Chipotle, Panera, Buffalo Cook Gains On Traffic Hopes

O ptimism over recent traffic trends has helped push stock prices up at fast-casual restaurant chains Chipotle
 Mexican Grill and Panera Bread, though increasing competition is squeezing the sector.

AtChipotle hopes are high that issues with pork suppliers are well behind the burrito chain, and that it will enjoy an uptick in traffic as it lures back carnitas lovers.

Meanwhile,Panera eyes a traffic boost from its Panera 2.0 initiative that launched last year. The chain improved customer technologies, making it easier and quicker to order from a computer, tablet or mobile phone.

Both companies lead the fast-casual trend that has taken hold of the restaurant industry in recent years and includes names as disparate asBuffalo Wild Wings,Zoe's Kitchen, and Shake Shack  

It's an increasingly crowded field that is likely to grow even more crowded thanks to some key trends.

One trend is the rising popularity of fast-casual fare, which tends to be healthier and fresher than traditional fast food and a lot less expensive than meals served at full-service restaurants.

Excess Retail Space

Another trend is the ever-shifting retail landscape itself.

"There's a lot of excess ... retail space coming onto the market right now because many retailers have been forced to shut down due to competition from e-commerce," said Morningstar analyst R.J. Hottovy. "So you're seeing a lot of competitors coming into the fast-casual space in these locations."

That extra competition comes as leading players like Panera and Buffalo Wild Wings -- and, to a lesser extent, Chipotle -- are finding it increasingly hard to maintain the rapid growth rates of years past.

Last month, Chipotle topped consensus earnings views with a 27% year-over-year increase. The bad news: that was its slowest EPS gain in a year, and the company fell short on same-store sales and overall revenue estimates. Q2 traffic actually dipped 0.3%.

Panera and Buffalo Wild Wings each reported lower Q2 earnings and also missed views on both the bottom and top lines.

Yet Wall Street still gave a warm embrace to all three stocks.

Chipotle shares rose 8% to 725.82 after it reported Q2 results on July 22. The stock eventually climbed to a new high of 758.61 on Aug. 5 and closed Friday off 2% at 720.65.

Panera's stock price also popped 8% to a new high of 202.27 on July 29. Shares have since ceded nearly all those gains, however, closing Friday down 1.2% to 185.52.

Shares of Buffalo Wild Wings spiked 11% on July 29 and touched a new high of 199 last Monday. They drifted to 189.53 by Friday.

Investors are particularly bullish about early Q3 traffic trends, Hottovy told IBD.

"They are not only starting to see some stronger traffic, but the overall fast-casual segment continues to take share from traditional players," he said.

Chipotle should benefit from the addition of a new pork supplier: the U.K.'s Karro Food Group.

Chipotle's Carnitas Way

During the first quarter, Chipotle suspended one of its U.S. pork suppliers because it fell short of standards regarding animal welfare. This hurt the supply of carnitas at about a third of Chipotle's eateries.

In a research report, analysts at Trefis said the addition of Karro "has certainly brought some relief" to Chipotle, "which was struggling with a shortage of pork to be used in its carnitas. The effect of a new pork supplier will be visible in the next few quarters, and we can expect improvement in the customer traffic and comparable sales growth."

JPMorgan analyst John Ivankoe has a similar view. With the addition of Karro, he says, carnitas are back in about 60% of Chipotle restaurants, "with the remaining 40% to be back on-line" by year-end.

This "should improve traffic trends going forward."

Meanwhile, Panera has gotten a lift from its 2.0 initiative -- which Hottovy says "has been doing relatively well" -- and a recent salad relaunch featuring reformulated salad dressings that contain no artificial colors, flavors, preservatives or sweeteners. In addition, Panera launched a new line of broth bowls.

BTIG analyst Peter Saleh noted in a report that Panera bakery-cafes that have converted to Panera 2.0 "have seen a cumulative sales increase of 7.2% and 9.6% after four and five quarters, respectively." That compares to an overall sales increase of about 6% over the past four quarters.

Panera's same-store sales growth accelerated to 4.7% during the first 27 days of July, Saleh said, driven by the company's "Food as It Should Be" ad campaign that began in mid-June.

However, "management indicated that comps were expected to moderate through the balance of the quarter as the amount of advertising spend normalizes in the coming months," Saleh said.

Buffalo Wild Wings, which occupies a kind of middle ground between fast-casual and casual dining, has managed to keep growing its comps even after last November's 3% menu price increase. That growth is partly because of an initiative to invest more money in labor and improve customer service, analysts say.

Analysts also look for Buffalo Wild Wings to get a boost when it closes its $160 million buyout of 41 franchised units, announced in June. Company-owned stores traditionally have outperformed franchised units in terms of same-store sales and revenue growth.

Macro Improvements

The fast-casual sector has benefited from improvements in the economy and job market -- especially in terms of drawing more lower- and middle-income consumers who tend to eat at traditional fast-food joints when times are hard.

Not all of the sector's news has been good, however.

Shake Shack shares, which went public in January, are off about 49% from the high set in May despite two straight quarters of accelerated sales and earnings growth. The stock is still up 140% from its IPO price. Fellow fast-casual burger jointHabit Restaurants (HABT) has been trading near post-IPO lows.

A third relatively recent fast-casual IPO, Mediterranean-themed Zoe's, hit a record 46.61 on July 23, but has since lost 21%. Zoe's will report second-quarter earnings on Thursday.