High Costs, Low Traffic Take A Bite Out Of Restaurant Stocks

The restaurant industry’s sales trends in recent quarters have been very challenging, as the Thursday report from Starbucks (SBUX - Free Report) shows. This makes it prudent for investors to take a closer look at the dampeners threatening growth in the restaurant industry. Particularly, negative comps growth, given sluggish traffic trends along with rising costs, are taking the sheen out of restaurateurs.

Below we discuss some of the downsides plaguing the restaurant industry:

High Expenses 

Costs related to various sales and comps boosting initiatives along with restaurant re-imaging expenses are hurting margins for companies like Domino's Pizza, Inc. (DPZ - Free Report) , The Wendy's Company (WEN - Free Report) and Brinker International, Inc. (EAT - Free Report) . Though these initiatives offer long-term advantages, the costs related to them are expected to continue to dampen margins in the near term.

Moreover, restaurants like The Cheesecake Factory Inc. CAKE and Panera Bread Company (PNRA) intend to make additional unit openings going forward. Thus, higher marketing and pre-opening costs associated with the same are expected to hurt profits.

Also, there has been considerable debate in the recent past over restaurant workers’ wages. Workers at quick-service restaurants claim that their employers' profits have not trickled down to them proportionately, which is leading to strikes for wage hikes. These incidents significantly hurt the reputation of restaurants. As a result, the companies are compelled to make minimum wage increases, which again lead to narrower margins. Moreover, higher labor costs due to a competitive labor market are expected to continue to keep profits under pressure.

Restaurant management turnover is another critical headwind for operators as turnover rates are now at the highest level since the recession, according to a report by Black Box Intelligence. This is further compelling restaurants to either hike wages or provide benefits, again at the cost of margins, to retain or attract employees. Industry giants like McDonald's Corp. (MCD - Free Report) and Domino's are working on these lines.

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