prior year period.
The Street EPS estimate for the quarter ended March 2022 of $0.74 indicates a 2.8% year-over-year increase. Similarly, Street’s revenue estimate for the same quarter of $1.13 billion reflects a 14.3% increase from the year-ago quarter. Additionally, BLMN has exceeded consensus EPS estimates in each of the past four quarters, which is impressive.
The stock has gained 9.7% over the past three months and 3.2% over the past month to close yesterday’s trading session at $21.36.
It’s no surprise that BLMN has an overall rating of B, which translates to Buy in our POWR rating system.
BLMN has an A rating for value. Its price-to-forward ratio justifies it at 0.45, 51.9% below the industry average of 0.93x. Its forward price/cash flow multiple of 4.81 is 53.2% below the industry average of 10.27. The stock also has a B quality rating, in line with its 12-month ROE of 195.42%, 1,019.57% above the industry average of 17.45%. It is ranked #9 in the restaurant industry.
To view additional POWR ratings for Growth, Momentum, Stability and Sentiment for BLMN, Click here.
Chuy’s Holdings, Inc. (CHUY)
CHUY owns and operates full-service restaurants under the Chuy name in the United States. The company offers a Mexican and Tex-Mex inspired menu and dishes as well as homemade sauces and allows customers to customize their orders.
For the fiscal fourth quarter ended Dec. 26, CHUY’s revenue increased 25.4% year-over-year to $98.67 million. Adjusted net earnings improved 104.2% from the same period a year earlier to $7.89 million, while adjusted net earnings per common share were 0.40 $, up 110.5% over the prior year period.
Analysts expect CHUY’s EPS to rise 18.3% year-over-year to $1.68 for fiscal 2023. Similarly, Street expects revenue from the same year increased by 12.4% compared to the previous year to reach 483.54 million dollars. CHUY has beaten consensus EPS estimates in each of the past four quarters.
Shares of CHUY have gained 2.2% over the past three months to close yesterday’s trading session at $25.13.
This promising outlook is reflected in CHUY’s POWR ratings. The stock has an overall rating of B, which is equivalent to Buy in our proprietary rating system.
CHUY has a value rating of B, in line with its forward Price/Book multiple of 1.69, 29.6% below the industry average of 2.39. The stock also has a B rating for quality, which is justified by its 12-month EBITDA margin and leveraged FCF margin of 15.06% and 10.71%, which are 18.75% higher. and 122.73% to their respective industry averages of 12.68% and 4.81. %. It is ranked #7 in the same industry.
In addition to the POWR ratings we have shown above, one can see the additional CHUY ratings for Growth, Momentum, Stability, and Sentiment. here.
DIN shares were trading at $74.56 per share on Thursday afternoon, up $2.13 (+2.94%). Year-to-date, the DIN is down -1.06%, compared to a -9.51% rise in the benchmark S&P 500 over the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. After…