Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Restaurant Stocks – Not on the Value Menu: Panera Bread Co (PNRA), Starbucks Corporation (SBUX)

Page 1 of 2

Several of the more fashionable restaurant stocks have been phenomenal investments during the recent cyclical bull market.  Investors in these stocks have been aided by the powerful trifecta of positive same store sales, increasing operating margins, and strong new store growth.  However, at least two of these tailwinds have a finite life and this does not take into account any operational missteps regarding same-store sales growth.  Below are four risks that make owning restaurant stocks at today’s lofty valuation a dangerous proposition.

Panera Bread Co (NASDAQ:PNRA)Risk 1:  Operating Margin Expansion is in the Final Innings

The massive expansion in operating margins is evidenced in the chart below.

These don’t have to collapse for consensus bullish estimates to fall short.  Panera Bread Co (NASDAQ:PNRA) has moved operating margins from 8.7% to 13.3% in just five years.  This has helped fuel five consecutive years of at least 20% earnings-per-share growth.  The outlook according to their 2013 guidance is FLAT TO UP 50 BASIS POINTS.  Simply put, operating margin expansion will slow considerably in upcoming years.

Chipotle Mexican Grill, Inc. (NYSE:CMG) leads most restaurant peers with 16% margins whereas many others, both growing and mature, reside in the 8-16% range.  While Chipotle’s margins improved during 2012, they contracted in the fourth quarter due to rising food costs.  It remains difficult to see how the company will be able to generate the operating leverage that fueled substantial EPS growth and a 58% annual return over the last four years.

Risk 2:  Same-Store Sale Growth Will Moderate

This chart shows quarterly same-store sales since the first quarter of 2009.

Several things are apparent in this chart.  First, the +10% SSS growth that Chipotle Mexican Grill enjoyed clearly couldn’t persist.  It was amazing that they were able to do it for seven consecutive quarters.  That sent the stock soaring to $440 per share.  Investors should have realized that lapping these superb growth numbers made continual double-digit growth impossible.  This is exactly what happened and the stock now resides more than 25% below its 2012 high.

Second, Starbucks Corporation (NASDAQ:SBUX) is in a similar spot having put in nine consecutive quarters of at least 7% same-store sales growth before dipping ever so slightly in the last several quarters.  The company has demonstrated a wonderful operational turnaround with brand extensions and expanded menu offerings.  Can they keep this up?

Lastly, The Cheesecake Factory Incorporated (NASDAQ:CAKE) again lags several peers on operational performance.  A premium valuation doesn’t appear to be supported given subpar margins and modest, albeit positive, same-store sales growth.

Risk 3:  New Store Growth- Law of Diminishing Returns

The graph below shows quarterly new store growth annualized.  The Cheesecake Factory was left off given little to no new store growth in the last several years.

This has been the third leg to Chipotle’s superb earnings-per-share growth story.  But can it persist?  They are forecasting new store growth of around 12% in fiscal 2013 which would be lower than recent results.  Their store count now stands at 1410, the same spot that Panera Bread (NASDAQ:PNRA) sat during 2010.  Panera Bread now has just over 1600 stores.  Will Chipotle’s new store count mirror that of Panera Bread after they reached 1400 stores?  If so, then new store count will start to drift from 18% to 12% to 6% relatively quickly.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!