Restaurant stocks have split sharply this year, with companies that own multiple brands gaining ground while single-brand chains have fallen. Brinker International, Darden Restaurants, and Restaurant Brands International have all risen roughly 32%, 18%, and 12% year to date. These firms own more than one chain, ranging from Chili’s and Olive Garden to LongHorn Steakhouse, Burger King, and Tim Hortons. In contrast, McDonald’s, Chipotle, Wendy’s, Shake Shack, and Domino’s have dropped this year, with several down double-digit percentages. These share moves highlight what some analysts see as the benefits of a diversified restaurant business, especially when cash-strapped consumers shift spending to other options when one brand fails to meet expectations.
One brand versus many
When leading restaurant groups release their upcoming quarterly earnings next week, investors will again evaluate the impact of running several brands on overall results. Inspire Brands—parent of Dunkin’, Buffalo Wild Wings and Jimmy John’s—is preparing for an IPO. A firm that relies on a single concept must count on that brand staying front-of-mind for diners. In contrast, a multi-brand operator can draw on other concepts when one slows down. This safety net matters, provided another chain can compensate for the weakness.
Nick Setyan, who covers restaurants for Mizuho Securities, noted that Darden exemplifies the advantages of scale, size and varied concepts. “If one business isn’t doing well, the other ones are,” he remarked. This pattern has emerged between the chain’s two flagship brands, Olive Garden and LongHorn Steakhouse. For several quarters LongHorn has been expanding faster than Olive Garden, and in the most recent period its comparable sales climbed 6.2% versus Olive Garden’s 1.1% increase. In an October note, KeyBanc Capital Markets highlighted Darden’s diverse portfolio as a strength, stating it provides the firm “exposure to a broad range of consumers.” The brokerage maintains a buy-equivalent stance with a $237 price objective, while the stock traded near $215 on Thursday.
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The risks of a mixed bag
Restaurant Brands International also gives investors access to several segments via Burger King, Tim Hortons and Popeyes, yet the mix cannot completely shield the group from a lagging brand. The company that owns Tim Hortons and Burger King announced a cash purchase of Popeyes for US$1.8 billion. During the second quarter, Burger King’s comparable sales in the United States rose to 8.5% after posting 5.8% in the prior quarter, whereas Tim Hortons’ comparable sales in Canada slipped to only 0.1% from 1.5% previously. Consequently, the recovery at Burger King has shouldered a larger share of the overall business while Tim Hortons’ growth stalled.
Setyan observed that the recent vigor at Burger King has driven the firm’s overall momentum, partly because the chain has been more effective at promoting its value offerings while McDonald’s sales have decelerated. “If it weren’t for Burger King’s current performance, I don’t know if [Restaurant Brands] would be going so well,” he stated. Mizuho began covering Restaurant Brands on October 20, assigning a buy-equivalent rating and setting an $85 price target. The stock was trading near $76 on Thursday.