Restaurant earnings will test whether owning more brands pays off

Restaurant stocks have split sharply this year. And it could be tied to how many brands they own.

Shares of Brinker International, Darden Restaurants and Restaurant Brands International are up roughly 32%, 18% and 12%, respectively, year to date. Those companies all own more than one restaurant chain, with brands collectively ranging from Chili's to Olive Garden, LongHorn Steakhouse, Burger King and Tim Hortons.

Meanwhile, stocks like McDonald's, Chipotle, Cava, Wendy's, Shake Shack and Domino's have all dropped this year, with several down double-digit percentages. Those companies all have one core chain to their names.

Those share moves underscore what some analysts see as the benefits of a diversified restaurant business, especially at a time when any misstep can make cash-strapped consumers go elsewhere when they dine out.

Investors will get another look at how operating multiple chains — or not — is affecting performance when major restaurant companies report quarterly results starting next week. One company that could be watching is Inspire Brands, the owner of chains like Dunkin', Buffalo Wild Wings and Jimmy John's, which is moving toward going public.

A business built around one main restaurant concept depends more heavily on that brand holding consumers' attention, whereas a company with a portfolio has other potential sources of sales if one brand loses momentum.

That cushion can be critical, but only if another chain is strong enough to pick up the slack, according to some Wall Street analysts.

"Darden is probably the best case of the scale and size and diversity of business," said Nick Setyan, a restaurant analyst at Mizuho Securities. "If one business isn't doing well, the other ones are."

Setyan said that dynamic has played out between Darden's key brands — Olive Garden and LongHorn Steakhouse — over recent quarters. LongHorn's growth has outpaced Olive Garden's for months, and in the latest reported quarter, LongHorn's comparable sales rose 6.2% compared with Olive Garden's 1.1%.

KeyBanc Capital Markets also cited the range of Darden's portfolio as a positive in an October research note, saying it gives the company "exposure to a broad range of consumers." The company's fine dining and casual offerings can be beneficial in a K-shaped economy where consumer spending can vary by income.

The firm has a buy-equivalent rating on Darden and a $237 price target, compared with a price of around $215 as of Thursday.

Restaurant Brands International, similarly, offers exposure to different categories and markets through Burger King, Tim Hortons and Popeyes. But its portfolio does not fully insulate the company from a weak brand.

In the second quarter, Burger King's U.S. comparable sales accelerated to 8.5%, from 5.8% in the first quarter, while Tim Hortons' Canadian comparable sales slowed to just 0.1%, from 1.5% over the same period. That left Burger King's turnaround carrying more of the portfolio as Tim Hortons stalled.

Setyan said Burger King's recent strong performance has been central to the company's momentum, helped by its ability to better communicate its value items to customers as McDonald's sales growth slowed.

"If it weren't for Burger King's current performance, I don't know if [Restaurant Brands] would be going so well," he said.

Mizuho initiated coverage of Restaurant Brands on Oct. 20 with a buy-equivalent rating and an $85 price target. Shares traded at about $76** **as of Thursday.

A focus on one brand can also be a strength. Starbucks and Cheesecake Factory have been restaurant-stock standouts this year, showing how a clear brand identity and investment can drive outperformance when execution and customer demand click. Their shares have climbed 21% and nearly 123%, respectively, this year.

And Starbucks, for its part, said it would not buy Chipotle after reportedly considering a massive buyout that would have diversified its business.