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America Has a Burger Bubble on Its Hands

By Nicholas Rossolillo - Sep 26, 2018 at 9:17AM

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The better-burger concept is defying gravity, but how long can it last?

American consumer spending is setting a blistering pace this year. Through the first eight months of 2018, retail sales are up 5.7% over last year's figures. Restaurants are getting a big boost, with industry sales up 6.2%.

The hamburger is leading the charge. The quintessential American fare is making a comeback despite consumer interest in eating healthier and is serving up problems for other dining-out options -- like Zoe's Kitchen. Momentum can often carry trends further than expected, but this juicy segment of the dining industry might have limited upside. Investors beware.

The scope of America's love affair

Optimism for the hamburger has been a rising tide for many restaurants. The fast-casual concept -- which features higher-quality ingredients without sacrificing the convenience of fast food -- has been particularly successful in pushing patties. Local burger joints have been popping up all over the country, and regional chains have been expanding. Fast-casual has been a best performer this year, according to restaurant industry analyst TDn2K. Here's a sampling of the biggest better-burger chains.

Restaurant

2017 Total Sales

YOY % Increase

2017 Store Count

YOY % Increase

Shake Shack (SHAK 0.03%)

$359 million

34%

159

39%

The Habit Restaurants (HABT)

$332 million

17%

209

22%

Five Guys

$1.4 billion

9%

1,321

3%

Culver's

$1.4 billion

10%

641

6%

Steak 'n Shake*

$1.1 billion

1%

1,027

11%

BurgerFi*

$150 million

13%

92

5%

Wayback Burgers*

$128 million

17%

135

12%

*Technomic 2017 estimate. YOY = year over year. Chart data source: Restaurant Business, Technomic, Shake Shack, and The Habit Restaurants.

Shake Shack and The Habit Restaurants, two publicly traded regional chains, illustrate the continued growth of the concept. During its second-quarter report, Shake Shack said that it opened 12 new domestic locations with a total of 32 to 35 planned for the year. At the end of 2017, there were 100 domestic locations. The Habit is setting an aggressive pace as well. Total openings for 2018 are expected to be 37 to 39; there were 209 at the end of 2017.

Fast-food and casual dining have been getting a bump, too. Chains like McDonald's (MCD 2.02%), while mainly focused on value, have revamped menus with better-burger options. Mickey D's U.S. comparable sales in the first and second quarters of 2018 increased 2.9% and 2.6%, respectively. IHOP parent Dine Brands (DIN -1.30%) launched an ad campaign over the summer to capitalize on the craze, temporarily changing the breakfast specialist's name to IHOb (for "burgers" instead of "pancakes"). The launch of the chain's new steak burgers has in part helped comparable sales rise 0.9% in the first half of 2018.

This is all very anecdotal evidence to illustrate the rapid expansion of the better burger, but taking those numbers in context with the broader restaurant industry paints a bleak story. America's love of the burger is stronger than ever, but investors could face some serious challenges.

A woman sitting at a restaurant table eating a hamburger, french fries, and a milkshake.

Image source: Getty Images.

Burger gains, restaurant pain

While the burger's advance has been pretty consistent the last few years, other restaurant results have been mixed. Industry-average comparable-store sales -- which combines foot traffic and guest ticket size -- declined for two years but have been trending positive in 2018. However, foot traffic is still falling. That's in spite of the aforementioned 6.2% increase in consumer spending on eating out.

Metric

Q1 2018

Q2 2018

July 2018

August 2018

Restaurant industry comparable sales

0.1%

0.9%

0.5%

1.8%

Foot traffic

(2.7%)

(2%)

(1.8%)

(0.8%)

Data source: TDn2K.

The culprit? Overexpansion and cannibalization. To scoop up the booming eating-out craze, chains are scrambling to open up new locations at a faster rate than diners are spending. That's what put the industry on shaky ground in the first place a few years ago, and it would seem the problem hasn't been solved. Burgers are among the prime offenders.

The restaurant industry is cyclical, so if consumer spending eases up, the industry problem could get even worse. There's no way of knowing when that could happen, and it's possible that spending continues to accelerate. A better-burger bubble is leading that charge, and it could be tempting to invest in its advance. However, the fact remains that new dining rooms are opening at breakneck speeds, and diners can't keep up. Investors should steer clear of burger stocks (and maybe even restaurant stocks in general).

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Stocks Mentioned

The Habit Restaurants, Inc. Stock Quote
The Habit Restaurants, Inc.
HABT
Shake Shack Inc. Stock Quote
Shake Shack Inc.
SHAK
$40.21 (0.03%) $0.01
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$247.74 (2.02%) $4.91
DineEquity, Inc. Stock Quote
DineEquity, Inc.
DIN
$65.15 (-1.30%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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