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Regaining an Appetite for Restaurant Stocks

It's difficult not to be spooked about investing in eatery stocks. The tight economy is drying up the discretionary income that finds more families eating cheaper at home.

Higher food costs, coupled with the consumer's reluctance to pay higher menu prices, are squeezing margins. Then add in everything from the fuel required for a round-trip to your favorite chain to the rising minimum wage requirements.

How can a chain survive in a tricky environment like this? Apparently, it's a lot easier than worrywarts may have led you to believe. Several food chains -- from casual sit-down eateries to pizza delivery outfits -- have reported earnings this week. There may be challenges, but they all appear to be getting by just fine as they sit out the rocky economic climate.

Let's take a look at a few of this week's earnings reports.

The jury is still out about whether IHOP erred in snapping up Applebee's last year. The company's income statements look entirely different as IHOP goes from a high-margin franchisor of its pancake-flipping blue-roofed hubs to one actually operating a ton of Applebee's casual dining establishments.

So even if quarterly revenue grew roughly fivefold to $442.8 million, earnings actually fell by 24% to $0.50 a share for the period. All of the debt that IHOP swallowed down to seal the deal is weighing on the company's financials.

The upside here is that its namesake chain is still rocking. Comps were up a sharp 3.7% during the period. IHOP has now strung together 21 consecutive quarters of higher comps. The same can't be said for Applebee's. It did manage a 0.5% store-level gain, but that's the first positive quarter for Applebee's in two years.

Denny's (Nasdaq: DENN  )
If IHOP's moves don't move you, maybe Denny's will win you over. Its quarterly report last night was practically the opposite of IHOP. Revenue fell yet earnings climbed higher, as Denny's is in the process of selling company-owned units to franchisees.

IHOP has been taking on debt, while Denny's has been using its franchise sale proceeds to pay down debt. The one thing both companies have in common is that comps are inching higher, even if the 0.7% unit-level spurt at Denny's may appear uninspiring.

Keep in mind that both IHOP and Denny's are chains that pride themselves on breakfast, and fast-food joints like Wendy's (NYSE: WEN  ) keep widening the reach of their nascent breakfast menus. I'm actually impressed to see both IHOP and Denny's clock in with higher comps under these conditions.

Texas Roadhouse (Nasdaq: TXRH  )
A couple of months ago, Texas Roadhouse shareholders were battered after the company missed its fourth-quarter targets and announced a slowdown in expansion plans. The showing was so bad it allowed me the opportunity to use Texas Chain Saw Massacre as a headline.  

There was no massacre this time around. Shares shot up 12% yesterday after the company posted a reasonable report. Revenue and earnings grew by 18% and 5%, respectively. Comps fell during the period, but have gone on to stabilize this month. The company believes it's on track to grow earnings by 5% to 15% this year. That is welcome confidence in this difficult industry.

Domino's Pizza (NYSE: DPZ  )
If you figured that the desire to eat more meals at home has been a gold mine for pizza delivery chains like Domino's, think again. Domestic comps actually fell by 5.2% for Domino's this past quarter. That contrasts with the concept's success abroad, where Domino's has now rattled off 57 straight quarters of positive comps.

Reported profits surged on flat revenue growth, but earnings tumbled sharply once you factor out one-time items from both comparable periods. Even if Domino's international prowess is saving its hide closer to home, where is the growth? Wait for Papa John's (Nasdaq: PZZA  ) to post its quarterly results next week before passing judgment on the niche. 

Load up the picnic basket
In sum, it hasn't been a bad week for the restaurateurs.

Maybe the death of casual dining is exaggerated. If even the struggling Max & Erma's (Nasdaq: MAXE  ) can receive a buyout bid at a premium the way it did earlier this week, maybe we're closer to the bottom in this space than the market thinks.

You should still watch what you eat, but it's definitely a good time to practice your chewing skills as you eye the menu of attractively priced eatery chains.

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10/20/2016 3:23 PM
DENN $10.39 Down -0.07 -0.67%
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TXRH $39.24 Down -0.32 -0.80%
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MAXE.DL2 $ Down %
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PZZA $80.15 Down -0.35 -0.43%
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