Are These 3 Restaurants Good Investments?

According to Black Box Intelligence, 2013 ended on a negative note for the restaurant industry in general. The report highlighted that bad weather in December and a shortened holiday season pushed fourth-quarter same-store sales into negative territory. The downturn in December was enough to wipe out the positive same-store sales trend experienced since September, leading to fourth-quarter comps of negative 0.2% for the industry.

Moreover, annual same-store traffic was dismal at a negative 2.1% for 2013 as compared to 1% growth reported for 2012. In short, consumers are eating out less.

However, even in this tough environment, there are brands that have been very successful, especially in the fast-casual and family dining segments, that saw positive same-store sales. In the backdrop of these numbers and data, we will take a look at Panera Bread (NASDAQ: PNRA  ) , Chipotle Mexican Grill  (NYSE: CMG  ) , and The Cheesecake Factory (NASDAQ: CAKE  ) and try to find the appetizing pick for investors.

Panera disappoints...
Panera's third-quarter results came as a jolt for investors as the company failed to meet its own optimistic guidance on many fronts. However, the results were not as bad as they were made out to be by the Street because the company did manage to perform better than last year. For example, it registered comps growth of 1.3%, most of it coming from price revisions as the number of transactions declined 1%.

Consolidated sales increased 8% from $529 million to $574 million. Growth in revenue was also fueled by new openings -- 17 by Panera and 15 by its franchisees -- taking the total up to 1,736 at the end of the quarter. Driven by positive comps and revenue growth, adjusted diluted earnings per share increased 9% to $1.35 as compared to $1.24 last year. Earnings were, however, within the management's previously provided range of $1.32–$1.36 per share.

...but a turnaround can't be ruled out
Panera reduced its guidance, which irked investors. However, if we look at its two-decade history as a public company, Panera has come out a winner time and again. Also, given its market share and size, Panera is here to stay. A bad quarter here and there shouldn't lead to a knee-jerk reaction, and no one would know this better than those who sold off Chipotle in a panic following bad results in late 2012. Chipotle has since bounced back by more than 100%, as shown in the chart below.

PNRA Chart

Panera data by YCharts

Chipotle's comps growth of 6.2% would put Panera's comps growth rate to shame. The growth in comps was due to an increase in traffic, unlike Panera. On the back of strong comps and unit expansion, consolidated revenue surged 18% year over year to $826.9 million. What is most enticing for investors is that Chipotle is expecting similar growth in comps in the fourth quarter.

Chipotle is having an excellent run, and its focus on "food with integrity" is resonating well with customers. Moreover, its announcement about eliminating genetically modified organisms, or GMOs, from its food by the end of 2014 has been received well by health-conscious consumers as well as investors. For 2014, it has plans to open 80-195 restaurants to sustain the growth trajectory.

Cheesecake: Another option
Cheesecake, a restaurant in the family dining sector, came up with comps growth of 0.8%, marking the 15th consecutive quarter of positive comps. On the back of positive comps, consolidated revenue grew 3.5% year over year to $469.7 million and adjusted EPS came in at $0.51, representing around 6% year-over-year growth in earnings.

At the end of the third quarter, Cheesecake operated 179 restaurants. Going forward, it plans to open nine new company-owned restaurants. It is also planning on expanding its international footprint by opening three to five restaurants in the Middle East and Mexico under licensing agreements. An encouraging third-quarter performance after a disappointing second quarter, despite negative trends in the industry, is a welcome change, and optimism is reflected in the share-price gains after the third quarter.

Looking ahead, Cheesecake is looking to sustain the momentum by opening more stores and expanding its international foot print, and this should help the company perform in a robust manner.

Bottom line
Panera might have taken a hit after its last quarter's results, but the company is no stranger to bouncing back. Its comps are still in positive territory, and opening more stores should help it get more customers to stores. On the other hand, both Chipotle and Cheesecake have been going strong and the initiatives that they are undertaking should enable them to continue their impressive run. Hence, investors looking for investment options in this industry could consider either Chipotle or Cheesecake for their portfolio, while those looking for a turnaround story could focus on Panera.


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