Among the many things 2016 was not exactly kind to was the restaurant industry. A perfect storm of election uncertainty, lower food costs at grocery stores and a newfound consumer desire to eat at home led to decelerating and declining same store sales throughout the year. This, in turn, sparked predictions of an industry-wide recession.
The start of 2017 hasn't been much kinder: Shake Shack, Papa Murphy's and Del Taco have already made c-suite changes that have spurred stock market losses, while Cheesecake Factory, Dunkin' Brands and Bob Evans have started the year off with stock downgrades from the Street. But all of this doesn't mean the new year is already doomed for dining.
Though the NPD Group, a market research firm, is projecting that 2017 will bring no traffic growth for the entire food service sector, its analysts and other close observers of the dining space believe that with the right management decisions and right consumer conditions, 2017 can bring improved performance for food retailers.
“Restaurant operators are in a position to alter the current forecast, but will need to differentiate themselves from the competition,” Bonnie Riggs, NPD Group’s restaurant industry analyst, said in a recent email. “In the year ahead, it will be critical for them to stay relevant in consumers’ minds, focusing on innovative products, unique promotions, competitive pricing, stating the benefits of eating at restaurants versus home, and delivering an enjoyable experience.”
Starbucks is one of Wall Street's top picks in food names for 2017. Pictured here, the Starbucks Reserve Roastery and Tasting Room in Seattle. (Photographer: David Ryder/Bloomberg)
Brian Bittner, an analyst at Oppenheimer, is also taking a cautiously optimistic view on the space. In a recent note, Bittner notes that rising gas prices and competition could pose challenges to the dining industry, but that ultimately, "We believe industry trends can improve throughout 2017 as jobs and personal income growth remain solid, grocery competitive headwinds ease and soft comparisons are lapped all while consumer sentiment improves."
Of course, not everyone is forecasting sunnier sales. Jefferies' Andy Barish, who in July foretold of a "challenging" 18 months for the restaurant industry, says that the post-election market rally -- which helped restaurant stocks gain 14% after Election Day and finish 2016 ahead of the S&P 500 -- and prospect of new policies under the next presidential administration shouldn't distract investors from the underlying issues.
"Although the market is clearly discounting the hoped-for benefits of corporate/personal tax cuts and less government regulation helping the industry, we remain focused on difficult near term fundamentals," he wrote in a recent research note. "Same store sales appear to be challenging during holiday season (maybe worse than expected and with weather and calendar not helping) and will likely continue to face competitive pressures throughout 2017 that may more than offset potential economic stimulus."
Despite their slightly divergent views on the restaurant industry as a whole, Barish and Bittner share bullishness on some of the same names in food. Both men have called Starbucks SBUX +1.18%, Panera and Jack in the Box good buys for 2017. Here's a look at what they had to say about each:
Panera: "Panera is the most aggressive non-pizza player going after the delivery market with its own build-out. Nearly 40% of the system will offer delivery by end of 2017," Bittner says. "In tests, delivery has driven at least a 10% sales lifts and start-up costs have been subdued. The basic math suggests that after a 5% sales lift, the contribution margins elevate meaningfully."
Jack in the Box: "We think management’s outlook for significant earnings per share accretion in fiscal year 2017 and beyond related to refranchising initiatives, general and administrative reductions and buybacks is realistic and also see significant longer-term value creation opportunity in Qdoba," says Barish.
Starbucks: "We do not see the CEO transition or potential coffee import tariffs as large enough risks to sit on the sidelines," notes Bittner. "Once Starbucks laps high comp hurdles of plus-9% and plus-7% in the December/March quarters, respectively, the story contains catalysts to become a loved stock again in large-cap retail."
Starbucks, it's worth noting, has proven a particularly popular pick among restaurant analysts: not only did it get endorsements from Barish and Bittner, but the stock has been named by JPMorgan, Nomura and Fitch Ratings as one of the sector's best picks for 2017. JPMorgan analyst John Ivankoe likes the coffee giant because of its rewards program, which he says is driving comparable store sales growth. Fitch, which assesses the credit that companies issue, said recently that Starbucks is on a "positive trajectory" and that modest margin expansion, cash flow growth and a "balanced financial strategy will result in relatively stable leverage."
Nomura analyst Mark Kalinowski has an even loftier projection for the ubiquitous caffeine purveyor -- which is that it will become even more ubiquitous. "Because beverages such as coffee and tea are near universal in their appeal, we believe that Starbucks will achieve its stated goal of having 37,000 units open by the end of 2021, up from 25,085 as of the end of fiscal 2016," he said in a recent note. "We believe that investors will continue to pay a premium multiple to enjoy this type of unit growth potential in their portfolio. And, well beyond 2021, we would not be surprised to see Starbucks exceed the 50,000-store level."
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