Restaurant stocks are off to a bang so far in 2023. If the year were to end right now after just one month, most investors would be pleased with the 20% average return on a basket of 44 restaurant names I track.
You did not misread that. Restaurant stocks are up an average of 20% so far in 2023, eclipsing the S&P 500 (up 6.1%), Russell 2000 (up 8.6%) and Russell Microcap Index (up 8.8%). That follows a year when the same group was down about 21%, but that performance was more in line with the S&P 500 (down 18%).
Just one restaurant stock I track is in negative territory year to date, that being Wendy’s (WEN) (down 5%). The top performer is Red Robin Gourmet Burgers (RRGB) , which is up 61% and happened to be one of last year’s biggest losers when it fell 65%. Red Robin’s “rebirth” — just the latest of several over the past umpteen years — is due in part to the company’s upbeat outlook for the fourth quarter as well as the announcement that it is considering a sale-and-leaseback transaction for as many as 35 company-owned properties. Red Robin is still expected to lose money in 2023 and 2024 according to consensus estimates.
The restaurant Big Five — a self-coined group that includes McDonald’s (MCD) (up 3%), Chipotle Mexican Grill (CMG) (up 16%), Yum Brands (YUM) (flat), Domino’s Pizza (DPZ) (up 3%) and Darden Restaurants (DRI) (up 8%) — are up an average of just 6% for the year.
More speculative names besides Red Robin, such as BurgerFi International (BFI) (up 35%), are seeing shareholder interest early in 2023. BurgerFi went public in late 2020 and has yet to capture any potential upside from its $157 million acquisition in 2021 of the 61-location Anthony’s Coal Fired Pizza and Wings chain. BurgerFi expects to generate $175 million to $180 million in 2023 revenue and adjusted EBITDA of $10 million to $12 million. Expectations for unit growth (there are currently 114 BurgerFi store and 60 Anthony’s store) call for 15 to 20 new franchised locations this year.
The question is how long the sector can continue at the breakneck return pace it has set in January. Restaurants are typically a top-performing sector coming out of a recession. It’s arguable whether we were in recession last year (I believe we were) and/or will be sometime in 2023. Perhaps part of the uptick early in 2023 is due to tax-loss selling, or mean reversion, as investors sold off losers late in 2022 and are buying them back now. Perhaps investors are more sanguine about consumer spending in 2023.
It is hard to imagine that this pace will continue, but it will be fun to watch.
