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Restaurant companies are complaining about decreased traffic, high oil costs, the credit crunch, and bad planetary alignments. But you wouldn't know it by the way their stocks have been acting lately.
According to the Wall Street Journal: the rising price of eggs led to the bankruptcy of Vicorp Restaurants Inc. the operators of the Village Inn and Bakers Square dining chains, and "Vicorp won't be the last."
The Journal added that things will get worse as "The $558 billion restaurant industry is hitting rough times, squeezed by many of the same woes affecting other sectors of the economy: tightfisted consumers, scarce credit and surging commodity prices." Furthermore, the Journal notes that the minimum wage increase scheduled to take place this summer will also add a new layer of costs t the industry.
The result has been "the worst slump in decades" as "Many chains have scaled back expansion plans or cut costs by skimping on things like extra sauce and free sour cream. Some are shuttering sites and laying off workers. Private-equity firms, which plunged into the business earlier this decade using gobs of borrowed money, are now especially vulnerable as those debts come due."
To be sure, Starbucks' (Nasdaq: SBUX) warning, issued after hours on Wednesday, won't be helpful. And the fact that Brinker International (NYSE: EAT), the owner of Chili's, Macaroni Grill, Corner Bakery, and Eatzi's, lost over $38 million in its latest quarter, is not likely to help things.
Yet, McDonald's seems to be doing well. And as we traveled to San Antonio, TX this past weekend, we had the opportunity to sample the cuisine of several casual diners along the way and throughout our stay.
What we saw was interesting. Chili's was moderately full, but had no lines. Applebee's, a few blocks from the Chili's we visited was full, but had no waiting sitting available. McDonald's was steady, with the drive through window quite steady, and open 24 hours. Panera Bread was steady, but had no lines. Whataburger was not particularly busy, but Whataburger is rarely busy.
Where was the big crowd? Outside of Round Rock, Texas, just north of Austin, there was a Cracker Barrel (Nasdaq: CBRL) that was packed to the rafters, and it was only 5:00 P.M. when we got there. By the time we finished our dinner, the waiting list had mushroomed and there were people waiting outside, sitting on rocking chairs and playing oversized checkers. And the curio shop was doing a booming business.
In fact, as we've traveled to multiple cities in the state of Texas over the past few months, as part of a junior tennis caravan, we've started to get a feel for the casual dining sector, as the same restaurants pop up in most places. And the Cracker Barrels seem to be the busiest of them all.
Chart Courtesy of StockCharts.com
But a look at Cracker Barrel's stock (above) isn't much different than the action in Brinker (below). Both stocks have come off of their bottoms and have rallied nicely over the last few weeks. And both have run into resistance near their 200 day moving averages. In fact, most of the restaurant stocks we mentioned above are all showing the same kind of chart patterns.
Chart Courtesy of StockCharts.com
Restaurant stocks are canaries in the coal mine bellwethers when the economy is about to soften. This was one of the first groups to start weakening, with Brinker topping out in February 2007, and Cheesecake Factory (Nasdaq: CAKE) stumbling several months before that.
So now, when things seem bleakest, and some of the mighty, such as Starbucks, are starting to buckle, why are these stocks moving higher?
Is it the fact that the tax rebate checks are going out next month? Is big money betting on the Fed's easing finally taking hold? Is the job picture about to get better? Or are oil prices about to top out, making gasoline cheaper and giving consumers more money to spend eating out?
It's a tough call. According to the Journal "Vicorp and Buffets Holdings Inc., which owns the Ryan's Steakhouse chain and filed for bankruptcy-court protection in January, together are closing about 110 restaurants and cutting 4,300 jobs. Both companies say more cuts could be in the offing."
And here's even more doom and gloom: "Almost all segments are struggling. Some midpriced chains, including Ruby Tuesday Inc., are battling persistent same-store sales declines. Metromedia Restaurant Group, which owns Bennigan's and Steak and Ale, recently hired a restructuring lawyer after it violated several agreements in its lending deal with GE Capital, according to people familiar with the company. Representatives for Metromedia and GE Capital declined to comment. Higher-end operators such as Ruth's Chris, Morton's and McCormick & Schmick's all posted declining same-store sales in the fourth quarter of the year."
Which brings us back to the original question. If things are so bad, why are these stocks acting fairly well?
Conclusion
The answer is elusive, which is fancy scribe talk for, shucks, we just don't know. Which of course is not to say that we won't speculate, since that's our stock in trade, and what you folks pay us to do. So, we suggest that you read our Market Moves section below for a bit of color commentary on this story.
But here's a thought. Starbucks took a tumble after hours yesterday, and could take a beating again during normal business hours.
We suggest watching the rest of the sector. If the rest of them joins Starbucks, we may have seen the best of the run for the sector. But if the others in the group ignore the Starbucks effect, it could be a sign that the big money bunch is betting on an economic recovery. And that would entail all kinds of things down the pike for the stock market and the economy.
Is this a rosy scenario? You bet. And if it works out that way, it means that big money may know something that the rest of us don't, or that big money is going to be sorely disappointed in the near future. If the latter is the case, then this rally in the stock market may not be around too long.
Disclosure: Dr. Duarte owns shares in McDonald's and Starbucks. McDonald's is an open recommendation in our Fallen Angels portfolio.
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DeutscheBank's Agricultural ETF (AMEX: DBA) topped out a few weeks before the news of food riots, rice rationing at Walmart (NYSE: WMT) and Costco (Nasdaq: COST) hit the mainstream media.
Chart Courtesy of StockCharts.com
Are smart traders using the wild and woolly headlines as a good opportunity to unload agricultural commodities on the unwary? It's a possibility.
The networks are going crazy, showing footage of food riots, and scouring the ends of the earth for stories about biofuels becoming a major reason for world hunger.
To be sure, it's hard to argue against the truth of what in some areas of the world is an increasingly difficult and saddening situation. But from an investment standpoint, it's possible that we may have seen a meaningful top develop in the agricultural commodities.
And if that's so, then it would explain why the restaurant stocks have rallied nicely in the last few weeks, even as commodity prices have been on the rise.
Indeed, this analysis is highly speculative, and we may be dead wrong. Still, it's well documented that when CNN is all over a story, and when the U.N. is a primary source of that story, it's awfully late in the game from an investment standpoint.
More important, the chart of DBA shows a double top in March, followed by a failed rebound in April, and rising volume as the fund failed to rally above its 20 and 50 day moving averages.
Rising volume when an ETF is looking wobbly, is usually a sign that more selling is straight ahead. |
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