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Restaurant stocks may have a tailwind in their favor to help offset some of the concerns about consumer spending trends.
The January Consumer Price Index report indicated a 3.9% year-on-year increase in the base rate, compared to the +3.7% expected by economists and the +3.9% pace observed in December. While the food at home category saw only a 1.2% increase from a year ago, the food away from home category outperformed overall inflation with a 5.1% increase for the month. In two years, CPI growth for food away from home slowed slightly in January from December's pace, but still rose 13.7%.
What may be even more relevant for the restaurant sector is that the spread between the CPI and the producer price index remains very high at 7.3 percentage points (chart below from Bank of America).
A positive gap between CPI and PPI increases margin for some restaurant companies, depending on their pricing power and raw material hedges in place. Analysts believe that if the CPI-PPI spread remains relatively wide, there could be more earnings surprises in the restaurant sector in the future.
The restaurant sector has seen some rising stars this year. Shake Cabin (New York Stock Exchange: SHAK) has increased 33% so far this year. The chain reported that systemwide sales increased 21.4% in the fourth quarter to $442.1 million. Comparable sales increased 2.8% year-over-year during the quarter, which was enough to beat the consensus expectation of +2%. On the expense side of the ledger, food and paper costs fell to 29.1% of sales from 29.5% a year ago and labor costs fell to 28.5% of sales from 28.9% from a year ago. Occupancy and related expenses fell to 7.7% of sales from 7.9%. Total expenses represented 100.5% of sales in the fourth quarter compared to 102.6% a year ago. Shack-wide operating profit was $54.6 million, or 19.8% of Shack sales, up from 19.0% a year ago.
Other big winners this year in the restaurant sector include FAT Brands (FAT) +48, Kura Sushi (KRUS) +37%, CAVA Group (CAVA) +29%, Wingstop (WING) +26%, First Watch Restaurant Group (FWRG) +22%, Potbelly (PBPB) +20% and Texas Roadhouse (TXRH) +21%.
Restaurant stocks that Looking Alpha analysts have been positive on recently include Domino's Pizza (DPZ) (analysis), Jack in the Box (JACK), Red Robin Gourmet Burgers (RRGB) (analysis), and Yum! Brands (YUM). Based solely on quantitative analysis, Brinker International (EAT) and Darden Restaurants (DRI) top the list of attractive stocks in the restaurant sector.
IPO Watch: Fresh from producing one of the Super Bowl commercials that generated the most buzz on social media, Dunkin' Donuts could go public again as part of Inspire Brands, sources told Bloomberg. Private equity firm Roark Capital has reportedly held preliminary talks with potential advisors about listing Inspire Brands in late 2024 or 2025. Inspire Brands owns Dunkin' Donuts, Arby's, Baskin-Robbins, Buffalo Wild Wings, Sonic and Jimmy John's. restaurant chains. Roark Capital also owns Focus Brands, which includes Auntie Anne's, Cinnabon and Jamba. In addition to all those investments, the physical education company also has a stake in The Cheesecake Factory (CAKE).
