5 Restaurant Stocks to Avoid

Once in a while a company will give its investors a clear signal that it may be time to sell. In the restaurant industry, there's no clearer sign than declining same-store sales, or "comps," a year-over-year comparison of sales at locations that have been open for at least 12 months. If an eatery can't increase sales organically in this way, it has little business opening new locations. And if it doesn't open new locations, its stock is ultimately headed in only one direction: down.

Because most publically traded restaurant chains have reported earnings for the second quarter, we now know which of them do and do not pass this litmus test. The best performers, like Chipotle Mexican Grill and Panera Bread, recorded comps in the high-single-digit to low-double-digit range. The worst performers, and the five of interest here, recorded negative same-store sales figures.

Company

Brands

Same-Store Sales (MRQ)

Debt

Cash

Ruby Tuesday (NYSE: RT  ) Ruby Tuesday (4.6%) $327 million $48 million
CEC Entertainment (NYSE: CEC  ) Chuck E. Cheese (2.4%) $397 million $17 million
Darden Restaurants (NYSE: DRI  ) Red Lobster, Olive Garden, The Capital Grille, Bahama Breeze, Seasons 52, and others (1.5%)* $2,170 million $74 million
Bob Evans Farms (Nasdaq: BOBE  ) Bob Evans Restaurant, Mimi's Cafe (1.3%)* $136 million $36 million
DineEquity (NYSE: DIN  ) IHOP & Applebee's (0.5%)* $1,640 million $32 million

Sources: Quarterly earnings statements and Yahoo! Finance. MRQ = most recent quarter.*Calculated as a weighted average of independent division sales.

As you can see, Ruby Tuesday takes the proverbial cake when it comes to the worst same-store sales performance, notching between 4% and 5% declines in both the most recent quarter and its 2012 fiscal year. According to its founder and CEO, Sandy Beall: "Our same-store restaurant sales for [the quarter ended June 5, 2012,] were roughly in line with our expectations as we pared back our level of couponing while continuing to test our television marketing programs." The one bright spot for the company is its recent acquisition of Lime Fresh, the popular Miami-based Mexican grill that competes with the likes of Chipotle and Qdoba.

The proprietor of Chuck E. Cheese, CEC Entertainment, comes second with a quarterly decline of more than 2%. On top of this, moreover, the chain is experiencing significant bottom-line pressure due to higher cheese, rent, and marketing costs. According to its CEO: "We are obviously not pleased with our first half of the year comparable store sales results and the impact on earnings." If I were a CEC shareholder, I'd second this displeasure.

Following closely behind is the restaurant conglomerate Darden Restaurants, the operator of Red Lobster and Olive Garden, among others. Unlike the preceding executives, Darden's CEO, Clarence Otis, was significantly more upbeat, citing the company's 10% year-over-year growth in net income, derived largely from the addition of 100 restaurant locations in the intervening 12 months. For anyone enticed by this, however, I'd urge you to peruse Darden's balance sheet, and particularly its massive $2.2 billion debt relative to its measly $74 million in cash and equivalents.

Finally, Bob Evans and DineEquity -- the latter owns and operates the IHOP and Applebee's chains -- round out the list. Bob Evans' results are largely the consequence of negative 3% comps in its Mimi's Cafe division, while DineEquity's are the result of negative 1.4% comps in its IHOP locations.

Foolish bottom line
At the end of the day, given these companies' disappointing comps, I encourage you to closely monitor their stocks using our free stock-tracking service, My Watchlist. Doing so will help you avoid being left standing without a chair when the music stops. In addition, to download a free report revealing three companies that our analysts are calling "middle-class millionaire-makers," click here now.

Fool contributor John Maxfield does not own shares in any of the companies mentioned above. The Motley Fool owns shares of Darden Restaurants. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (12) | Recommend This Article (63)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2012, at 5:58 PM, 48ozhalfgallons wrote:

    Big recessions are the demise of restaurants.

  • Report this Comment On August 09, 2012, at 6:05 PM, bretco wrote:

    Where's the beef ?

    Mickey D's, thats where !

  • Report this Comment On August 09, 2012, at 6:10 PM, Bsorge10 wrote:

    Let's face it - restaurants are a tough way to make a buck. Even McD's makes most of their money as a franchiser. I like that end of the business where someone else is doing all of the hard work!

  • Report this Comment On August 09, 2012, at 6:31 PM, gdf55 wrote:

    McDonalds' most recent set of comps didn't look all that great, either...

  • Report this Comment On August 09, 2012, at 6:52 PM, johnluma wrote:

    How can any sit-down restaurants compete in this economy? This is not only not a surprise, it is not an indication of the great potential for these stocks within a year or two.

  • Report this Comment On August 09, 2012, at 8:27 PM, hudsondusters wrote:

    Darden is fine. Lobster prices are way down. All mature chains SSS slow. Darden is more like oracle, chipotle like salesforce. Duh. Different parts of the growth curve and value investor long term thinking vs short term momo. This is like MAKO vs JNJ.

  • Report this Comment On August 09, 2012, at 10:00 PM, mikecart1 wrote:

    Restaurants are outdated for the most part. You can buy most of the appliances and cooking tools the restaurants use and the internet teaches you how to cook pretty much everything. You can cook food far cheaper at home that is far more healthier and has far more nutrients and protein. It makes no sense for anyone to spend $20 on a meal that includes tip when I can make that same meal for $5 with bigger portions and more protein!

  • Report this Comment On August 10, 2012, at 7:53 AM, kayakmastr wrote:

    Same store sales are down implies folks are not returning and new folks are not coming in . Sounds like a message regarding the experience. I have eaten at most of these and all are at the bottom of my "where to go list." No surprise here for me.

  • Report this Comment On August 10, 2012, at 9:12 AM, TOM48 wrote:

    Buy YUM

  • Report this Comment On August 10, 2012, at 11:28 AM, Truth2Power wrote:

    Interesting that the two "best performers," PNRA and CMG, are "fast casual" restaurants, while the "worst performers" (besides CEC) are the quintessential sit-down chains (Carlson Corp., parent of TGI Fridays, isn't publicly traded, or I imagine it might also make the list).

    With most fast-food chains--including MCD and Wendy's (WEN)--reporting disappointing second quarters, it seems like the middle is the safest place to be at the moment.

    I wonder how some of the upscale chains are doing (not that I know of any public upscale restaurant companies)?

  • Report this Comment On August 18, 2012, at 12:49 AM, rpqrocks wrote:

    Is anyone holding ARCO? ?

  • Report this Comment On August 19, 2012, at 8:42 AM, GtownRJ wrote:

    mikecart1 wrote:

    "Restaurants are outdated for the most part."

    You left out less garbage like MSG and more dishes to wash.

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