Weekly Notes On Restaurant Industry: McDonald’s, Dunkin’ Brands, & Chipotle Mexican Grill

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CMG: Chipotle Mexican Grill logo
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Chipotle Mexican Grill

The U.S. restaurant industry is facing tough competition among the fast food chains for the breakfast segment market share. However, fast casual restaurants still hold the upper hand in terms of customer traffic. On top of that, unfavorable weather conditions in some parts of the U.S. is one of the major factors of concerns for many fast food brands. Despite the operational headwinds, 60% of restaurant operators reported an increase in same-store sales in the twelve month period ended February 2015, according to the National Restaurants Association. [1] Sales at the fast casual restaurants are strongest at lunch hours, and the traffic at that time is comparable to that in casual dining restaurants. According to Euromonitor, Americans spent more than $21 billion at fast casual restaurants last year. Below is the chart for the monthly change in restaurant traffic in the U.S.

Source: www.statista.com

In addition to that, commodity inflation might also impact the businesses, as prices of beef and other meat products are expected to remain high in 2015. This might force the companies to raise their menu prices.

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Here’s a quick round up of the restaurant companies covered by Trefis.

McDonald’s

On April 22, McDonald’s Corporation (NYSE:MCD) released its first quarter earnings report for the fiscal 2015. The company’s global comparable sales declined 2.3% due to negative customer traffic in all the major operating segments. McDonald’s consolidated revenues declined 11% year-over-year (y-o-y) to $5.9 billion whereas operating income declined 28% y-o-y to $1.38 billion. In the first quarter, the company faced strategic charges worth $195 million in operating income, resulting in a negative impact of $0.17 to EPS. As a result, net income dropped 33% y-o-y to $811 million. [2] This is the first earnings report under the new CEO, Stephen Easterbrook, who took over the position on March 1. On March 4, McDonald’s announced new menu sourcing initiatives in the U.S., including sourcing of chicken raised without antibiotics. [3] The company has announced its intention to release its turnaround plan on May 4.

McDonald’s stock traded between $95 and $96, and soon after the earnings report release, the stock jumped 4% to $99, before dropping back to $97. Our price estimate for the company’s stock is $97 (market cap of $94 billion) which is roughly the same as the current market price.

See Our Complete Analysis For McDonald’s Corporation

Dunkin’ Brands

Dunkin’ Brands (NASDAQ:DNKN) released its first quarter earnings report for fiscal 2015 on April 23. Dunkin’ Donuts U.S. reported comparable store sales growth of 2.7%, whereas Baskin-Robbins U.S. reported 8% growth in comparable store sales. The company’s net revenues grew 8.1% year-over-year (y-o-y), whereas adjusted operating income increased 15.8% y-o-y. [4] On the other hand, Baskin-Robbins International continued to show slower comparable store sales growth, as the segment’s total revenues for the quarter decreased 21.5% y-o-y. In the U.S., the company’s DD Perks loyalty Program and online cake ordering provided a boost to the revenue growth. Moreover, Dunkin’ Brands, along with J.M Smucker Company (NYSE: SJM), expanded its partnership with Keurig Green Mountain (NASDAQ:GMCR) by signing agreements for the manufacturing, marketing, distribution, and sale of Dunkin’ K-Cup packs in the U.S. and Canada. [5]

Dunkin’ Brands’ stock rose from $47 to $53 soon after the release of the earnings report. Our price estimate for the company’s stock is $48 (market cap of $4.7 billion), which is roughly 10% below the current market price.

See full analysis for Dunkin’ Brands

Chipotle Mexican Grill

Chipotle Mexican Grill (NYSE:CMG) reported impressive numbers in its Q1 2015 earnings report, released on April 21, as the company delivered 20.4% year-over-year (y-o-y) growth in net revenues to $1.09 billion. The company’s comparable store sales grew 10.4%, compared to 13.4% in the same period last year, and as a result, despite the strong financial result, Chipotle’s stock (CMG) slipped more than 7% in the first trading hour on April 22. [6] The company’s net income rose 47% y-o-y to $122.6 million, resulting in an increase of 160 basis points in restaurant level margins to 27.5%. As a result, Chipotle managed to report diluted EPS of $3.88, up 47% y-o-y. The company mentions that it suspended one of its pork suppliers in the U.S. after a recent audit, on claims of below standard animal welfare protocols, affecting the supply of Carnitas to about one-third of the company’s outlets. Chipotle expects the comparable store sales in the second quarter to be in the low-to-mid single digits, with as much as 200 basis points negative impact due to the pork shortage.

Chipotle’s stock fell from $695 to $635 soon after the release of the earnings report. Our price estimate for the company’s stock is $669 (market cap of $20.8 billion), which is roughly 5% above the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

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Notes:
  1. Restaurant Performance index remained positive in February as softer sales and customer traffic levels were offset by a more optimistic outlook []
  2. McDonald’s Q1 2015, earnings call transcript []
  3. McDonald’s USA announces new antibiotics policy and menu sourcing initiatives []
  4. Dunkin’ Brands Q1 2015, earnings call transcript []
  5. Dunkin’ Brands, The J.M. Smucker Company and Keurig expand partnership to make Dunkin’ K-Cup packs available at retail outlets nationwide and online []
  6. Chipotle Q1 2015, earnings call transcript []