Registered: Apr 2010
07-23-12 06:33 PM
Restaurant stocks are reeling from a combination of rising food costs, along with weak consumer spending.
The Midwest drought is sending corn and wheat prices spiraling, kicking off a chain reaction in the food chain. Meat & poultry prices are also affected because of the rising feed costs.
With food costs rising, restaurants are now forced to choose between raising menu prices to offset higher costs, OR accepting the hit to profit margins – leading to disappointing EPS.
The US consumer is struggling. Corporations are propping up their own profit margins by cutting costs (revenue numbers have been disappointing, but so far this quarter the earnings side of the ledger has been saved by cost cutting). Of course corporate cost cuts can be directly translated into layoffs and slower hiring. Last week’s unemployment report showed renewed concerns on this front.
Internationally, the story is much the same. This morning, McDonalds Corp (MCD) missed earnings, blaming the poor performance on a strong dollar and weaker global demand…
So basically the restaurant sector is stuck between a rock and a hard place. Costs are going up, demand is going down, and profits are getting squeezed.
Last week Chipotle Mexican Grill (CMG) dropped a bomb on the industry, dropping more than 20% in Friday’s session.
The announcement pressured other growth-oriented chains (PNRA, BLWD & TXRH all fell more than 3%) and the charts for restaurant stocks are unraveling.
Watch for the dip buyers to step in and support CMG here. It’s a Wall Street darling and will certainly get some initial help from mutual funds as well as retail investors.
But the charts are broken, the bearish sentiment is picking up, and we’ve got several restaurant stocks on the bearish trade blotter – watching for appealing technical entry points.