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Restaurant & Retail Roundup

Restaurants and retailers underperform indexes in January. Restaurant stocks have been volatile in recent months, with a strong finish to 2023, partially offset by a retracement YTD in January. For January, our equal-weighted index of restaurant stocks declined 1.2%, underperforming the S&P 500, which rose 1.6%. Retail companies significantly underperformed the S&P 500, with a decline of 5.0%. Short interest trends. Short interest data was published after the close on January 24, 2024, reflecting data as of January 12, 2024. Total short interest in restaurant stocks (42 stocks included in our list) was up ~3.5% in the first two weeks of January. The greatest increases in short interest were First Watch (FWRG) and Brinker International (EAT). Casual dining is seeing greater increases in short-interest trends versus the large-cap QSR names. For the restaurants, the highest levels of short interest were for Red Robin (RRGB: 14.5%), Cheesecake Factory (CAKE: 13.3%), Dave & Buster’s (PLAY: 13.1%), Sweet Greens (SG: 12.9%), and Brinker International (EAT: 12.6%). For the retailers, the highest levels of short interest were for Kohl’s (KSS: 28.0%), Lovesac (LOVE: 23.3%), Boot Barn (17.2%), Children’s Place (PLCE: 17.1%), and Build-A-Bear (BBW:16.1%). Casual dining same-store sales (SSS) are off to a difficult start in 2024. Based on our checks in recent weeks, SSS are decelerating due in large part to difficult Y/Y comparisons and inclement weather versus January 2023 (second warmest on record). We estimate that SSS declined ~9.0%, with traffic decreases of 10.5% for casual dining companies through the first three weeks of January. Restaurant takeaways from ICR. We recently attended the ICR Conference, and we outline our key takeaways: (1) unit growth is expected to accelerate for restaurants in 2024; (2) the outlook for restaurant demand is somewhat mixed, but most management teams believe that traffic will be negative for the better part of 2024; (3) most companies will be more conservative for menu pricing in 2024 given significant increases coming out of COVID; (4) the most significant cost headwind will be labor given shortages and changes in laws (i.e. AB 1228); and (5) digital transformation and automation continue to be a high priority for most companies given the long-term outlook for labor. Takeaways from Brinker’s (EAT) earnings. Brinker announced its fiscal 2Q earnings on January 31. We outline our key takeaways: (1) Chili’s “3 for Me” campaign is resonating, and new product news is coming; (2) EAT is seeing good traffic trends and improving mix, with positive traffic of 1.9% at Chili’s (base business/excluding virtual brands) and improving mix due in part to increased premium margarita sales; (3) management is somewhat cautious on the consumer but believes the recent downturn in comps is mostly a function of weather; (4) commodity cost inflation is expected to be up slightly Y/Y in fiscal 2H24 (ending June), however, commodity costs look to be better than expected; (5) management talked about a more conservative consumer but remained upbeat in its outlook and raised revenue guidance slightly for the fiscal year (ending June 2024).