People may be devouring $5 value meals, but at what cost to restaurants?

By Charles Passy

Investors are looking at dining companies and 'weighing potential winners and losers,' Raymond James analyst warns

As more chain restaurants offer discounts and deals to woo inflation-weary customers, a prominent industry expert is warning that they may soon pay a price in terms of their bottom lines.

Brian M. Vaccaro, a Raymond James (RJF) analyst who tracks the restaurant industry, said in a note issued Wednesday that while some restaurants "have experienced strong market share gains" as a result of value "hooks," others may not be in the same position.

Investors are "weighing potential winners [and] losers as the industry value/promotional environment continues to intensify," Vaccaro wrote, citing deals offered by McDonald's (MCD), Burger King (QSR), Wendy's (WEN), Starbucks (SBUX) and Sonic.

Raymond James is lowering its second-quarter and second-half 2024 earnings estimates for McDonald's; Bloomin' Brands (BLMN), the parent company of Outback Steakhouse, Carrabba's Italian Grill and other chains; First Watch Restaurant Group (FWRG); and Dine Brands Global (DIN), the parent company of Applebee's, IHOP and Fuzzy's Taco Shop.

Vaccaro did point to other factors that are creating challenges for restaurants, such as higher beef and chicken costs, although he also noted that dining spots are "benefiting from reduced, and in some cases record low manager and hourly turnover levels."

Restaurants can still make money off their discounted deals. For example, fast-food-industry analyst Mark Kalinowski told MarketWatch last month that McDonald's likely earns anywhere from 1% to 5% profit on its $5 meal promotion, which includes a McDouble cheeseburger or McChicken sandwich, a four-piece order of Chicken McNuggets, a small order of french fries and a small soft drink. That translates into anywhere from $.05 to $.25 per meal.

But that's a relatively small chunk of change by industry standards. Kalinowski said the goal is that some customers will look beyond the $5 meal once they're inside the restaurant.

"They're hoping you bring your buddy, who's going to order that Double Quarter Pounder with Cheese meal," Kalinowski said.

But these days, many Americans are strapped financially, and it may be a tall order for them to splurge. Vaccaro said the lower- and perhaps middle-income consumer "seems to be increasingly selection and/or price sensitive" when it comes to restaurants.

He also warned that such consumers could be skipping dining out altogether and "trading down" to shopping at the grocery store instead.

On a brighter note, Vaccaro named Shake Shack Inc. (SHAK) as a stock with an attractive entry point after a 20% pullback from May highs. And he said for the second quarter, he expects the strongest same-restaurant sales to come from Wingstop (WING), Brinker (EAT), Cava Group (CAVA) and Chipotle Mexican Grill (CMG).

Brinker is parent to Chili's Grill & Bar and Maggiano's Little Italy restaurants.

The analyst also favors Cheesecake Factory (CAKE), where margins have returned to prepandemic levels.

MarketWatch reached out to McDonald's and some other restaurant chains cited by Raymond James for comment but didn't receive immediate responses.

-Charles Passy

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

07-18-24 0921ET

Copyright (c) 2024 Dow Jones & Company, Inc.