In this article, we discuss 8 restaurant stocks to avoid as Americans begin to cut spending.
The restaurant industry has possibly been one of the worst casualties of the recession among the consumer discretionary sector. The continuously rising inflation and low consumer sentiment add to the troubles brewing in the restaurant space. Morgan Stanley’s CIO, Mike Wilson, has been bearish on the sector for a while now, citing compressed margins, soft demand amid inflation, and higher costs. Wilson began warning investors against restaurant stocks in April 2022, and these companies have indeed underperformed benchmark indices.
Similarly, Baird analyst David Tarantino said on July 5 that the slowdown in the firm’s casual dining survey data is a major cause for concern, and the short-term outlook for the discretionary sector is not attractive. A latest USDA report suggested that prices for food at home and food away from home categories are projected to surpass historical averages in the current inflationary backdrop.
The Bureau of Labor Statistics reported that the cost of food away from home climbed 7.4% in the 12 months ending May 2022, while the cost of food at home soared 11.9% over the same time. Some restaurant industry officials have said that this might be a positive catalyst for demand trends in this macro environment. However, McDonald’s Corporation (NYSE:MCD) CEO Chris Kempczinski announced in early May that low income consumers now order cheaper menu items or are shrinking their routine order sizes. This reiterates the potential trouble that restaurants could face in the near-term.
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The impact on restaurants varies according to their offerings and customer base. Industry analysts have identified a few restaurants that could land in hot water as Americans begin to cut spending. Some of these names include The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK).
Our Methodology
We selected these restaurant stocks based on recent analyst ratings which suggest that slowed consumer spending has had an impact on these firms. We have arranged the list according to the hedge fund sentiment around the stocks, which was gauged from Insider Monkey’s Q1 database of 900+ elite hedge funds.
Restaurant Stocks to Avoid As Americans Begin to Cut Spending
8. Kura Sushi USA, Inc. (NASDAQ:KRUS)
Number of Hedge Fund Holders: 14
Kura Sushi USA, Inc. (NASDAQ:KRUS) runs a chain of technology-enabled Japanese restaurants in the United States. The company’s restaurants offer the Kura Experience, which is a revolving sushi service model. On July 11, BMO Capital analyst Andrew Strelzik downgraded Kura Sushi USA, Inc. (NASDAQ:KRUS) to Market Perform from Outperform with an unchanged $80 price target. After Kura Sushi USA, Inc. (NASDAQ:KRUS)’s 35% share price gain on July 8 after its Q3 earnings beat consensus estimates, the stock is approaching his price target, the analyst told investors in a research note. However, the analyst contended that while the latest results show Kura Sushi USA, Inc. (NASDAQ:KRUS)’s robust business momentum, he remains concerned about the consumer spending outlook, also adding that most of the casual dining companies in his coverage are already factoring in a recession.
According to Insider Monkey’s data, 14 hedge funds were bullish on Kura Sushi USA, Inc. (NASDAQ:KRUS) at the end of the first quarter of 2022, with combined stakes worth $45.7 million, compared to 13 funds in the earlier quarter, holding stakes in the company valued at $52 million. George Mccabe’s Portolan Capital Management is the leading stakeholder of the company, with 335,127 shares worth about $18.5 million.
Like The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK), analysts are monitoring Kura Sushi USA, Inc. (NASDAQ:KRUS) amid the challenging macro backdrop.
Here is what Roubaix Capital has to say about Kura Sushi USA, Inc. (NASDAQ:KRUS) in their Q4 2020 investor letter:
“Companies like Kura Sushi (KRUS) should benefit from the consumer rebound, but also have their own unique drivers of value over the next 2+ years. In the case of Kura Sushi, the company is one of the newest restaurant concepts in the U.S. market. With just under 30 stores in 2020, the opportunity for growth is vast to a targeted long-term goal of ~300 locations. The product offering is quality food at an affordable price, something that always resonates with consumers. The experience is unique due to the highly automated food ordering, delivery, and a ‘gamified’ plate return system that all operate on automated conveyor belts. In addition to entertainment value, it enables high throughput with minimal staff. This operating model makes the business more readily scalable nationally as it is less dependent on labor. With rents for many attractive locations in decline due to the pandemic, the concept has a good chance to secure good locations at favorable prices. Even at its modest size, Kura has shown the ability to deliver excellent margins. We expect the end of 2021 and the following year to be a breakout for the company, and the modest valuation versus high growth benchmarks provides a roadmap for solid returns for the stock.”
7. BJ’s Restaurants, Inc. (NASDAQ:BJRI)
Number of Hedge Fund Holders: 16
BJ’s Restaurants, Inc. (NASDAQ:BJRI) was founded in 1978 and is based in Huntington Beach, California. The company owns and operates casual dining restaurants in the United States, offering pizzas, beverages, appetizers, entrées, pastas, sandwiches, specialty salads, and desserts. Casual dining traffic has declined overall, as shown by negative sales growth despite restaurants charging higher prices amid inflationary pressures.
On June 16, Citi analyst Jon Tower lowered the price target on BJ’s Restaurants, Inc. (NASDAQ:BJRI) to $24 from $30 and maintained a Neutral rating on the shares. The analyst slashed price targets for multiple company-owned restaurants in his coverage on the back of rampant inflation, higher interest rates, and the consequent effect on market multiples.
Among the hedge funds tracked by Insider Monkey, 16 funds were bullish on BJ’s Restaurants, Inc. (NASDAQ:BJRI) at the end of Q1 2022, up from 7 funds in the prior quarter. Frederick Tucker Golden’s Solas Capital Management is one of the leading position holders in the company, with 235,000 shares valued at $6.65 million.
6. Dutch Bros Inc. (NYSE:BROS)
Number of Hedge Fund Holders: 16
Dutch Bros Inc. (NYSE:BROS) is an Oregon-based company that franchises drive-thru shops. The company sells hot and cold espresso beverages, cold brew coffee products, Blue Rebel energy drinks, tea, lemonade, smoothies, and other beverages. On July 11, Baird analyst David Tarantino downgraded Dutch Bros Inc. (NYSE:BROS) to Neutral from Outperform. The analyst is greatly concerned about the likelihood of discretionary spending deteriorating in the second half of this year and into 2023 and is taking a more conservative approach in terms of comps and EPS estimates for the majority of the names in his restaurants coverage. At this point, he continues to like shares of companies with robust and defensive business models, with solid track records of reporting good relative performance in tough economic conditions, said the analyst, who categorized his downgrade of Dutch Bros Inc. (NYSE:BROS) as “tactical” in light of soaring macro risks.
According to Insider Monkey’s data, 16 hedge funds were bullish on Dutch Bros Inc. (NYSE:BROS) at the end of the first quarter of 2022, up from 14 funds in the last quarter. Richard Driehaus’ Driehaus Capital is a significant stakeholder of the company, with 256,096 shares valued at more than $14 million.
In addition to The Cheesecake Factory Incorporated (NASDAQ:CAKE), Restaurant Brands International Inc. (NYSE:QSR), and Shake Shack Inc. (NYSE:SHAK), Dutch Bros Inc. (NYSE:BROS) is one of the restaurant stocks to avoid as Americans begin to cut spending.
5. The Cheesecake Factory Incorporated (NASDAQ:CAKE)
Number of Hedge Fund Holders: 17
The Cheesecake Factory Incorporated (NASDAQ:CAKE) was founded in 1972 and is headquartered in Calabasas, California. The company owns and operates restaurants throughout the United States and Canada. Piper Sandler analyst Nicole Miller Regan on July 11 lowered the firm’s price target on the stock to $30 from $38 and kept a Neutral rating on the shares. Similarly, on July 8, Wedbush analyst Nick Setyan said that restaurant valuations are “near a trough,” as he believes early signs of inflation have peaked. He lowered the price targets of many restaurants in his coverage sector, slashing the target price for The Cheesecake Factory Incorporated (NASDAQ:CAKE) stock to $38 from $49.
In the first quarter of 2022, 17 hedge funds were bullish on The Cheesecake Factory Incorporated (NASDAQ:CAKE), with combined stakes worth $51.5 million, compared to 18 funds in the earlier quarter, holding stakes in the company valued at $62.4 million. D E Shaw featured as the leading stakeholder of the company, with 315,310 shares worth $12.5 million.
Here is what Baron Small Cap Fund has to say about The Cheesecake Factory Incorporated (NASDAQ:CAKE) in its Q1 2021 investor letter:
“Shares of The Cheesecake Factory, Inc., the operator of casual dining restaurants, were up significantly in the first quarter, as their dining rooms reopened, and business recovered from the depths caused by COVID restrictions. We believe that the company weathered the downturn very well and emerged a stronger, more profitable entity, with an improved outlook. Off Premise sales were robust during the shutdown, and we believe that a good portion of those sales will be retained, so that each restaurant will do more revenue than before. We expect about 15% of restaurants in the casual dining space will be shuttered forever, which will help Cheesecake’s volumes and already strong competitive position. And we are excited about the opportunity for it to grow units, especially in the North Italia and Fox brands, which the company acquired prior to COVID. However, with the stock quadrupling off the bottom and back to its highs of five years ago, and trading at a good multiple of our expectation of near-term earnings, we sold about a third of our position into strength.”
4. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL)
Number of Hedge Fund Holders: 19
Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) is a Tennessee-based company that runs Cracker Barrel stores consisting of restaurants with gift shops. Its restaurants offer breakfast, lunch, and dinner, as well as dine-in, pick-up, and delivery services. On June 27, BofA analyst Sara Senatore downgraded Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) to Underperform from Neutral with a price target of $94, down from $108. From 2012 to 2019, Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) had consecutively outperformed both family dining and casual dining segment averages, noted the analyst, who still sees the company as a “family dining leader”. However, short-term challenges continue to accelerate for its customers and the company’s relative multiple reflects same-store sales growth which will potentially be revised downward.
Among the hedge funds tracked by Insider Monkey, 19 funds were bullish on Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) at the conclusion of the first quarter of 2022, up from 16 funds in the previous quarter. Cliff Asness’ AQR Capital Management is the largest position holder in the company, with 378,238 shares worth $44.6 million.
3. Shake Shack Inc. (NYSE:SHAK)
Number of Hedge Fund Holders: 21
Shake Shack Inc. (NYSE:SHAK) is a New York-based company that owns and licenses Shake Shack (Shacks) restaurants in the United States and internationally. Shacks is known for its hamburgers, hot dogs, and crinkle cut fries. On July 18, Morgan Stanley analyst John Glass lowered the price target on Shake Shack Inc. (NYSE:SHAK) to $48 from $63 and reiterated an Equal Weight rating on the shares. The analyst lowered second half and 2023 estimates across most of his restaurant coverage ahead of Q2 earnings to factor in potentially weak sales as consumers face increasing pressures. On average, he slashed his full service estimates by 5% for 2022 and 11% for 2023 and trimmed fast casual estimates by roughly 2% for both years, the analyst noted.
Among the hedge funds tracked by Insider Monkey, 21 funds reported owning stakes in Shake Shack Inc. (NYSE:SHAK) at the end of Q1 2022, compared to 22 funds in the prior quarter. Joel Ramin’s 12 West Capital Management is the biggest stakeholder of the company, with 1.7 million shares worth $120.7 million.
Here is what Alger has to say about Shake Shack Inc. (NYSE:SHAK) in its Q3 2021 investor letter:
“Shake Shack, Inc. was among the top detractors from performance. Shake Shack is a modern day “roadside” burger stand serving a classic American menu of premium burgers, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. Founded by Danny Meyer’s Union Square Hospitality Group (“USHG”), Shake Shack was created by leveraging USHG’s expertise in sourcing premium ingredients, community building, hospitality, fine dining and restaurant operations. There are currently 339 locations, including restaurants in 32 U.S. states and the District of Columbia and 116 international locations in cities like London, Hong Kong, Shanghai, Singapore, the Philippines, Mexico, Istanbul, Dubai, Tokyo, Seoul and more.
Shares of Shake Shack underperformed in the third quarter due to a slower-than-expected recovery in urban locations and a lower-than-expected margin outlook. Sales at Urban locations were still down 18% year over year in July compared to a 23% decline in May, a modest improvement but less than expectations. We believe a delay in return to work has caused a temporary stalling in the company’s margin recovery, but this should improve as urban mobility increases and tourism from foreigners normalizes. On margins, the company guided to 15%-17% restaurant-level margins, which was below expectations of 18.9%. This margin outlook factored in higher wage inflation, which the company will begin to offset with a 3.5% price increase in the coming months. We believe margin recovery can potentially follow a sales recovery so near-term revenue choppiness may result in margin weakness but we believe the company is well positioned for when the environment normalizes as the pandemic winds down. Ultimately, we believe the pandemic accelerated Shake Shack’s digital efforts, so the company is currently positioned to benefit from a strong online presence. Digital was only 12% of sales in the early months of 2020, but that increased to 47% as of the second quarter of this year.”
2. Restaurant Brands International Inc. (NYSE:QSR)
Number of Hedge Fund Holders: 23
Restaurant Brands International Inc. (NYSE:QSR) operates as a quick service restaurant company that owns brands like Tim Hortons, Burger King, Popeyes Louisiana Kitchen, and Firehouse Subs. Morgan Stanley analyst John Glass on July 18 cut the price target on Restaurant Brands International Inc. (NYSE:QSR) to $52 from $56 and reiterated an Underweight rating on the shares. The analyst slashed estimates for the second half of 2022 and 2023 across much of his restaurant and foodservice distributors coverage ahead of Q2 earnings to price in weakening sales as consumers suffer from rising inflation.
According to Insider Monkey’s data, 23 hedge funds were bullish on Restaurant Brands International Inc. (NYSE:QSR) at the end of March 2022, compared to 24 funds in the previous quarter. Bill Ackman’s Pershing Square is the largest position holder in the company, with 23.8 million shares worth about $1.4 billion.
Here is what Pershing Square Capital Management has to say about Restaurant Brands International Inc. (NYSE:QSR) in its Q4 2021 investor letter:
“QSR is a high-quality business with significant long-term growth potential trading at a highly discounted valuation.
Comparable sales have recovered or are well on their way to recovery.
Tim Hortons Canada improved to a mid-single-digit decline during Q3 relative to 2019.
Burger King U.S. under new leadership and poised to make a recovery.
Burger King International and the Popeyes brand continue to grow well with strong same-store sales growth relative to 2019 levels. As underlying sales trends recover, QSR’s share price should more accurately reflect our view of its business fundamentals.
Management continuing to make investments for future growth.
Digital: G&A investment to modernize digital platforms and loyalty programs.
New Units: Return to historical mid-single-digit unit growth in 2021 and beyond.
Brand Acquisitions: Purchased Firehouse Subs for $1bn in December.
Remains cheap relative to intrinsic value and peers.
Trades at less than 18x our estimate of 2022 free cash flow per share.
The company began repurchasing shares in August.
As underlying sales trends recover, QSR’s share price should more accurately reflect our view of its business fundamentals. QSR’s share price increased 3% in 2021 and has decreased 7% year-to-date in 2022.”
1. Brinker International, Inc. (NYSE:EAT)
Number of Hedge Fund Holders: 27
Brinker International, Inc. (NYSE:EAT) is a Texas-based company that owns, develops, and franchises restaurants under the Chili’s Grill & Bar and Maggiano’s Little Italy names. On July 18, Goldman Sachs analyst Jared Garber downgraded Brinker International, Inc. (NYSE:EAT) to Neutral from Buy, slashing the price target to $28 from $46. The analyst sees higher downward risk for same-store sales trends at both Chili’s and Maggiano’s as the macro environment worsens. Additionally, incremental gains from Brinker International, Inc. (NYSE:EAT)’s digital brands, It’s Just Wings and Maggiano’s Italian Classics, may be difficult to materialize in a “more cost-sensitive environment for consumers,” the analyst told investors. He expects the stock to be volatile as estimates reset.
Among the hedge funds tracked by Insider Monkey, 27 funds were long Brinker International, Inc. (NYSE:EAT) at the end of Q1 2022, down from 35 funds in the preceding quarter. Brett Barakett’s Tremblant Capital is the leading stakeholder of the company, with 1.23 million shares valued at roughly $47 million.
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Disclosure: None. 8 Restaurant Stocks to Avoid As Americans Begin to Cut Spending is originally published on Insider Monkey.
