Fast-casual names downgraded as menu pricing constraints, traffic trends keeping pressure on FAFH

Lacking pricing power to compete with food-at-home trends (“FAH”) and with traffic trends still decelerating, Piper Sandler has moved to the sidelines on Dutch Bros (NYSE:BROS), Shake Shack (NYSE:SHAK), and Sweetgreen (NYSE:SG) to accommodate a more balanced risk-reward and downgraded the three to Neutral from Overweight.

Inflation trends between FAH and food-away-from-home (“FAFH) show FAFH inflation has been running in excess of FAH by ~300 basis points or more for 14 consecutive months, Piper Sandler analyst Brian Mullan notes, leaving fast casual dining with little room for even incremental menu pricing adjustments.

For Dutch Bros (BROS) the downgrade snapped a four-day winning streak for the stock after disappointing guidance whacked shares as much as 28%. The downgrade also reflects the likelihood that the broader consumer backdrop offsets the boost from aggressive promotional efforts by the company. Specific to Dutch Bros’ downgrade is the hiring of CEO Brian Niccol at its rival “likely to drive positive change” at Starbucks (NASDAQ:SBUX), Mullan adds.

In addition to a downgrade, Mullan lowered his target price for Dutch Bros by 12% to $36.

Mullan’s downgrade to Shake Shack (SHAK) assumes the same fundamental shifts in the fast-casual category that influenced the downgrade to BROS, namely menu pricing constraints, as well as efforts to optimize operation and financial discipline that will be stymied by the deterioration in the industry backdrop. Although he is still bullish on SHAK’s ability to improve and grow the business over time, the risk-reward has become more balanced at current levels, warranting a Neutral rating, and -6% adjustment to the target price to $114.

Finally, Sweetgreen (SG) was also downgraded at Piper Sadler to Neutral from Overweight with a corresponding 18% increase in the price target to $39. Like its peers in the category, share price upside for SG might be “a bit harder to come by over the balance of the year” despite confidence in the management team’s ability to navigate long-term growth.

Mullan assures investors he is not negative of SG, rather sees the “current risk-reward as more balanced at current levels” coming out of earnings season for the fast-casual sector and macro considerations that could impact FAFH.

Despite his confidence in the company, Mullan’s downgrade has left shares of Sweetgreen more than 6% lower on Monday, pulling away from its 2-year high set on Friday.