5 Restaurant Stocks to Avoid
Once in a while a company will give its investors a clear signal that it may be time to sell. In the restaurant industry, there's no clearer sign than declining same-store sales, or "comps," a year-over-year comparison of sales at locations that have been open for at least 12 months. If an eatery can't increase sales organically in this way, it has little business opening new locations. And if it doesn't open new locations, its stock is ultimately headed in only one direction: down.
Because most publically traded restaurant chains have reported earnings for the second quarter, we now know which of them do and do not pass this litmus test. The best performers, like Chipotle Mexican Grill and Panera Bread, recorded comps in the high-single-digit to low-double-digit range. The worst performers, and the five of interest here, recorded negative same-store sales figures.
Same-Store Sales (MRQ)
|Ruby Tuesday (NYS: RT)||Ruby Tuesday||(4.6%)||$327 million||$48 million|
|CEC Entertainment (NYS: CEC)||Chuck E. Cheese||(2.4%)||$397 million||$17 million|
|Darden Restaurants (NYS: DRI)||Red Lobster, Olive Garden, The Capital Grille, Bahama Breeze, Seasons 52, and others||(1.5%)*||$2,170 million||$74 million|
|Bob Evans Farms (NAS: BOBE)||Bob Evans Restaurant, Mimi's Cafe||(1.3%)*||$136 million||$36 million|
|DineEquity (NYS: DIN)||IHOP & Applebee's||(0.5%)*||$1,640 million||$32 million|
Sources: Quarterly earnings statements and Yahoo! Finance. MRQ = most recent quarter.*Calculated as a weighted average of independent division sales.
As you can see, Ruby Tuesday takes the proverbial cake when it comes to the worst same-store sales performance, notching between 4% and 5% declines in both the most recent quarter and its 2012 fiscal year. According to its founder and CEO, Sandy Beall: "Our same-store restaurant sales for [the quarter ended June 5, 2012,] were roughly in line with our expectations as we pared back our level of couponing while continuing to test our television marketing programs." The one bright spot for the company is its recent acquisition of Lime Fresh, the popular Miami-based Mexican grill that competes with the likes of Chipotle and Qdoba.
The proprietor of Chuck E. Cheese, CEC Entertainment, comes second with a quarterly decline of more than 2%. On top of this, moreover, the chain is experiencing significant bottom-line pressure due to higher cheese, rent, and marketing costs. According to its CEO: "We are obviously not pleased with our first half of the year comparable store sales results and the impact on earnings." If I were a CEC shareholder, I'd second this displeasure.
Following closely behind is the restaurant conglomerate Darden Restaurants, the operator of Red Lobster and Olive Garden, among others. Unlike the preceding executives, Darden's CEO, Clarence Otis, was significantly more upbeat, citing the company's 10% year-over-year growth in net income, derived largely from the addition of 100 restaurant locations in the intervening 12 months. For anyone enticed by this, however, I'd urge you to peruse Darden's balance sheet, and particularly its massive $2.2 billion debt relative to its measly $74 million in cash and equivalents.
Finally, Bob Evans and DineEquity -- the latter owns and operates the IHOP and Applebee's chains -- round out the list. Bob Evans' results are largely the consequence of negative 3% comps in its Mimi's Cafe division, while DineEquity's are the result of negative 1.4% comps in its IHOP locations.
Foolish bottom line
At the end of the day, given these companies' disappointing comps, I encourage you to closely monitor their stocks using our free stock-tracking service, My Watchlist. Doing so will help you avoid being left standing without a chair when the music stops. In addition, to download a free report revealing three companies that our analysts are calling "middle-class millionaire-makers," click here now.
The article 5 Restaurant Stocks to Avoid originally appeared on Fool.com.Fool contributor John Maxfield does not own shares in any of the companies mentioned above. The Motley Fool owns shares of Darden Restaurants. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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