Investors were loving big restaurant chains in 2017. The rest? Not so much.
McDonald’s Latin American franchisee, Arcos Dorados Holdings, was the top performing restaurant stock on Wall Street in 2017, having surged nearly 92% during the year.
Right behind Arcos? Its franchisor, McDonald’s, which was the top-performing brand among publicly traded restaurant companies, thanks to a 41% increase in its stock price.
The performance highlighted a gap between large and small restaurant companies. Investors shifted their money toward larger companies, shying away from riskier “growth” chains that showed any weakness over the past year.
On average, restaurant stocks declined nearly 2% in 2017. The median decline was even worse: 4.7%.
And imagine what would have happened had industry stocks not rallied late in the year. The average increase in the last three months of the year was 3.5%.
The average was hardly a surprise. Restaurant sales and traffic were weak throughout 2017, and the weakness wasn’t just limited to casual-dining chains. Fast-casual concepts and pizza concepts not named Domino’s all struggled during the past year.
Bigger-name companies dominated, largely because they performed better
And that included the biggest name, McDonald’s.
The chain’s same-store sales improved as the year went on, and investors were confident in the chain’s moves to build long-term sales growth. That included plans to introduce fresh-beef burgers made to order this year as well as remodeled restaurants that will include self-order kiosks.
The chain is also introducing a new value offering this week: a menu of items for $1, $2 and $3.
Instinet analyst Mark Kalinowski on Tuesday picked McDonald’s as his top restaurant stock for 2018.
But it wasn’t just McDonald’s. Olive Garden owner Darden, Burger King owner Restaurant Brands International, Taco Bell owner Yum Brands, Dunkin’ Brands and Wendy’s were all among the 11 best-performing restaurant stocks.
Smaller concepts fell out of favor among investors
Especially any company that saw some sales weakness.
Nine companies lost more than 30% of their value in 2017, and most of them were smaller companies.
The weakest performing company was the small, upscale casual-dining chain operator Kona Grill, whose stock plunged more than 86% in 2017.
But newly public companies Zoes Kitchen (down 30%), Bojangles' (down 37%) and Habit Restaurants (down 45%) all saw steep declines in 2017 due to sales problems. So did Pollo Tropical owner Fiesta Restaurant Group (down 36%).
Weaker casual- and family-dining names likewise struggled on Wall Street. That includes Applebee’s owner DineEquity (down 34%) and Bravo Brio Restaurant Group (down 34%) as well as Luby’s, which declined by 38%.
The weakest-performing companies included several fast-casual names
Such as Zoes, Habit and Fiesta, helping the burgeoning sector to a relatively weak average decline of nearly 5%.
In addition to the other names, fast-casual burger chain operator Good Times Restaurants declined by more than 15%.
And Chipotle Mexican Grill, struggling all year to recover from a steep sales decline in 2016, declined by more than 23%—ultimately prompting the departure of Steve Ells, the company’s founder, as CEO.
On the other hand, some fast-casual chains performed well. Wingstop, the Texas-based chicken wing chain, rose more than 32%. And Shake Shack stock increased more than 20%.
Investors pumped money back into casual dining in the fourth quarter
Stock in Famous Dave’s surged nearly 74% in the last three months of the year as sales recovered and the company hired a new CEO. That led to a turnaround in the stock—which finished the year up 33%.
That was casual-dining stocks in a nutshell. The beleaguered sector struggled most of the year, and the average stock price declined 8% in 2017.
But the sector’s stocks surged at the end of the year, increasing 9% on average in the fourth quarter.
The reason is simple: Same-store sales among dine-in concepts, which also include family-dining chains, improved in October and November, giving investors some confidence in a turnaround for those companies.