Amid broader restaurant industry weakness, Bernstein says bar and grill has been the weakest segment in the restaurant sector over the past six quarters, mainly hurt by deflation and competitive pressures.
Analyst Sara Senatore noted that bar and grill has never been immune to industry weakness, but it has been weak since the fourth quarter of 2015.
Deflation, Competition
“Bar and grill is at the epicenter of deflation, with beef deflating further than even other proteins, improving the relative value of eating at home,” Senatore wrote in a note.
The analyst said beef prices in grocery stores have fallen by double digits, encouraging consumers to eat at home.
Further, The bar & grill segment is hypercompetitive that in turn creating intense topline pressure for the operators.
“The bar and grill category is among the most competitive – with multiple scaled competitors – while also competing for share of stomach with the fast food hamburger category, where significant price competition has prevailed,” Senatore explained.
Off-Premise Headwind
The growth in off-premise may also present more of a headwind as bar and grill's less portable food and higher alcohol mix could mean it may participate less in off-premise growth.
In this backdrop, the analyst said Darden Restaurants, Inc. DRI is likely to remain a share gainer, while valuation is more attractive for Brinker International, Inc. EAT.
“The multiple gap between DRI and EAT is now at its five-year peak, reflecting continued strength at DRI and weakness at EAT. We believe, however, that we will need to see an improving pricing environment before EAT's topline reaccelerates meaningfully,” Senatore added.
Shares of Darden Restaurants closed Thursday’s trading at $75.22, while Brinker ended at $41.80.
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