What happened
Shares of Ruth’s Hospitality Group (RUTH -8.23%) were falling today after the parent of Ruth’s Chris steakhouses got hit by an analyst downgrade one trading day after it reported earnings.
As of 2:46 p.m. ET, the stock was down 8.2%.
So what
Raymond James analyst Brian Vaccaro lowered his rating on the high-end steakhouse chain from outperform to market perform, arguing that higher inflation would weigh on earnings next year.
Vaccaro noted that Ruth’s sales are well above 2019 levels, but he said the stock is now fairly valued.
Ruth’s Hospitality stock sold off on its third-quarter earnings report last Friday after the company missed earnings estimates.
Overall, it wasn’t a bad quarter for the restaurant group as comparable sales ticked up 2.9%, but restaurant operating expense roses sharply in the quarter, likely due in part to labor inflation and shortages, which weighed on the bottom line. Earnings per share fell from $0.20 to $0.16, which missed estimates of $0.19.
Now what
Ruth’s offered guidance only on the cost side of the ledger, cutting its capital expenditure forecast modestly, a sign that it could be conserving cash in preparation for a possible recession.
While the company has performed well this year and sales are significantly above 2019 levels, Ruth’s is at risk in a recession as a high-end restaurant. If consumers begin to cut discretionary expenses, eating out at restaurants, especially expensive ones, are likely to be among the first expenses they cut.
If interest rates continue to rise, expect the restaurant stock to take a hit, as that will increase the chances of a recession.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
