In this article, we discuss 3 restaurant stocks to avoid as Americans begin to cut spending. If you want to see more stocks in this list, check out 8 Restaurant Stocks to Avoid As Americans Begin to Cut Spending.
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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