Recovery in the housing industry seems to be keeping diners at home around the kitchen table. The Restaurant Same Store Sales Index forecasts a sluggish 2.0% increase in Q3 2013, far below the healthy 3.1% advance recorded in the same period last year. However, the exception seems to be the lower-priced dining options.
The Quick Service sector ex-McDonald’s (MCD) appears to be the strongest sector for Q3 2013 at a 3.8% gain, still way below the 5.3% increase in Q3 2012. This group of restaurants is expected to have a hard time matching last year’s strong results.
The housing industry has improved, encouraging shoppers to buy big ticket items for the house. Diners may be staying home more, but they didn’t skip their cup of joe and a doughnut. This helped boost sales at Starbucks and Krispy Kreme Doughnuts.
Coffee doesn’t cost much and neither does a fast-food meal. As a result, the Quick Service group is outperforming the somewhat higher-priced Casual Dining restaurants. Consequently, the overall Q3 2013 2.0% SSS growth represents a decline even from the Q2 2013 SSS of 2.6%.
Q3 2013 restaurants SSS — slower growth
Source: I/B/E/S estimates.
Note: Aggregate mean data is revenue weighted.
Quick Service performers
The overall Quick Service sector has a 2.7% SSS estimate, below the 3.8% pace set in Q3 2012. The group contains some of the strongest performers in the index.
Starbucks Corp. has the strongest comp estimate in our restaurant universe, at 6.6%, slightly below its Q3 2012 result of 7.0%. In addition to growing same store sales, SBUX earnings are expected to rise by nearly 60% this quarter. The company scores a StarMine Earnings Quality Model score of 91 out of 100, indicating that its earnings are likely to have come from sustainable sources.
Similarly, Krispy Kreme Doughnuts Inc. has a robust 5.1% SSS estimate vs. 6.8% a year-ago. Still, McDonald’s has the biggest weighting in the index. Excluding the latter, the sector improves to a 3.8% SSS estimate, below the 5.3% gain seen in Q3 2012. MCD also has the lowest estimate in the sector at 1.0%, due to its Asia Pacific Middle East and Africa group’s -0.1% SSS.
Meanwhile, Yum! Brands is expected to post a 1.5% SSS estimate, even though the company’s mainland China business is expecting a -10.1% SSS decline.
Casual Dining outlook
The estimate for the Casual Dining group is currently -0.2% for Q3 2013, weaker than the 1.3% result posted in Q3 2012. Excluding Darden Restaurants Inc., the sector improves to 0.4%, also below its 2.1% Q3 2012 result. Ruby Tuesday Inc. and Darden Restaurants appear to be the weakest in the Casual Dining group, with SSS estimates of -8.0%, and -1.3%, respectively. Ruby Tuesday is struggling to grow sales, given consumer reluctance to spend and increased competition.
Meanwhile, weakness at Darden Restaurants stems from its Olive Garden division, which is expected to see same store restaurant sales decline by 1.9%. The company has an EPS estimate of $0.70 for the current quarter, but a five-star analyst with a very accurate rating believes it could be as low as $0.64.
The bright spot in the sector is Texas Roadhouse, with a 3.2% SSS estimate. The restaurant chain increased menu prices and traffic increased. Texas Roadhouse has a StarMine SmartHoldings score of 92 out of 100, meaning that the stock shares fundamental factors with other companies that are widely held by institutions. This similarity increases that chance that institutional portfolio managers will consider buying or increasing their holdings.
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