Can Burger Stocks Whet Investors' Appetite?

Burgers have been quite a rage in America over the past several years. From being a region-focused market to taking over the global markets by a storm, the burger industry has come a long way. With the gourmet burger chains offering a diverse platter, the market has been spreading out with new entrants and expansion by established ones.

As per data from research firm Euromonitor International, burger sales in the U.S. grew over 14% between 2010 and 2015. The firm also noted that competition among burger companies has intensified over the years, peaking in 2015, with promotions and exclusive menu offers flowing in from all corners. In fact, U.S. burger sales touched $103 billion in 2015, marking a remarkable year for burger stocks.

However, after years of soaring demand, burger sales in the industry are now on a decline. Soft consumer spending in the U.S. restaurant space has been resulting in lower-than-expected traffic. As a result, comps growth in the U.S. burger segment has slowed down significantly from the first quarter of 2016.

RETAIL-FOOD & RESTAURANTS Industry Price Index

RETAIL-FOOD & RESTAURANTS Industry Price Index

Burger Giants Take a Hit

Weaker consumer spending trends in the domestic market as well as certain company-specific issues have taken a toll on the stock prices of some of the leading names in the space.

Shake Shack Inc. (NYSE:SHAK) , which debuted as a public company on Jan 15, 2015, saw its stock price scale higher in the months that followed. Though Shake Shack came crashing down in the later part of 2015, this has made the stock more reasonable priced as its Forward Price to Earnings ratio dropped from the previous levels of nearly 1000 times earnings.

However, following a successful first-quarter 2016, the company posted weaker-than-expected comps growth in the second quarter. Notably, economic and political uncertainty in key international markets along with negative currency translation has hurti sales. As a result, the stock has declined nearly 11% year to date.

Meanwhile, burger chain Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) has been grappling with rising costs and expenses since the beginning of 2016, mainly due to higher labor costs.

Further, the company reported Red Robin reported weak second-quarter 2016 results and also slashed its sales and profit outlook for the full year. Resultantly, the company’s stock tumbled over 27% on a year-to-date basis.

Another burger specialist The Habit Restaurants, Inc. (NASDAQ:HABT) has also seen its stock price plunge by nearly 40%. The second-quarter 2016 was not too favorable for this company as earnings lagged the Zacks Consensus Estimate while revenues were in line. Notably, the company slashed its full-year 2016 revenue guidance.

What Can do the Trick?

Despite being a relatively expensive stock, Shake Shack has solid growth potential given its strong brand, solid balance sheet and lucrative store economics. Also, menu innovation and limited time offerings should aid in boosting comps in the near future.

Shake Shack has also been focusing on highly valued millennial consumers who prefer brand experience and healthy food. Such efforts to meet consumer preferences have made it a hit among the younger generation. Thus, the company’s popularity and successful expansion into various cities around the world could bring its growth story back on track in fourth-quarter 2016.

Meanwhile, Red Robin targets to improve sales and regain market share as the year progresses by focusing on increasing speed of service, fostering awareness through local marketing initiatives and opening new restaurants. Also, efforts to reinvigorate the brands through menu innovation and remodeling programs should bode well.

Habit Restaurants too has increased its focus on menu innovation and unit growth. Further, the company is emphasizing on reducing the average cook time to cater to customer traffic, especially during peak hours. Also, various limited-time-offers (LTOs) coupled with digital initiatives should help attract customers.

Our Take

The recent dip in the fortunes of the burger stocks certainly raises questions about their future prospects.

However, burgers have been the comfort food for Americans for long as it is affordable, handy and customizable.

Thus, despite the pitfalls in the form of sluggish comps growth and traffic trends, we expect effective sales initiatives and the widespread appeal of burgers to help these notable companies gain momentum, going ahead.

Red Robin currently has a Zacks Rank #4 (Sell) while Shake Shack and Habit Restaurants carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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