Analysts expect restaurant chains to report a gain of 2.8% in SSS for the third quarter of 2012, down slightly from year-earlier levels, as companies in the group prepare to grapple with the effects of this summer’s drought on their cost structures.
Whether they are dishing up cheesecake and chicken wings or just doughnuts, fast food chains and restaurants expect the drought to take a toll on their earnings, revenues and in some cases their same-store this year, even as companies in this group prepare to report what appears likely to be at best a modest growth in same-store sales for the third quarter of 2012. The Restaurant Same Store Sales Index, which includes 35 restaurants in the casual dining, quick service, and fine dining categories, is forecasting that SSS for the period will rise only 2.8%, down from the 3.5% gain recorded during the same period last year.
Casual dining restaurants, including chains like CEC Entertainment Inc. (CEC.N) and Darden Restaurants Inc. (DRI.N), appear to be struggling far more than are quick service restaurants such as Chipotle Mexican Grill (CMG.N) and Yum! Brands (YUM.N). Analysts expect the latter group to post a 3.4% increase in SSS; while that’s below the 4.3% SSS advance recorded in the year-earlier period, it’s far more impressive than the forecast gain of only 1.0% for the Casual Dining group. (The latter figure compares to 1.2% gain in SSS during the third quarter of 2011.) Leaving out the impact of McDonald’s (MCD), the Quick Service group is expected to post a 4.2% advance in SSS for the quarter, unchanged from year earlier levels. Analysts expect McDonald’s to report a sharp decline in the rate of growth in SSS, to only 2.2% in the third quarter of 2012 from 4.4% reported in the year-earlier period.
References to the drought and its potential impact on costs and the bottom line at restaurants of all kinds popped up frequently when management of these businesses discussed their second-quarter results earlier this summer. “Obviously, we’re concerned about the underlying corn cost increases,” Steve Hare, CFO at Wendy’s Co. (WEN.O), told investors last month. Beginning in the first quarter of 2013, Hare said he expects to see the impact of the drought spill over into the price of chicken as well, thanks in part to the higher price of corn, and create “some negative cost pressures” for the restaurant chain. The company already is on pace to report earnings that fall slightly short of analysts’ expectations; its Predicted Surprise today stands at -2%.
An analyst whose reports are monitored by StarMine believes that Cracker Barrel Old Country Store (CBRL.O) is one of the restaurant chains most likely to feel a big impact on its bottom line from the drought because of its sensitivity to movements in commodity prices. Larry Hyatt, the company’s chief financial officer, confirmed that he expects commodity inflation to be “stubbornly high, with an estimated range between 4% and 6%” into next year. Nonetheless, analysts expect the restaurant chain to report a healthy 3.2% increase in SSS for the third quarter, a big improvement over the 1.6% decline in SSS it reported for the same period in 2011.
While Buffalo Wild Wings (BWLD.O) management also voiced concern about the impact of the drought on commodity prices earlier this summer, the company’s SSS, at least, appear likely to be among the industry’s most robust. Analysts expect the casual dining chain to post a 6% jump in SSS for the period, greatly outpacing most of its rivals. Nonetheless, the increase in commodity costs will still take a toll on the company’s bottom line; analysts have been trimming their earnings forecasts for the chain to reflect what they expect to be higher costs for its signature chicken wings, as well as a slower pace of sales growth during the second quarter. Those analysts have applauded measures taken by management to boost pricing, by 1.2% in July and another 1% in September, as part of an effort to pass on its higher costs to customers.
On the flip side of the equation, analysts expect that CEC Entertainment Inc. will post the weakest SSS figures from those companies within the Restaurant universe. CEC may see same-store sales decline by 3.5% for the third quarter, in what would be its fifth straight quarter of negative growth, as the chain’s restaurants have remained weak. Unsurprisingly, analysts have trimmed their earnings projections for the third quarter based on this SSS forecast, and a lack of visibility for the second half of 2012 in general.
For more insight into what’s cooking in the restaurant sector, and the complete preview of third-quarter same-store sales for both Casual Dining and Quick Service companies, please take a look at this report from our analyst JharonneMartis-Olivo.
