The year 2014 turned out to be a tough one for the leading burger chain McDonald’s Corp. (MCD). This Zacks Rank #3 (Hold) company’s earnings missed the Zacks Consensus Estimate in two of the trailing three quarters while revenues fell short of the consensus mark in all three. As a result, the company has an average positive earnings surprise of only 2.41% and a negative revenue surprise of 1.73%.
Overall, the company’s performance was unimpressive and its share price failed to register gains in 2014. This compares with the S&P 500’s gain of 12.4%. This brings us to the question as to why McDonald’s, once the industry’s darling, struggled to keep pace with the broader index.
Besides some common industry headwinds, a slew of negatives in most of its operating regions resulted in the weak performance of the company. In fact, the company has been consistently posting negative comps over the past six months. Comps at all its operating regions have been under pressure. It has not been able to post positive comps since Oct 2013 in the domestic market owing to heightened competition and a few unwise decisions that slowed down service. The introduction of too many items in 2013 continued to impact service and orders in 2014 as well.
Europe, its other important market, has seen sluggish comps owing to the weakening of euro and poor performance in Russia where the company is facing pressure from consumer safety regulators. This has even led to temporary disclosure of restaurants. The Asia/Pacific, Middle East and Africa regions have also performed dismally due to food safety issues in China.
In Jul 2014, it was found that Shanghai Husi Food Co. – a supplier of McDonald’s — was reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This led to food safety concerns and lower consumer confidence, which negatively impacted comps.
How Was the Performance of Other Restaurant Stocks?
The U.S. restaurant industry was under the weather at the beginning of 2014. Increasing food costs, weak consumer spending environment and a few political and general issues kept the industry under pressure.
However, better job prospects, stepped-up economic activities, better-than-expected GDP numbers, improved business, renewed optimism as a result of the housing recovery, rising wages and cheap fuel in the second part of the year improved the bleak picture to some extent. In fact, the economy recorded back-to-back quarters of strong growth in over a decade and is now well on track for the best annual job growth since late 1999.
Not surprisingly, consumer sentiment jumped to 93.6 in December from 88.8 in November, as per Thomson Reuters/University of Michigan. The final reading represents the highest level in nearly eight years.
Buoyed by positive sales and traffic and an optimistic outlook among restaurant operators, the Restaurant Performance Index (RPI), which tracks the health of and outlook for the U.S. restaurant industry, remained above 100 at 102.1 in November – the 21st consecutive month in which the RPI scored above 100.
This signifies expansion of key industry indicators. The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), remained above 100 in November – marking the ninth consecutive month in which the index came above 100.
Stocks That Outperformed McDonald’s
More or less all restaurateurs were affected by the fluctuations in the economy, but some of them managed to outperform owing to their strong fundamentals. Though fourth quarter results have not been announced yet, we have handpicked three stocks with almost the same menu as McDonald’s but turned out to be better performers in terms of three-quarter average revenue and earnings surprises, and year-to-date share price return. These stocks also hold a favorable Zacks Rank and therefore are expected to perform well going forward as well.
Based in South Carolina, Denny's Corp. (DENN) offers a wide selection of lunch and dinner items including burgers, sandwiches, salads, along with an assortment of beverages, appetizers and desserts. This Zacks Rank #2 (Buy) company is well known for its breakfast items, which are available round the clock.
The company’s earnings beat the Zacks Consensus Estimate in two of the past three quarters and matched the same in one. It currently has a positive earnings surprise of 7.87%. Revenues missed the consensus mark in one quarter but beat the same in two quarters. The company currently has a positive revenue surprise of 0.23%.
In 2014, share price of the company gained 43.4%, much higher than McDonald’s. Owing to its varied menu offerings and innovations, marketing and advertising and focus on brand protection and quality, the company has been able to post an impressive performance.
Based in California, Jack in the Box Inc.’s (JACK) restaurants offer a broad selection of distinctive products, which include hamburgers, tacos, specialty sandwiches, drinks, real ice cream shakes, salads and side items. Jack in the Box restaurants also offer guests the ability to customize their meals and to order any product, including breakfast items, any time of the day.
The Jack in the Box restaurant chain was the first major hamburger chain to develop and expand the concept of drive-thru restaurants. Besides, most of its restaurants have seating capacities ranging from 20 to 100 and are open 18-24 hours a day.
This Zacks Rank #2 company’s earnings beat the Zacks Consensus Estimate in two of the past three quarters while missing the consensus mark in one. Revenues topped the estimates in all three quarters of the year. The company has an average positive earnings and revenue surprise of 4.67% and 0.96%, respectively. Share price of the company gained 61.4% in 2014.
Based in Ohio, The Wendy's Company (WEN) offers an extensive menu comprising hamburger sandwiches and chicken breast sandwiches, which are customized to suit the customer’s choice of condiments. Wendy’s menu also includes chicken nuggets, chili, French fries, baked potatoes, freshly prepared salads, soft drinks, Frosty desserts and kids’ meals. In addition, the restaurants sell a variety of promotional products on a limited time basis.
This Zacks Rank #3 company’s earnings missed the Zacks Consensus Estimate in one of the three quarters, it beat and remained in-line in the other two quarters. On the revenue front, the company missed the consensus mark in one quarter while beating the estimate in the other two.
Currently, the company has a positive average earnings and revenue surprise of 9.63% and 1.46%, respectively, much higher than McDonald’s. In 2014, share price of this company gained 6%, higher than McDonald’s. The company’s brand transformation initiatives like menu innovation, promotional offerings, re-imaging of restaurants and bold new packaging are helping it to perform well.
Other Better-Performing Restaurateurs
There are some other restaurants that do not have similar offerings but have emerged better than McDonald’s in 2014 owing to their own speciality and strong fundamentals. Fresher, healthier, and customized meals from upstart fast-casual chains like Chipotle Mexican Grill Inc. (CMG) are stealing the profits and therefore posing competition for burger giants like McDonald’s.
Chipotle Mexican Grill currently has a positive earnings surprise of 5.07% and revenue surprise of 4.62%. Cracker Barrel Old Country Store, Inc. (CBRL), another food chain offering Sandwich Platters comprising Half Pound Hamburger and Grilled Chicken Tenderloin, Fancy Fixin’s, Country Salads, Desserts, Beverage and Juices has posted three-quarter earnings and revenue surprise of 4.91% and 1.06%, respectively. Also, the company has a separate Kids Menu.
Sonic Corp. (SONC) and Ruby Tuesday, Inc. (RT) also posted positive earnings and revenue surprises better than McDonald’s. Other food chains like Bob Evans Farms, Inc. (BOBE), Carrols Restaurant Group, Inc. (TAST), Del Frisco's Restaurant Group, Inc. (DFRG), Popeyes Louisiana Kitchen, Inc. (PLKI) and Red Robin Gourmet Burgers Inc. (RRGB) did better than McDonald’s mainly on the earnings front.
Bottom Line
We would like to see how these outperformers fare amid a soft consumer spending environment and rising commodity costs as the year progresses.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment