Earnings season is in full swing as we take a quick glance around the restaurant industry. Thus far there have not been any glaring surprises whether positive or negative. With that in mind, we will take a look at some of the underlying themes currently making headlines in the sector.
The Breakfast Wars
In 1972, McDonald’s Corp. (MCD - Free McDonald's Stock Report) unveiled the Egg McMuffin, which quickly changed the fast food landscape and more than 40 years later remains the flagship breakfast offering for the company. Over those decades, the ubiquitous chain has fleshed out its early morning menu and sprinkled in healthier options to reflect changing customer wants. Undoubtedly, MCD is the leader in this game, but a run at the crown is in the works, and the advertising campaign to go behind it is in full swing.
Taco Bell, one of the chains under the Yum! Brands (YUM) umbrella, has cut itself a nice niche in the fast food realm. In the past few years, one could argue that its Doritos Locos tacos has been the hottest new item in this space. On the heels of this momentum, perhaps, a decision has been made to make an advance into the breakfast world. The menu will be spearheaded by breakfast burritos and waffle wraps, the former already being featured on MCD’s slate. We are all for more options and increased competition for our morning pallets, but YUM has its work cut out for itself if it is to make sizable in-roads in this day part. We think Taco Bell loyalists will certainly sample the new breakfast offerings, but are less inclined to believe that McDonald’s loyalists will eschew the old reliable for a new thing. Only time will tell, but our initial reaction to the move is skepticism.
In the meantime, all of the fast food sector needs to be wary of the employee unhappiness that is brewing to a froth. Global wage protests are being organized for 150 cities here in the United States, and 33 other countries are following America’s lead. Rallies are set for May 15th to improve both pay and working conditions. This situation needs to be monitored closely.
Burger King Making Global Strides
Recall that Burger King Worldwide (BKW) was taken private not too long ago and then emerged as a reorganized entity for an IPO in the summer of 2012. The stock has performed well since its re-release and, compared to some of its fast food brethren over that span, the numbers are staggering (up about 75% in last two years). Burger King has excelled at realizing what it is, a fast food burger-focused joint, and stuck to its guns. Yes, its advertising campaigns are a bit unconventional, but it’s going up against McDonald’s in most markets, so thinking outside the box is a must. That said, while MCD attempts to cater to the masses, BKW just keeps pumping out different kinds of burgers that appeal to its base. With that, as North American numbers are ho-hum for both itself and the sector as a whole, The King has set its sights on an aggressive overseas push. More than 300 stores opened in Europe and emerging markets in the most recently reported quarter. Traffic numbers have been especially robust in Latin America and the Asia/Pacific rim. Growth investors will like what they see here, but we caution that larger strides in same-store sales on the home front will be necessary before enthusiasm reaches a fever pitch. With the recent harsh winter now in the rearview mirror, this could be the time for BKW to put up an improved showing.
Cracker Barrel Summer Prospects
Truth be told, Cracker Barrel (CBRL) does not generate nearly the amount of headlines as some other entities in the restaurant space (see McDonalds and Starbucks Corp. (SBUX)), but some pundits have come up with a theory that this summer could be a good one for the casual dining chain, and we are on board. Those that follow this column know that we did not give companies much sympathy for dealing with the extreme conditions experienced across America this winter. Some had a case to make, while others masked problems and simply pointed to the weather. Let us be clear, Cracker had a legitimate claim. Roughly 85% of its restaurants are located near interstate highway exits and it has no locations in California. Some of its competition had better starts to 2014 due to a concentration in the Golden State. Anyway, there is no arguing that pent-up demand for the open road should be elevated as summer kicks into high gear. If and when this surfaces, CBRL will benefit, possibly more than any other concern in this space.
Shake Up At Bob Evans
Sandell Asset Management, which has a 6.8% stake in Bob Evans Farms (BOBE), has been pushing for change within the company for the last few months, and now it seems some progress is being made. Sandell’s main complaint is that BOBE has underperformed its peer group for a number of years. In an effort to improve this relative showing it wanted changes to the board of directors. Positive comprehensive change was the overall goal and, with the nomination of eight new directors, that ball is rolling. Included in that group were former top brass at Arby’s, Sonic Corp. (SONC), and O’Charleys. In the meantime, and perhaps bowing to pressures created by Sandell’s words, BOBE announced that three board members, were departing and would be replaced by fresher faces, but not the ones on Sandell’s list. Almost immediately, the activist investment firm released a terse missive stating that the maneuver was a knee jerk reaction and, to put it kindly, that it would simply not suffice. Shortly after the response, the CFO resigned effective May 16th). No word yet on whether or not these two events are mutually exclusive. The company’s annual meeting, which is usually held in August, will be worth monitoring.
At the time of this writing, the author did not have positions in any of the stocks mentioned.