Soft Restaurant Earnings May Take A Bite Out Of This ETF

The restaurant industry has fallen out of favor recently as evident by the Zacks industry rank which is in the bottom 39% segment currently. While the gradual rebound in the U.S. economy and lower energy spending continue to favor consumer spending and should therefore act as tailwinds to the restaurants business, wage growth and rising menu prices are serious headwinds to the business (read: ETFs to Buy After Strong Jobs Report).

For a clearer picture of the sector, let’s take a closer look at some of the recent earnings releases (read: ETFs in Focus as Starbucks (NASDAQ:SBUX) Dishes out Lukewarm Results).

McDonald’s Corp. (NYSE:MCD) reported a mixed-bag Q2 on July 26 after market close. Its earnings of $1.45 per share (adjusted for strategic charges) came ahead of the Zacks Consensus estimate of $1.38. Barring the effect of strategic charges and prior-year restructuring charges of $0.04 per share, diluted earnings per share grew 13% in constant currencies, as per management.

Its revenues of $6.265 billion fell 4% year over year mainly due to currency headwinds. In constant currency, the figure declined 1%. Revenues also missed the Zacks Consensus Estimate of $6.281 billion. Its global comparable sales rose 3.1%, with positive comps noted in all segments. However, comps came short of analysts’ expectations. Shares fell about 4.5% on July 26, managing to add over 0.1% after hours.

Panera Bread Co (NASDAQ:PNRA) beat on both lines and impressed investors on July 26 after market close. Its earnings of $1.78 per share were up 11% year over year and beat estimate by 3 cents while revenues of $698.9 million (up 3% year over year) beat the estimate by a whisker. Company-owned comparable net bakery-cafe sales rose 4.2% in Q2. Also, the mid-point ofthe 2016 non-GAAP earnings per share guided range was raised. Shares advanced about 3.9% after hours on July 26.

Buffalo Wild Wings (NASDAQ:BWLD) posted mixed Q2 results. Its earnings of $1.27 per share (up 13.4% year over year) beat Zacks Consensus Estimate by a penny but its revenues of $490.2 million grew 15% year over year. Revenues missed the Zacks Consensus Estimate of $502 million. However, BWLD shares were up over 5.3% after hours on news that activist investment firm Marcato Capital has taken a bigger stake in the sports-themed restaurant chain.

BJ's Restaurants Inc. (NASDAQ:BJRI) also reported on July 26 and depressed investors by missing on both lines. Earnings missed by a penny while revenues fell short by 1.2%. Shares were down 2.7% after hours.

Apart from these recent reporters,Yum! Brands Inc. (NYSE:YUM) came up with mixed results and Chipotle Mexican Grill Inc. (NYSE:CMG) missed on both lines. All in all, the operating backdrop of the sector is definitely not upbeat.

Tough Time Ahead for Restaurant ETF?

If somber earnings are not enough to scare you, analysts’ downgrades on plenty of restaurant stocks may do that. Lately, Stifel Nicolaus and Jefferies tapered their outlook on several restaurant stocks. Jefferies believes that the “industry has at least 18 months of challenges ahead” given weaker comps and increasing labor costs. On the other hand, Stifel got “bearish on restaurants and adopted an industry-wide recession outlook.”

Moreover, McDonald’s management noted that food-at-home inflation is likely to be flat to up about 1% for this year, which is considerably lower than food-away-from-home inflation which is expected to be up 2.5% to 3.5%. Naturally, such a wide difference in prices may discourage guests from eating out frequently.

All these developments put the pure-play ETF on the restaurant industry – Restaurant ETF BITE – in focus. The fund may slip in the days to come on slowly mounting pressure (see all consumer discretionary ETFs here).

BITE in Focus

The fund gives exposure to 41 restaurant stocks.Arcos Dorados Holdings, Domino’s Pizza and Dave & Busters Entertainment are top three stocks of the fund. It charges 75 bps in fees.

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