The restaurant industry made a strong comeback from COVID-19 pandemic-led disruption last year. However, with the mounting risk of recession due to continuing geopolitical strife and multi-decade high inflation, we think it could be wise to avoid overvalued restaurant stocks Chipotle Mexican Grill (CMG), Wingstop (WING), Shake Shack (SHAK), Kura Sushi (KRUS) and FAT Brands (FAT). Let’s discuss.
The COVID-19 pandemic caused severe stress to the restaurant industry, which largely had to close to contain the infection’s spread. However, with the easing of restrictions and changes in business models by restaurants to meet changing customer needs, the industry made a strong comeback last year. Consumer spending at restaurants grew by 16% in 2021 versus the prior year, when restaurant spending declined by 12%. Spending was up 2% in 2021 versus 2019.
In January, inflation surged to a 40-year-old due to high demand amid a severe supply chain crisis. And the Consumer Price Index is expected to hit fresh highs in February on the war between Ukraine and Russia, which has been driving up prices of crude oil and essential commodities. During inflationary periods, households and individuals are often forced to choose to spend on necessities over luxuries. This could lead to a decline in eating out at restaurants as people cut back on their discretionary spending.
Given this backdrop, we think it could be wise to avoid restaurant stocks Chipotle Mexican Grill, Inc. (CMG), Wingstop Inc. (WIN), Shake Shack Inc. (SHAK), Kura Sushi USA, Inc. (KRUS), and FAT Brands Inc. (Fat). These stocks look overvalued at their current prices and could witness a downtrend in the near term.
Chipotle Mexican Grill, Inc. (CMG)
CMG in Denver, Colo., together with its subsidiaries, operates Chipotle Mexican Grill restaurants. The company develops and operates restaurants that serve a menu of burritos, burrito bowls, tacos, and salads, made using fresh ingredients. The company’s Chipotle Mexican Grill restaurants serve a menu of burritos, burrito bowls, tacos, and salads.
CMG’s adjusted general and administrative expenses increased 16% year-over-year to $132.83 million for its fourth quarter, ended Dec. 31, 2021. The company’s current liabilities increased 6.2% year-over-year to $873.68 million. Also, its total liabilities increased 9.9% year-over-year to $4.35 billion.
In terms of forward EV/S and EV/EBITDA, CMG’s respective 4.53x and 26.60x are higher than the 1.19x and 8.92x industry averages. Furthermore, its 14.43x forward P/B is 427.3% higher than the 2.74x industry average. Analysts expect CMG’s EPS to decline 3.4% per annum over the next five years. And over the past six months, the stock has declined 25.6% in price to close the last trading session at $1,420.63.
CMG’s weak fundamentals are reflected in its POWR Ratings. It has a D grade for Value. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
Wingstop Inc. (WIN)
WING is a fast-casual chicken wings-focused restaurant chain that franchises and operates restaurants under the Wingstop brand name. Its restaurants offer classic wings, boneless wings, and tenders that are cooked-to-order and hand-sauced-and-tossed in various flavors. WING is headquartered in Dallas, Tex.
For its fiscal fourth quarter, ended Dec. 25, 2021, WING’s long-term debt increased 0.5% year-over-year to $469.39 million. The company’s cost of sales increased 20.5% year-over-year to $14.72 million. And its total costs and expenses increased 8.6% year-over-year to $57.81 million.
In terms of forward P/S and EV/EBITDA, WING’s respective 10.94x and 39.99x are higher than the 0.95x and 8.92x industry averages. Its 50.63x forward EV/EBIT is 324.8% higher than the 11.92x industry average. For the quarter ending March 31, 2022, WING’s EPS is expected to decline 9.1% year-over-year to $0.40.
WING’s POWR Ratings reflects its poor prospects. It has a D grade for Growth, Value, and Sentiment. Within the Restaurants industry, it is ranked #35. To see the additional ratings of WING for Momentum, Stability, and Quality, click here.
Shake Shack Inc. (SHAK)
SHAK in New York City operates roadside burger stands. The company serves an American menu of burgers, chicken sandwiches, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, and wine. Its menu focuses on food and beverages crafted from a range of classic American foods.
SHAK’s adjusted pro forma net loss widened 269.6% year-over-year to $4.76 million for the fourth quarter, ended Dec. 29, 2021. Also, its adjusted pro forma loss per fully exchanged share widened 266.6% year-over-year to $0.11. In addition, its total expenses increased 23.5% year-over-year to $209.74 million.
In terms of forward EV/S and P/S, SHAK’s respective 2.92x and 2.72x are higher than the 1.19x and 0.95x industry averages. Its 37.35x forward EV/EBITDA is 318.7% higher than the 8.92x industry average. Analysts expect SHAK’s EPS to turn negative in fiscal year 2022. Over the past year, the stock has declined 42.3% to close the last trading session at $65.98.
SHAK’s POWR Ratings are consistent with this bleak outlook. It has an overall rating of D, which translates to a Sell in our proprietary rating system.
Kura Sushi USA, Inc. (KRUS)
KRUS operates technology-enabled Japanese restaurants in the United States. KRUS serves Japanese cuisine through its sushi service model. Its menu comprises nigiri, hot rolls, hand rolls, gunkan, noodles, ojyu, teppanyaki, desserts, and beverages. KRUS is headquartered in Irvine, Calif.
For the fiscal first quarter, ended Nov. 30, 2022, KRUS’ total restaurant operating costs increased 111.8% year-over-year to $25.64 million. The company’s operating expenses increased 98% year-over-year to $31.09 million. Also, its net loss narrowed 79.9% year-over-year to $1.27 million.
In terms of forward EV/S and EV/EBITDA, KRUS’ respective 3.52x and 91.66x are higher than the 1.19x and 8.92x industry averages. Its 4.85x forward P/B is 77.2% higher than the 2.74x industry average. For the current quarter and next quarter, KRUS’ EPS is expected to remain negative. The stock has declined 40% year-to-date to close the last trading session at $48.55.
KRUS’ weak fundamentals are reflected in its POWR Ratings. According to our rating system, it has an overall rating of D, which translates to Sell.
FAT Brands Inc. (Fat)
FAT in Beverly Hills, Calif., is a multi-brand restaurant franchising company. It acquires, markets, and develops fast-casual, quick-service, casual, and polished casual dining restaurant concepts worldwide. It owns the brands including Round Table Pizza, Fatburger, Marble Slab Creamery, Johnny Rockets, Fazoli’s, Twin Peaks, Great Grill & Wings, Pretzelmaker, Elevation Burger, Yalla Mediterranean, Ponderosa, and Bonanza Steakhouses.
In February, the Federal authorities commenced investigating the CEO of FAT, Andrew Wiederhorn, and a family member due to claims of securities and wire fraudmoney laundering, and attempted tax evasion.
FAT’s total costs and expenses increased 408.5% year-over-year to $27.38 million for the third quarter, ended Sept. 26, 2021. The company’s adjusted net loss came in at $2.03 million, compared to $0.31 million net income in the year-ago period. Also, its adjusted loss per share came in at $0.14, compared to an adjusted EPS of $0.02 in the year-ago period.
In terms of forward EV/S and P/S, FAT’s respective 6.27x and 1.20x are higher than the industry averages of 1.19x and 0.95x. Furthermore, its 48.25x forward EV/EBIT is 304.8% higher than the 11.92x industry average. Analysts expect FAT’s EPS for its fiscal year 2021 to come negative. Over the past six months, the stock declined 34.4% to close the last trading session at $7.50.
FAT’s POWR Ratings reflects its poor prospects. It has an overall D rating, which translates to a Sell in our proprietary rating system.
It has a D grade for Value and Quality. It is ranked #44 in the Restaurants industry. Click here to see the additional ratings of FAT for Growth, Momentum, Stability, and Sentiment.
CMG shares were trading at $1,428.62 per share on Thursday morning, up $7.99 (+0.56%). Year-to-date, CMG has declined -18.28%, versus a -11.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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