Is Tariff An Issue For Restaurant Sector? J.P. Morgan Highlights Winners & Losers

Last week, J.P. Morgan analyst John Ivankoe hosted Bloomin’ Brands Inc BLMN, CAVA Group Inc CAVA, Brinker International Inc EAT, and Sweetgreen Inc SG at the J.P. Morgan Las Vegas forum.

The analyst noted that the key takeaway from all four companies was the focus on doing “fewer things better” and consistently reinvesting in customer and employee experiences.

According to the analyst, stock volatility has created opportunities, with the current 10-year yield of 4.3% helping global QSR valuations, easing fears of a 5-6% yield.

The analyst recommended adding fresh investments in Dutch Bros Inc BROS, Starbucks Corp SBUX, and CAVA.

While McDonald’s Corp MCD and Restaurant Brands International Inc QSR are fairly valued, slower U.S. data and international growth may present better buying opportunities, per the analyst.

Yum! Brands Inc YUM exceeded expectations, benefiting from tech-fee recapture. Domino’s Pizza Inc DPZ is fairly valued due to high expectations. It remains uncertain if the Middle East conflict’s impact will drive sustained sales growth or just a leveling out.

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The analyst upgraded the shares of CAVA to Overweight. CAVA has significant potential for expansion in the U.S., with impressive free cash flow generation and a strong pipeline of operational and brand initiatives to drive sales and profits.

The analyst reiterated a Neutral rating on Chipotle Mexican Grill, Inc CMG and EAT due to high valuations and peak comps, but remain cautiously optimistic and would consider adding on volatility.

Overweight-rated SG and Krispy Kreme Inc DNUT face sales and profit challenges, with SG offering near-term potential through seasonal menus and loyalty programs.

Following YUM’s Taco Bell analyst day on March 4, which highlighted the “Byte by YUM!” platform and improving KFC international trends, the analyst conducted a full model review and a valuation reset.

Projections include Taco Bell U.S. growing to 9,000 units by 2030 and Taco Bell International expanding to 2,000 units. The analyst assumes KFC international (excluding China) will increase to 22,300 units, while KFC China will reach 19,400.

Compared to previous expectations, only BROS, DPZ, and Taco Bell (YUM) are performing ahead, while high-growth brands like CAVA, SG, Chili’s, and SBUX are on track.

Larger QSR brands like MCD, BK (QSR), KFC/PH (YUM), and fast-casual chains such as CMG and Shake Shack Inc SHAK are underperforming. Casual dining brands like Darden Restaurants Inc DRI (Olive Garden), Texas Roadhouse Inc TXRH (Roadhouse), and BLMN (Outback) are also tracking lower.

The U.S. restaurant labor market remains stable, with open positions at 6.2% of total employment, close to the 20-year average of 4.4%. The quits rate stands at 3.8%, near the historical average of 4.0%.

Consumer confidence has declined, with a focus on the “expectations” component, as cautious consumers become more selective in discretionary spending.

Large QSR brands, like MCD and DPZ, report weaker performance among low-income consumers. In contrast, high-growth brands like CAVA are seeing strong growth in the lowest income quartiles, suggesting a shift toward QSR trade-ups and growing brand awareness.

According to the analyst, sourcing talent and retention remain key to building strong brands and scaling operations, mainly during the rapid adoption of in/out-of-store tech.

Total industry supply growth has remained surprisingly resilient, up 12% from third-quarter FY18 to third-quarter FY24 for a CAGR of ~2%, opined the analyst.

So much attention is placed on future AI driven opportunities, but the reality is 40% of the industry sales are from the top 500 chains with a very large addressable market of another 60% are considered to be independents, the analyst noted.

Tariffs are less of an issue for this sector than other industries but related inflation could impact several daily consumer staple commodities including avocados, seasonal produce/fruit and coffee, said the analyst.

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