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Wall Street's Outlook for the Restaurant Industry


It's been a volatile year for restaurant stocks, especially many franchised restaurant brands. But since the election, most stocks on the Franchise Times watch list have seen a dramatic lift.

With the madness, at least of the election, behind us, investors are looking forward to 2017 with bated breath. There are certainly opportunities, but plenty more risk to come as well.

Some of the brightest minds in restaurant investing came together at the 2016 Restaurant Finance & Development Conference to share a bit of their outlook for the industry for the coming year. Of course, the first thoughts were around the new elephant in the room: President-elect Donald Trump.

"When you talk to people in the industry, they talk about the stimulus of lower taxes," said David Palmer, a restaurant analyst with RBC Capital Markets.

He said the likelihood of lower taxes has large operators eager to see what will happen, and that has stock investors pouring money into the sector.

Early conversations about radical changes to the Affordable Care Act also have investors salivating, watching for a "possible 50-to-70 basis-point benefit as an operator if healthcare is changed," said Palmer.

But as restaurants stocks surged, the watchers of Wall Street urged caution.

Howard Penny, a restaurant and retail analyst at Hedgeye Risk Management, said the current bump is all psychology.

"I don't know what's going to happen, but for the next year, it's baked in," said Penny, who added rising wages especially will be a factor in the next year under the new overtime rule and various state wage increases.

Roger Lipton of Lipton Financial Services echoed Penny's sentiments, saying while there could be opportunities, it's no return to the good ol' days of Reagan because of a whole slew of macroeconomic factors affecting the market.

"Donald Trump with the best tools and best intent doesn't have the environment Reagan had," said Lipton. "It's not going to be a smooth road in my opinion."

Roger Matthews, the former CFO of Panera and now a banker at Bank of America Merrill Lynch, also pointed to several forces that will shape the next year or years.

"We've talked about wages rising, they've started rising, but not as much as people thought," said Matthews.

On top of that, he pointed to an ongoing traffic battle with all the units that are still coming online.

"If you couple with that with the direction wages are going, there's going to be some interesting headwinds for the industry," said Matthews.

All the analysts said commodities will be something to watch. The historically low prices are helpful to the restaurant profit and loss statement, and have empowered the industry to deeply discount (with varying degrees of success). But it's also allowed grocery stores to cut prices and widen the gap between grocery and restaurant prices to historic levels. If something forces those commodities to rise, it could force grocery stores to raise prices again, skewing value perceptions back toward restaurants.

Despite what some public figures say, the banks are lending. The ease of capital has been bittersweet, as it's allowed restaurants to expand and renovate. For public companies, that's provided a sales lift from 5 to 20 percent at freshly designed locations. But that capital has also flowed to private regional and super regional brands, allowing them to expand and reinvest in operations.

"On the banking side, we talk about these disruptive brands," said Matthews. "Those large established players, a lot of their competition isn't coming from national players, but from regional, millennial players getting all kinds of capital. They're going to feel persistent, steady erosion."

But that doesn't mean it's all bad news for public restaurant companies. Those that resonate with millennial consumers are well positioned to ride a wave of an exploding demographic.

"One of the big insights is that millennials are spending twice as much as a baby boomer on restaurants," said Lipton. "We see a great tailwind for this industry from millennials."

Penny said the job growth across the board, but especially among stereotypically underemployed millennials, will be a boon for the entire industry.

As for the asset-light model being pushed by various activist investors, it's great for large multi-unit operators, and investors love it, but an aggressive flip to the model might not be prudent.

"The market loves the asset light. In the race, however, to get to that model, there's a lot of value being given away," said Matthews, who has seen discount prices for formerly corporate stores. "Frankly, it's a great time to be a buyer."

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About This Blog

The latest news, opinions and commentary on what's happening in the franchise arena that could affect your business.

Laura MichaelsLaura Michaels is editor of Franchise Times. She can be reached at 612.767.3210, or send story ideas to lmichaels@franchisetimes.com.
Beth EwenBeth Ewen is senior editor of Franchise Times. She can be reached at 612.767.3212, or send story ideas to bewen@franchisetimes.com.
Nicholas UptonNicholas Upton is restaurants editor at Franchise Times. He can be reached at 612.767.3226, or send story ideas to nupton@franchisetimes.com.
Mary Jo LarsonMary Jo Larson is the publisher of Franchise Times Magazine and the Restaurant Finance Monitor.  You can find her on Twitter at




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