Zacks Industry Outlook Highlights: Domino's Pizza, Wendy's Company, Brinker International, Cracker Barrel Old Country Store And Dave & Buster's Entertainment

For Immediate Release

Chicago, IL – November 30, 2017 – Today, Zacks Equity Research discusses the Restaurants, including Domino's Pizza, Inc. (NYSE:DPZ) , The Wendy's Company (NASDAQ:WEN) , Brinker International, Inc. (NYSE:EAT) , Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) and Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) .

Industry: Restaurants, Part 3

Link: https://www.zacks.com/commentary/138821/restaurant-stocks-challenged-by-low-traffic-high-costs

Troubles simmering in the U.S. restaurant industry over the past few quarters are known to all. This is reflected in the industry’s recent stock-market performance as well, which has lagged the broader market in the year-to-date period.

Stocks in the Zacks Restaurant industry are up +12.1% this year, which compares to a +17.7% gain for the S&P 500 index in the year-to-date period. Negative comps as a result of sluggish traffic, along with rising costs, are the contributing factors to this underperformance.

Below we discuss some of the downsides hampering the restaurant industry:

High Expenses: Higher payroll expenses and costs related to various comps and sales boosting initiatives along with restaurant re-imaging expenses are hurting margins for companies like Domino's Pizza, Inc., The Wendy's Company and Brinker International, Inc. Though these initiatives offer long-term advantages, the costs related to them are expected to continue to dampen margins in the near term. Additionally, resorting to more discounting and value bundling might further put pressure on casual dining operators’ already tight operating margins.

Moreover, restaurants like Brinker, Cracker Barrel Old Country Store, Inc. and Dave & Buster's Entertainment, Inc. intend to make additional unit openings going forward. Thus, higher marketing and pre-opening costs associated with the same are expected to hurt profits.

Also, there has been considerable debate in the recent past over restaurant workers’ wages. Workers at quick-service restaurants claim that their employers' profits have not trickled down to them proportionately, which is leading to strikes for wage hikes. These incidents significantly hurt the reputation of restaurants. As a result, the companies are compelled to make minimum wage increases, which again lead to narrower margins. Moreover, higher labor costs due to a competitive labor market are expected to continue to keep profits under pressure.

Additionally, recruitment and retention of employees has emerged as a top challenge for restaurant operators. As the economy keeps improving and employment levels rise, there is more competition for qualified employees to fill vacant restaurant positions. Meanwhile, restaurant management turnover is a critical headwind for operators as turnover rates continue to rise, as per a report by TDn2K’s. This is further compelling restaurants to either hike wages or provide benefits, at the cost of margins, to retain or attract employees.

Comps Under Pressure: Over the past few quarters, consumer behavior has been volatile and their willingness to spend on most goods, especially eating out, is showing signs of decline, which is resulting in low consumption. This is because, along with wage growth, inflation is also on the rise, which translates into lower real income and thus less disposable income. The situation has taken a turn for the worse, thanks to higher health care costs and tightened credit availability in the United States.

Moreover, as consumers demand high-quality products at lower prices, grocery stores are being forced to decrease their food prices to remain competitive. This is resulting in a bigger gap between food-at-home and food-away-from-home indices.

Most of the restaurateurs are thus bearing the brunt of soft comps trends. In fact, the third quarter of 2017 marked the seventh consecutive quarter of negative comparable sales for the restaurant industry as a whole, per a report by TDn2K’s Black Box Intelligence. Given the persistent negative comps trend, there has been a lot of buzz over the restaurant industry hitting recession.

But it is to be noted that the chief reason for the drop in same-store sales is a significant decline in traffic. In fact, per market analysts, diners are spending more per visit instead of visiting chain restaurants more often, which is hurting traffic. An increased number of new restaurants amid limited growth in eating-out budgets as well as increased pressure from grocery stores add to the woes. Also, increases in menu prices are at times preventing people from dining out. This unwillingness of Americans to dine out is thus pulling down restaurateurs’ sales.

Slowdown in New Restaurant Openings: As the operating environment has become increasingly challenging, the decline in sales volumes have begun to impact the returns on new restaurant openings. As a result, some of the restaurants are slowing down their development plans.

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