Chipotle, Starbucks Gain as William Blair Dubs Them Favorites

William Blair’s Sharon Zackfia, Tania Anderson, and Matthew Curtis use the end of earnings season to take a look at restaurant stocks and fret about recent weakness in sales. They write:

Bloomberg News

With most second-quarter results already reported, aggregate same-store sales trends across the industry accelerated to a 1.5% to 2.0% clip from a weather-affected 0.5% average gain in the first quarter, although two-year comp trends slowed modestly on a sequential basis. Perhaps most concerning was the broader restaurant sales slowdown that occurred in June and seems to have continued into July.

They do, however, note that restaurant stocks should get a boost from lowest expenses. Zackfia and team explain:

On the cost front, restaurant industry wage inflation remains quite manageable at the slowest rate of wage inflation since 2005. Food costs also remain favorable with inflation in the low-single-digit range, while lower-year-over year grain futures are suggestive of continued low commodity inflation into 2014 (particularly given the recent pullback in corn futures, which are now nearly 30% lower versus mid-July).

Their favorites: Chipotle Mexican Grill (CMG) and Starbucks (SBUX). They explain why:

For Starbucks, we anticipate continued potential for earnings upside on remarkably healthy and consistent same-store sales trends (which we believe have continued into the September quarter), with its June quarter comp of 9% leading the entire restaurant industry, despite more than 19,000 global locations. For Chipotle, we remain heartened by strong midsingle-digit same-store traffic gains, with a likely price increase in the first half of 2014 poised to provide upward momentum to estimates, particularly as Chipotle has already absorbed significant commodity inflation that has increased its cost of sales to 33%-plus.

Starbucks has gained 1.3%, while Chipotle has risen 1%. Dunkin Brands (DNKN), which was also mentioned positively for its strong same-store sales, has advanced 0.9%.

Oppenheimer, meanwhile, highlights Darden Restaruants’ (DRI) tough summer. Brian Bittner and Michael Tamas write:

We reduce 1Q14E EPS (Jun-Aug) to $0.63 vs. Street’s $0.75. Consensus likely to come down to $0.70 range after several outliers in $0.80+ range adjust. We model -3.4% comps for the Big 3 in 1Q14E, vs. sell-side’s current -0.6%…

High shrimp costs add pressure to 1H14 margins before expected relief in 2H. At 10% of COGS, shrimp is largest food cost and is up 40% YoY as bacterial infection has killed shrimp and constrained supplies from Asian shrimp farms. Management believes this specific issue is fixable relatively quickly and price relief could follow.

The analysts also reduced their price target to $54 from $58. Darden’s shares are virtually unchanged.