Smaller Restaurants Are Starving for Sales After Earnings Misses

(Bloomberg) -- Restaurants with some of the smaller market values are leaving investors hungry this earnings season after a year of feasting. Or maybe it's their larger peers that are eating their lunch.

Eleven of the 21 restaurants in the Russell 2000 Growth Index that reported quarterly results missed revenue estimates by an average of 0.4 percent, according to data compiled by Bloomberg. It's a sudden setback after two straight quarters with an average revenue surprise of better than 1 percent for the group and could raise concerns for the companies reporting next week, including Jack in the Box Inc. and Papa John's International Inc., which has had its own set of difficulties recently.

Two of the index's worst performers Friday are Shake Shack Inc., which fell almost 12 percent by midday, and Nathan's Famous Inc., down as much as 9.2 percent. The burger chain's full-year revenue forecast trailed the average analyst estimate, while the brand best known for its hot dogs reported a drop in quarterly revenue from a year ago. Shake Shack's market cap has shrunk to $2.1 billion, down from over $2.5 billion last month, while Nathan's is under $400 million.

Of the small-cap restaurants that have reported earnings so far, four beat and five missed average comparable-store sales estimates compiled by Bloomberg. Estimates for two companies were unavailable.

Disappointing sales from Cheesecake Factory Inc. and Texas Roadhouse Inc., two of the three highest-weighted restaurants in the 21-member index, have sent the group down 6 percent in the last two weeks, compared with a 1 percent rise for the S&P 500 Index. Similar top-line sales misses in the second and third quarters of 2017 forced the restaurant group to an 18-month low last September, but it rallied 38 percent over the next nine months to a record high in June of this year.

It hasn't been doom and gloom for all eateries in recent weeks. The 10 large-cap restaurants in the Russell 1000 Index performed well in July, bolstered by strong earnings from McDonald's Corp. and Yum! Brands Inc. The standout in that index this year, Chipotle Mexican Grill Inc., is up nearly 60 percent in 2018, though its post-earnings boost last week has been tempered by renewed food safety concerns.

Papa John's looks eager for some good news after shares lost 17 percent in a July filled with controversy surrounding its founder John Schnatter. Depending how second-quarter earnings look Tuesday post-market, investors might be saying football season can't come soon enough.

To contact the reporter on this story: Hank Tucker in Chicago at htucker24@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Brad Olesen, Jeremy R. Cooke

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