Restaurant sales decline again -- is it time to buy?
According to the U.S. Census Bureau's September retail sales report, restaurant sales have declined yet again through the summer months. Restaurants, bars, and the like have hit a soft patch as the average American family opts to curb its eating-out bill. As a result of the negativity, many stocks in the food and drink industry have been clobbered.
What the sales report actually said
During September, sales fell 1.8% compared with August. That was on top of a 1.6% decline in July. The summer weakness has investors worried, and many restaurants have echoed these concerns. From fast food to full service establishments, foot traffic has been slowing down.
While the month-over-month numbers look dire, often overlooked is the year-over-year trend. Through the first nine months of 2016, sales at restaurants and drinking establishments are up 6.4% from last year. During September alone, sales were up 7.5% year-over-year.
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Far from being a dire situation, average sales gains pushing the high single digits would indicate a banner year for food services. The bigger picture trend indicates an increasing willingness on the part of families to go out to eat rather than cook at home.
But dining trends, much like overall retail trends, have been favoring a combination of high quality and convenience. Price-conscious diners are demanding more bang for their buck, be it from fresher food, bigger portions, or a unique dining experience.
Some restaurant stocks have been punished by the market more than others, but growth has nonetheless continued. Let's look at a few names.
Zoe's Kitchen(NYSE: ZOES) offers up a fresh menu of Mediterranean-inspired dishes in a fast casual environment. Still a small chain with only 191 locations, the company has been averaging revenue growth of over 20% since becoming a public company in early 2014. This feat has been accomplished from nearly 40 new location openings in the past year and same-restaurant sales averaging 5% this year.
The stock recently pulled back, though, as foot traffic isn't growing as much as investors had hoped earlier in the year. Zoe's shares are now down over 20% year-to-date and nearly 50% from highs seen earlier this year.
Texas Roadhouse (NASDAQ: TXRH) is all about value. The steakhouse chain serves up large portions at reasonable prices in a "Lone Star State"-themed atmosphere. The family friendly establishment has also been on a run, with sales growing over 10% for a decade. During the last quarter, profit was 56.7% higher than a year ago.
Shares have dipped 14% in the past three months, but the company is not slowing down. New locations continue to open, with a sports bar concept, Bubba's 33, getting added to the mix. After the stock's recent slide, the company looks like a good value, with management expecting top and bottom line growth to continue in the double digits.
Buffalo Wild Wings
Buffalo Wild Wings' (NASDAQ: BWLD) sports bar concept has taken off over the past few years. Total locations have increased nearly 50% since the end of 2011; revenue has averaged 24% growth; and profit growth has come in at 20%. Now a well-established destination for spectators and fans of all things sports, the company is transitioning to an emphasis of returning value to shareholders.
As investors grapple with the change in direction for the years ahead, the stock has become a roller coaster. Currently, shares are in a valley, falling over 20% from August levels. While management sees increasing investor payouts through a new $300 million stock repurchase program and a possible dividend initiation in the works, growth of the business is far from over. International openings have become a larger share of expansion, while the development of two new chains in R Taco and Pizza Rev, plus a target of 15% a year profitability growth, are core to management plans going forward.
What foodie investors should consider
Despite the summer doldrums, the longer-term trend for the restaurant industry still enjoys a positive trajectory with 6.4% year-over-year restaurant sales growth.
Nevertheless, the recent negativity brings excitement for investors looking for bargains. With still-growing chains getting clobbered with the rest of the food and beverage world, it's time to fill up your plate.
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