Which Fast Casual Restaurants Had Higher 1Q16 Earnings Margins?
Fast Casual Restaurants Struggled in Early 2016
EBIT margins
EBIT (earnings before interest and tax) are key to investment decisions, as they indicate the efficiency of a company’s business. EBIT affect EPS (earnings per share) and should ultimately drive share prices.
The leaders
Compared to 1Q15, out of the seven fast casual restaurants under review, only Shake Shack (SHAK) and Potbelly (PBPB) managed to improve their EBIT margins in 1Q16. Rising labor wages may have been one of the major factors behind companies’ falling margins.
SHAK’s margin improved from -12.7% to 8.7% in 1Q16, while PBPB’s margin improved from 1.1% to 2%. Lower commodity prices and same-store sales growth of 9.9% pushed SHAK’s EBIT margin up. Fiesta Restaurant Group (FRGI), whose margin fell from 10.7% in 1Q15 to 9.2% in 1Q16, still enjoyed the highest margin among the seven companies under review.
FRGI’s margin fell due to operating inefficiencies and higher discounts and promotions. Panera Bread’s (PNRA) margin fell from 9.3% in 1Q15 to 8.7% in 1Q16 due to a rise in capital expenditure on its Panera 2.0 implementations.
The laggards
Negative same-store sales growth and increased food and paper costs due to increased food safety measures pushed Chipotle Mexican Grill’s (CMG) EBIT margins into negative territory. CMG’s EBIT margins fell from 17.3% in 1Q15 to -6.5% in 1Q16.
CMG and McDonald’s (MCD) form a combined 0.7% of the holdings of the SPDR S&P 500 ETF (SPY). CMG was followed by Noodles & Company (NDLS), which had an EBIT margin of -1.6% in 1Q16 compared to 1.8% in 1Q15.
Increased labor costs, deleveraging due to negative same-store sales growth, and a rise in marketing and operational initiatives led to the fall in NDLS’s margin. During the same period, Habit Grill (HABT) posted an EBIT margin of 6.5% compared to 7.5% in 1Q15.
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