OPINIONFinancing

Fast-casual chains regained investor faith last year

Led by Wingstop and Chipotle, the sector was a bright spot during an otherwise difficult year on Wall Street, says RB’s The Bottom Line.
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The chicken wing chain Wingstop recovered from a rare sales decline in 2017 only to face skyrocketing wing costs by the end of the year.

The company put all of that in the past in 2018 to generate strong sales and profit growth, which pleased investors so much they made the Dallas-based company the top-performing restaurant stock of the year.

Wingstop rose nearly 65% during the year, beating every other restaurant chain we track. It also sped what had been a fairly steady performance for the company since its 2015 initial public offering. Wingstop has since tripled since first pricing its shares at $19.

But Wingstop isn’t alone. Fast-casual chains regained some favor on Wall Street—representing a relatively rare bright spot during an otherwise difficult year for stocks, including many restaurants.

2018 Top 5 Stock Winners

Chipotle Mexican Grill and Noodles & Co. both saw significant recoveries in stock price last year, coming back from brutal periods.

Chipotle’s stock rose nearly 50% in 2018 as investors bought into what new CEO Brian Niccol was selling. The company overhauled management, moved headquarters to California and underwent a marketing makeover as it sought to recover sales lost following a series of food safety incidents in 2015.

Noodles, meanwhile, rose by a third as the Denver-based chain regained sales and improved profitability.

The average fast-casual stock rose more than 17% last year, according to a Restaurant Business analysis. On average, casual-dining stocks declined 16%, and fast-food stocks declined nearly 7%.

Last year proved to be a difficult one on Wall Street: The S&P 500 fell 6.2% for the year.

2018 Top 5 Stock Losers

Most restaurant companies saw declines last year. The worst performers included iPic Entertainment (down 74%), the restaurant-movie theater chain, as well as Luby’s (down 55%) and Fatburger owner Fat Brands, which fell 46%.

Both iPic and Fat Brands went public through “mini IPOs” designed for smaller companies. Yet they’ve failed to win over public investors since going public.

Two more traditional companies also struggled, however. Del Frisco’s Restaurant Group declined 53% despite selling one weak concept (Sullivan’s Steakhouse) and buying two growth chains in Barcelona Wine Bar and Bartaco. The company is now looking for buyers and is getting pressure from an activist investor.

Red Robin Gourmet Burgers and Brews, meanwhile, saw its stock fall nearly 53% due to performance challenges at the casual-dining company.

The median restaurant stock declined nearly 12%, and 29 of the 47 stocks we track saw declines in 2018.

But larger-company stocks performed much better. That includes McDonald’s Corp., which followed up a strong stock performance in 2017 with a 3% gain in 2018—despite traffic concerns and an end-of-the-year franchisee uprising.

Starbucks Corp. stock rose 12%, and Yum Brands stock rose nearly 13%.

Large-scale casual diners such as Olive Garden owner Darden (up 4%), Chili’s Grill & Bar owner Brinker International (13%) and Applebee’s owner DineEquity (up 33%) all won over investors with strong performances by their flagship brands.

It’s also possible that the larger companies were the beneficiaries of a rush to safety. Investors lost patience with many smaller chains such as Chuy’s (down 37%), Potbelly Sandwich Shop (down 35%), Dave & Buster’s (down 19%) and Del Taco (down 18%).

The declines of so many restaurant stocks should continue to fuel an active period for take-private deals—companies such as Bojangles' Famous Chicken 'n Biscuits, Fogo de Chao, Sonic Corp., Zoes Kitchen, Jamba Juice and Buffalo Wild Wings were sold to private investors last year.

Indeed, four companies are believed to be looking for buyers, including the aforementioned Del Frisco, Papa Murphy’s Pizza (down 12% in 2018), Jack in the Box (down 21%) and Papa John’s (down 29%).

With so many stocks coming off down years, buyers could find some bargains.

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