Restaurant Stocks: Winners & Losers

NEW YORK ( TheStreet) -- Stocks in the restaurant sector were mixed on Monday with shares of Chipotle Mexican Grill ( CMG) and Brinker International ( EAT) up several percentage points.

There were a number of laggards in the sector, however, as market watchers weighed weakness in the financial sector with news of an international bailout in the euro zone.

>>Restaurant Stocks: Earnings to Watch

Among restaurant stocks dragged down by the session's bearish overtones were shares of McDonald's ( MCD), Yum! Brands ( YUM), Starbucks ( SBUX), Jack in the Box ( JACK) and Wendy's Arby's ( WEN).

Here is a look at winners and losers in the restaurant sector Monday, with some background on what's moving the stocks.

McDonald's

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McDonald's shares were 0.6% lower past midday. The burger-and-fries behemoth said last week it began charging customers in China higher prices for its burgers, drinks and other menu items in an effort to offset higher costs.

>>McDonald's Raises Prices in China

The increase "is because of higher raw material prices and we've adjusted our prices accordingly," Sophia Luan, spokeswoman for McDonald's China, told Dow Jones. McDonald's also intends to raise prices in its U.S. and European markets to offset higher commodity costs.

McDonald's plans to have more than 2,000 restaurants in China within the next four years, according to Asia President Tim Fenton.

Earlier this month McDonald's said its Monopoly game promotion helped drive results in October, leading it to post 6.5% growth in its global comparable same-store sales, or sales at stores open at least one year -- during the month.

McDonald's positive monthly results followed its better-than-expected third-quarter earnings report.

Yum! Brands

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Yum! Brands, which operates fast-food chains under the KFC, Pizza Hut and Taco Bell brands, was lower by 1.3% on Monday.

Yum! said comps grew 6% in China in its recent quarter. In the U.S., comps grew 8% at Pizza Hut and 3% at Taco Bell. Comps at KFC fell 8%.

"We continue to make progress at all three divisions and are especially pleased with the continued strong results from our China business," said CEO David Novak. "The combination of high-return, new-unit development, same-store-sales growth and increasing margins drove operating profit growth of 23% in China for the quarter."

Acceleration in emerging markets like Russia, France and Vietnam, as well as more established European markets seems on track, noted Stifel Nicolaus analyst Steve West. Sales improvement in China should also continue to build.

Yum! said earlier this week it sees strong growth potential for its restaurant concepts in India next year.

>>Yum! Brands Forecasts Growth in India

Comparable same-store sales, or sales at stores open at least one year -- a closely watched metric in the restaurant industry -- should increase in the mid-teen percentages, Niren Chaudhary, chief of Yum's Indian operations, told Reuters at the World Economic Forum's India summit.

Starbucks

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Starbucks shares fell 0.6% on Wednesday. Starbucks is also looking to expand in emerging markets, particularly in China where it said last week it intends to begin growing coffee beans.

>>Starbucks to Grow Coffee in China

"Starbucks, for the first time in our 40-year history, is going to start growing coffee," CEO Howard Schultz said while on a trip to Beijing. "We're going to actually plant trees and grow coffee in China, in the Yunnan Province," he said, according to a CNN report.

Shultz called the move "a comprehensive strategic commitment to doing business in China, in a way that's locally relevant."

China's Yunnan Province, which borders Myanmar, is a region known for its quality coffee, and the Seattle-based coffee chain is looking to work with the provincial government "to share our coffee knowledge, to help Yunnan continue to develop into a top-quality coffee-growing region and bring the distinctive Yunnan coffee taste to our customers around the world," Schultz said.

"We've been here for 12 years now, with 400 stores in the mainland, 800 stores in greater China," Schultz said.

The CEO told Bloomberg recently that Starbucks plans to open 500 stores this fiscal year, 400 of which will be outside the U.S. China will be the coffee shop chain's biggest growth market over the next two years, the report said, and Middle Kingdom consumers can expect to choose from over 1,000 Starbucks locations in the country in the "near future," according to the company's China chief, Jinlong Wang.

Jack in the Box

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Jack in the Box shares traded 2.9% lower ahead of its fiscal-fourth quarter and fiscal 2010 earnings report, due out after the closing bell.

The fast food chain is expected to post fiscal 2010 earnings of $84.7 million, or $1.54 per share, down 32.2% from year-earlier earnings of $2.27 per share.

Full year revenue is expected to have decreased 7.7% to $2.28 billion.

Jack in the Box faces stiff competition from value menus offered at rival chains like Arby's, Burger King and McDonald's .

Jack in the Box posted better-than-expected earnings a year ago, for the fourth fiscal quarter of 2009, despite a 6% decline in same-store sales in the period.

Wendy's Arby's

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Wendy's shares were lower by 1.3% on Monday.

Wendy's recently hiked its quarterly cash dividend by half a penny per share to 2 cents. The higher dividend will be paid next on Dec. 15 to shareholders of record on Dec. 1.

The increased payout brings Wendy's yield to 1.7%.

>>10 Top Dividend Stocks Increasing Payouts

Atlanta-based Wendy's increased dividend was announced earlier this month even as Wendy's booked a surprise quarterly loss on weaker-than-expected revenue.

>> Wendy's Disappoints With Surprise Loss

Wendy's also adjusted its forecast, saying 2010 results would likely be toward the low end of its previously announced guidance.

"These third-quarter results are simply not satisfactory to us," conceded CEO Roland Smith, who said the quarter was "a difficult one" both for its Wendy's and Arby's brands of fast food restaurants.

Chipotle Mexican Grill

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Chipotle was among the sector's gainers in Monday's session. Its shares jumped 2.9% in early afternoon activity.

Chipotle handily beat expectations and reported a 39.9% rise in earnings for the third quarter thanks in large part to an 11.4% jump in comparable same-store sales.

RBC Capital Markets maintained a sector perform rating on Chipotle shares following its stellar earnings report, and raised its price target to $185. Stifel's West maintained his buy rating, and upped his price target to $215, from $183.69.

Deutsche Bank analyst Jason West said key issues this earnings season are commodities, comps and 2011 guidance. He noted that Chipotle cautioned shareholders about slight food costs inflation in the second half of 2010 but didn't extend that guidance to 2011. He expected flat cost of goods sold, assuming that higher input costs would be passed on to consumers, noting that "CMG's tone around food costs versus willingness to raise prices will be important."

Comp expectations were high, and DB's West was looking for growth of 9% in the closely-watched metric. He expected CMG to offer guidance on 2011 same-store-sales, likely in the low-to-mid single digit range.

In the earnings report, Chipotle said comps would grow by a high single-digit percentage for 2010, and a low single-digit percentage for 2011.

Stifel Nicolaus analyst Steve West expected comps growth of 7%, and 13% unit growth leading to 19% to 20% revenue growth. His EPS expectations were two cents below consensus at $1.28 per share, though he noted that Chipotle "remains the top high-growth company in the restaurant space and continues to gain market share."

The analyst was looking for higher gross margins, based on lower food costs and improved efficiencies, to offset higher labor and operating expenses.

Chipotle said it opened 22 new restaurants, bringing the total restaurant count to 1,023, and anticipates opening between 135 and 145 additional restaurants next year.

Brinker International

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Brinker shares gained 2.3% on Monday.

Brinker, the operator of Chili's Grill & Bar and Maggiano's Little Italy restaurant brands, recently posted a 40% jump in quarterly earnings to 21 cents per share, despite a 6% decline in revenue.

UBS reiterated a neutral rating on Brinker shares in early October, and raised its price target on the stock to $20, from $17.

Brinker said its strong double-digit earnings gain was helped by lower tax rates and reduced expenses.

Profits beat expectations but sales came up short.

Comps grew 4.2% in the quarter, dragged by sluggishness at Chili's. Maggiano's saw comps grow 1.4%.

Total operating costs and expenses fell to $622.5 million in the quarter.

Brinker expects its tax rate to fall to 20.4%, from 23.4%.

-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

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