It's not easy running a restaurant these days -- and it's not easy being an investor in most eatery stocks, either. Shares of Shake Shack (NYSE: SHAK), The Cheesecake Factory (NASDAQ: CAKE), and Habit Restaurants (NASDAQ: HABT) have suffered double-digit percentage declines this year, and at least one Wall Street pro thinks that things won't be getting better anytime soon.
Nick Setyan at Wedbush downgraded the three restaurant stocks on Tuesday, going from outperform to neutral on all three investments. He sees negative pressures on comparable sales continuing to weigh on the performance of casual-dining and fast-casual concepts. His concerns aren't materially different from those of other worrywarts who have been talking up this so-called restaurant recession. Setyan feels that the widening gap between menu prices, which are inching higher, and supermarket food prices, which have held relatively steady, will keep driving the hungry away from eating out. There's also the consumer trend away from physical retail shopping, leaving a mark on eateries near shopping malls or in strip malls. He also sees the income of wealthier households plateauing, a factor also nibbling at consumer demand.
Shake Shack has held up the best of the three stocks being downgraded, trading just 10% lower in 2017. The high volume "better burger" darling posted better-than-expected second-quarter results, but offered up weaker outlook for all of 2017 than analysts were forecasting. Shake Shack exploded on the scene with its healthy comps, but unit-level sales are now negative.
Cheesecake Factory is another name that used to delight investors with consistently positive comps, but the casual-dining chain known for its large portions, wide menu offerings, and signature desserts also clocked in with negative comps for its most recent quarter. Cheesecake Factory also lowered its full-year earnings outlook, a troublesome sign suggesting that things won't be getting better anytime soon.
Habit Restaurants joined Shake Shack and Cheesecake Factory in putting out disappointing quarterly results during the first week of August. The value-minded burger chain that draws high marks on taste tests has been a laggard since shortly after it went public.
Wedbush's Setyan doesn't like where he sees the industry heading. He predicts that margins would contract because customers aren't accepting that chains are passing on higher occupancy and labor costs to them.
Setyan's downgrades are also accompanied by lower price targets. He's slashing his goal on Cheesecake Factory from $52 to $44, Shake Shack from $40 to $36, and Habit from $19 to $14. The silver lining here is that all three stocks are now trading just below those revised price markers, but that won't mean much if fundamentals continue to crumble and if Setyan's next step is another downgrade with another round of lower price targets.
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