Jefferies Previews Q4 Restaurant Earnings: 'Challenges Likely Persist into '16'

• Shares of restaurant companies have been trending south over the last six months.
• Jefferies’ Andy Barish maintained ratings on various restaurant stocks, while revising the estimates for some of them.
• Challenges facing restaurant stocks are likely to persist in 2016, Barish stated.

Analyst Andy Barish mentioned that restaurant stocks continue to be under pressure and are following the weaker trends witnessed at the end of 2015. “Overarching concerns on SSS/traffic and labor continue to hold back the group as they retrench from record high valuations.”

Barish believes that the 4Q earnings would not change this trend and “choppy quarters” could continue to be “greeted harshly.”

“SSS trends decelerated in October and November and look like they stabilized/improved on tougher December compares. Traffic remains elusive as restaurant supply has expanded back to peak levels and doesn’t show many signs of letting up yet,” the Jefferies report noted.

Del Taco

Barish maintained a Buy rating for Del Taco Restaurants Inc TACO, with a price target of $16.

The company pre-announced better-than-expected 4Q results and FY16 guidance. The revenue estimates for 4Q and 2015 have been raised to $133million and $424million, respectively. The adjusted EBITDA estimates for 4Q and 2015 have been raised to $19.6million and $62.4million, respectively.

Domino's

Barish maintained a Hold rating for Domino's Pizza, Inc. DPZ, with a price target of $102.

The analyst believes that Domino’s long-term outlook remains positive, given the company’s ability to leverage its leadership in digital ordering to record improved SSS over the next several years. He added, however, that the company’s near-term EPS is likely to remain depressed due to forex headwinds and higher G&A.

The EPS estimate for 4Q has been raised from $1.06 to $1.09 to reflect marginally higher SSS.

Papa John’s

Jefferies has a Hold rating for Papa John's Int'l, Inc. PZZA and a price target of $64.

Papa John’s is one of the leading players in QSR, with predictable SSS as it leverages its strong brand and robust digital platform to take market share, Barish said.

“We think that there is a realistic potential for EPS in ’15 & ‘16 to end up showing mid-teens growth (we imagine initial ’16 guide will be in the 13-16% range as cheese costs continue to fall and we potentially see less Y/Y pressure from certain G&A and insurance costs),” the analyst wrote.

The company is benefiting from robust SSS trends and improving profitability in its international business. Barish expects Papa John’s domestic SSS to face modest headwinds as competitors turn more aggressive with pricing. The domestic SSS estimate for 4Q15 has been reduced from 4.3 percent to 2.5 percent to better reflect the difficult comparisons.

Papa Murphy’s

Barish maintained a Buy rating for Papa Murphy's Holdings Inc FRSH, with a price target of $19.

The analyst expects Papa Murphy’s to reiterate its technology timeline for 2016 with online ordering likely to be rolled out by the end of 1Q16. The company’s digital marketing platform is likely to be launched in 2H16, giving a boost to the company’s SSS in the second half of the year.

Increased G&A expenses, pre-opening costs and labor/COGS inefficiencies are expected to restrict the company’s 4Q earnings. The EPS estimate for 4Q15 has been reduced from $0.16 to $0.13.

Popeyes Louisiana Kitchen

Jefferies maintained a Buy rating for Popeyes Louisiana Kitchen Inc PLKI, with a price target of $67.

Barish mentioned that Popeyes represents one of the top performing share gainers in QSR, given its consistent SSS outperformance, visible unit growth opportunity and an attractive near-100 percent franchised ownership structure. Popeyes pre-announced better-than-guided 4Q and 2015 global SSS of 2.8 percent and 5.9 percent, respectively.

The company is expected to report 4Q and 2015 EPS of $0.41 and $1.91, respectively.

Red Robin Gourmet Burgers

The analyst maintained a Buy rating for Red Robin Gourmet Burgers, Inc. RRGB, with a price target of $90.

The company pre-announced 4Q SSS of -2 percent and EPS of $0.80-$0.84. Barish expects the SSS trends to start improving in 2016 and continue to accelerate as the year progresses.

“We think these trends will continue to accelerate as we move through the year, given the potential impact from the Brand Transformation remodels, the adjusted marketing strategy and the likelihood that the intense competitive discounting seen since October will prove unsustainable and diminish,” the Jefferies report mentioned.

Wingstop

Barish maintained a Buy rating for Wingstop Inc WING, with a price target of $28.

The company’s strengths lie in its highly franchised model and competitive differentiation. “The brand skews toward minority consumers and can very successfully employ B/C real estate, both of which creates more of an “open playing field” for growth than many other fast-casual brands in a segment,” the analyst commented.

The EBITDA estimate for 4Q has been raised modestly from $6.2 million to $6.3 million.