The restaurant industry is difficult. Competition is fierce. Consumers are picky. Workers are transitory. And profit margins can be razor thin. The National Restaurant Association estimates that only 20% of restaurants are successful. About 60% of all restaurants fail in their first year of operation, and 80% fail within five years of opening. Those are some depressing statistics and they help to explain why many restaurant stocks chronically underperform the broader market. Currently, there’s quite a long list of restaurant stocks to avoid.
A lot of restaurant stocks have missed out on the rally of the past 18 months. While tech stocks zoomed ahead, many restaurant companies have seen their share price stuck in the mud, unable to gain any traction or forward momentum. Higher prices prompted by inflation have forced many consumers to eat at home, hurting the financial results and stock performance of restaurant chains and companies. Slowing economic growth at home in the U.S. and abroad has further complicated matters.
As you update your portfolio to take into account current trends, don’t get caught holding these three restaurant stocks to avoid.
Darden Restaurants (DRI)
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The stock of Darden Restaurants (NYSE:DRI) is down nearly 10% on the year as the company continues to report mixed financial results and a decline in same-store sales. Darden, which owns franchise restaurants such as Olive Garden and LongHorn Steakhouse, most recently announced earnings per share (EPS) of $2.62, which met Wall Street forecasts. Revenue totaled $2.97 billion, which fell short of the $3.03 billion expected among analysts. The company’s sales rose 6.8% from a year earlier.
Darden’s executive team stressed that the company’s sales got a lift from its acquisition last year of Ruth’s Chris Steak House, which provided it with 53 new restaurant locations. However, overall same-store sales decreased 1% in the quarter as nearly all restaurant segments reported same-store sales declines. A year ago, Darden reported same-store sales growth of 12%. Management lowered their revenue forecast for this year to $11.4 billion from $11.5 billion previously.
McDonald’s (MCD)
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Nothing seems to be able to move the stock of McDonald’s (NYSE:MCD). Not a new plan to sell Krispy Kreme (NASDAQ:DNUT) doughnuts at its outlets nationwide, and not a growth strategy that will see the Golden Arches open 9,000 new restaurant locations and add 100 million members to its loyalty rewards program by 2027. Despite all these efforts, MCD stock is down 10% on the year and languishing. Mixed first-quarter financial results didn’t help the share price any.
McDonald’s warned that consumers are pulling back on discretionary spending and said that boycotts continue to hurt its sales in the Middle East. It announced EPS of $2.70 versus $2.72 that was expected among analysts. Revenue in Q1 of this year came in at $6.17 billion compared to $6.16 billion that was forecast on Wall Street. Global same-store sales rose 1.9% during the quarter, missing estimates of 2.1%. Management said that spending grew due to higher prices, but acknowledged that low-income customers are starting to avoid the restaurant chain.
Starbucks (SBUX)
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Coffee shop chain Starbucks (NASDAQ:SBUX) deserves special mention as one of the top restaurant stocks to avoid as its latest financial results were arguably the worst of any restaurant company. Starbucks, which is known for its distinctive green aprons and lattes, announced a disastrous Q1 print that sent SBUX stock down 15% immediately. The share price is now trading 6% lower than where it was five years ago. The situation is so bad that it prompted former CEO Howard Schultz to come out of retirement and criticize the company on social media.
Same-store sales fell 4% as traffic at Starbucks cafes declined 6% in the quarter. Analysts were anticipating same-store sales growth of 1%. Across all regions and markets, Starbucks reported declining same-store sales and customer traffic. In China, Starbucks’ second-largest market, same-store sales plunged 11% year-over-year (YOY). Like McDonald’s, Starbucks blamed its troubles on consumers pulling back on discretionary spending and on slowing economies in countries such as China.
Looking ahead, Starbucks gave a glum outlook, lowering its forecast for both 2024 earnings and revenue, and saying that its outlets are likely to continue underperforming for several more quarters.
On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
