Why Are So Many Restaurant Companies Dialing Back on Guidance?

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This earnings season is just getting underway, but about half of the companies that have reported have missed on revenues. That's not a trend that pleases investors. As a result, some huge names have gotten more conservative on their 2019 forecasts.

Then there's the other side of the story: Companies like Domino's, Chipotle Mexican Grill, and a number of fast-casual restaurants are in optimistic growth mode.

In this segment of the MarketFoolery podcast, host Chris Hill is joined by Taylor Muckerman of Motley Fool Canada to talk about the fast-casual segment, the accelerating trends toward offering delivery, digital ordering, and more.

A full transcript follows the video.

This video was recorded on Jan. 22, 2019.

Chris Hill: Let's move onto the restaurant industry. You and I were talking this morning. Look, we're very early into earnings season, and yet we're already seeing somewhere in the neighborhood of 50%, maybe even slightly more than that, of companies coming out reporting missing on the top line. As you pointed out when we were chatting this morning, you have a bunch of restaurant companies that are ratcheting back their guidance. That's probably for the better. I think as a general rule of thumb, you and I are both fans of under-promise, over-deliver.

Taylor Muckerman: Absolutely!

Hill: We'd rather see companies be a little bit more conservative with their guidance. And yet, across the industry, we see all of these companies pulling back their guns. But as you pointed out, we've also got some pretty well-known names that, not only are they not really ratcheting back the guidance, they're almost immune to what's happening in the rest of the industry.

Muckerman: Yeah, you mentioned the guidance being lowered in some big names. Apple, obviously, one of the biggest that we've heard. Samsung, Delta, Macy's, Kohl's, American Airlines, Constellation Brands, Ford, Stanley Black & Decker today down about 15% after lowering guidance.

Hill: Yeah, I should say, it's not just the restaurant industry where the guidance it's being ratcheted back.

Muckerman: Yeah, it's all over the place. And yet, you see fast casual and big restaurant brands, and some with access to delivery -- you see Chipotle, Starbucks, Domino's, McDonald's, these companies grew their share price last year and it looks like they're continuing to be aggressive moving forward. Domino's talking about doubling their revenue from the 2017 levels by 2025, adding 2,000 more stores. Granted, I think they're benefiting a little bit from Papa John's struggles. But I don't think that's entirely why they're doing so well right now. To pull up 50% in the market last year vs. the overall market selling off considerably to end the year, with the new CEO and his marketing background and that heightened focus there. As a whole, when you look at Chipotle and its peers in fast casual, up 17% last year. One of the lone bright spots of the market. And I think moving forward, the American eater is continuing to eat. Grubhub delivery service, that stock's doing pretty well. When you contrast that with Blue Apron, obviously a total source of investor wealth destruction. That's the home eater cooking at home vs. having food delivered to them already pre-made. I think that we're moving more and more in that direction, of people just wanting that food ready for them when they want it.

Hill: I'm glad you mentioned Grubhub. It really does seem like we're at a point now where, if you own a restaurant stock or you're thinking about buying a restaurant stock, one of the questions you absolutely need to ask as an investor is, what is this company's strategy when it comes to delivery? They need to have one. And it's not to say it's the same answer for everyone. But, in some cases, it does make sense to partner with a Grubhub and outsource that. Others are trying to do it on their own. Again, it's not that one size fits all. But if they don't have an answer to that, that goes on the negative side.

Muckerman: Yeah, absolutely. You don't need Grubhub, but you do need delivery, or at least some kind of mobile order ahead option where you can pick up. You look at companies like Brinker International, it owns Chili's. They performed very well last year. Applebee's owner Dine Equity up 33% last year. Both of these companies offering that call-ahead or text-ahead or order-ahead on your phone, come in, pick it up, and take it right back to your house if you want to. So, you're not necessarily forced to eat at the restaurant or wait for that food to be prepared in your seat and then tip. I think those options are critical when you look at these restaurant stocks.

I think maybe down the line, if restaurants don't prepare themselves properly -- you still have people coming in to eat, and then you get these people ordering, which opens your market up to a lot more people. Yeah, that's great, but if your kitchen and staff aren't prepared, food quality could suffer. So, you need to definitely be prepared for that on the staffing side. Definitely keep your standards high, even though you're going to have this crazy influx of potential customers that aren't visiting and staying at your location.

Hill: You're also seeing it show up more in marketing and advertising. A couple of the restaurant chains you just mentioned, their television ads are promoting the delivery aspect and the pickup aspect.

Muckerman: Domino's calls it their fortressing strategy. They're taking a page out of Starbucks' playbook. These 2,000 stores aren't going to all be in new locations. They're looking to add condensed locations, where you have closer pickup times, or shorter delivery times. You're not going to see one city with one store, you're going to see a city with multiple stores in close proximity so that everyone there can get their pizza in just a few minutes picking it up or having it delivered.

Hill: One bit of restaurant news today that is timely, doesn't really tie in so much with this discussion because it's not a publicly traded company, but Chick-fil-A did announce that, despite the fact that Atlanta is home to the Super Bowl and there's a Chick-fil-A location in the stadium, in keeping with their long-standing practice, they will not be open. So, anyone going to the Super Bowl who's hoping to get a little Chick-fil-A, sorry, they're not going to be open. They're not open on Sundays.

Muckerman: Good for them!

Hill: Yeah, good for them.

Muckerman: Stand your ground.

Hill: Absolutely!