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Goldman Digests Casual Dining Restaurant Stocks, Serves Up 2 Buys And 2 Sells

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Goldman Digests Casual Dining Restaurant Stocks, Serves Up 2 Buys And 2 Sells

The casual dining restaurant segment continues to lose market share as consumers prefer convenience and speed instead of experiences, according to Goldman Sachs analyst Katherine Fogertey. As such, investors may prefer to buy individual names instead of the entire group.

The Ratings

Fogertey initiated coverage of:

  • Bloomin' Brands Inc (NASDAQ: BLMN) at Buy, $25 price target.
  • Brinker International, Inc. (NYSE: EAT) at Buy, $50 price target.
  • Cheesecake Factory Inc (NASDAQ: CAKE) at Neutral, $41 price target.
  • Darden Restaurants, Inc. (NYSE: DRI) at Sell, $115 price target.
  • Texas Roadhouse Inc (NASDAQ: TXRH) at Sell, $52 price target.

Bloomin' Brands

Bloomin' is in the process of exploring strategic alternatives which could include the sale of specific assets or the company as a whole, Fogertey wrote. However, the bullish case for the stock can still be made if no action is taken. The company can benefit from third-party delivery options at its Outback and Carrabba's business.

Over the longer-term, improvements at the Outback brand alone can help re-rate Bloomin's stock multiple higher, the analyst wrote. Ongoing initiatives include relocating stores to higher traffic areas and implementing G&A discipline.

Brinker Intentional

Brinker's core brand of Chili's accounts for more than 90% of total System Sales and has a path to grow through third-party delivery options, Fogertey wrote. As it stands today Chili's off premise business is 25% smaller than Olive Garden who doesn't even offer a third-party delivery option. As Chili's closes the gap with its rivals it can generate system-wide comps of 2.5% in 2020 and 1.8% in 2021. Each new store that offers delivery can see an extra $100,000 per year in sales.

Meanwhile, short interest stands at 34% of active shares outstanding which implies the research firm's bullish stance is "out of consensus."

Related Link: Analysts In Cars Getting Coffee: JPMorgan Upgrades Starbucks After Traveling To HQ

Cheesecake Factory

Cheesecake Factory has a strong mall-based presence which is suffering from declining footprint, Fogertey wrote. However, these concerns are "well understood" by investors and the Street who has one of the most negative rating distributions across the restaurant sector.

The company's recent acquisitions of North Italia and Fox Restaurant Concepts brings in more profitable restaurants that offer higher growth, the analyst wrote. But integration risks remain a concern despite strong consumer views of the brands.

Darden Restaurants

Olive Garden's parent company deserves credit for building a "sizable" off-premise business which accounts for 14.5% of 2019 sales, Fogertey wrote. However, delivery is only offered on orders above $75 that are placed prior to 5:00 p.m. the night before. This creates some near-term concerns the delivery side of the business will grow slower than rivals who have third-party partners.

In addition, the LongHorn business is not only more exposed to commodity price increases but it is losing momentum to rival Texas Roadhouse.

Related Link: Which Restaurant Stocks Is RBC Hungry For?

Texas Roadhouse

Texas Roadhouse should continue generating better than average comps but higher commodity and labor inflation are notable concerns,Fogertey wrote. In fact, these two headwinds could result in Texas Roadhouse's 2020 Restaurant Margins falling shy of management's own longer-term guidance of 17% to 18%.

Meanwhile, Bubba's 33 is showing some encouraging metrics, including an average unit volume of $3.8 million which is 35% higher compared to other Sports Bar concepts. However, the chain remains an "unproven concept" and management has taken a conservative approach to growth.

Benzinga's Take

The American consumer remains particularly strong and could trade up from Chili's and Olive Garden to Texas Roadhouse.Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Posted-In: Analyst Color Long Ideas Short Ideas Price Target Initiation Restaurants Top Stories Analyst Ratings Best of Benzinga

 

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