Income disparity and job market trends widen gap within dining sector - BofA Securities

[Shake Shack Food]
Ant DM

BofA Securities revised its ratings on several restaurant chains to reflect income and labor market disparities that are shaping industry trends—particularly the divide between full-service and casual dining.

The income divergence between middle income households against upper income households, as well as acute inflationary pressures on lower income households suggests full-service restaurants (FSR) are better positioned during periods of widening income disparity as the top quintiles of income account for 65% of spending on FSR vs 58% on total fast food spending.

Data compiled by BofA Securities also suggests that a soft labor market for new college graduates, Gen Y and Gen Z job changers and new entrants in the job market will also impact restaurant spending.

Given these disparate outlooks across consumer cohorts and ability of the larger competitors to be largely shielded from persistent spending troughs, BofA Securities’ Sara Senatore and Isiah Austin upgraded Brinker International – parent company of Chile’s – to Buy from Neutral, and downgraded Portillo’s (PTLO [https://seekingalpha.com/symbol/PTLO]), Papa John’s (NASDAQ:PZZA [https://seekingalpha.com/symbol/PZZA]), and Sweetgreen (SG [https://seekingalpha.com/symbol/SG]) to Neutral from Buy, while Shake Shack (SHAK [https://seekingalpha.com/symbol/SHAK]) was dropped to Underperform from Neutral.

“The largest competitors in each segment – full service, limited service, casual dining restaurants – are more insulated, able to press their advantage by investing in the business across value (COGS), service ((labor)), and marketing,” Sanatore and Austin write in their research note.

For Papa John’s (NASDAQ:PZZA [https://seekingalpha.com/symbol/PZZA]), BofA sees downside risk to the current forecast of single digit U.S. comparable sales growth, reflecting intensifying macro and competitive headwinds from Domino’s (DPZ [https://seekingalpha.com/symbol/DPZ]) and Little Caesars. Valuation, however, is supportive, with a balanced risk/reward supporting a Neutral rating on the stock and $50 price target. Papa John’s (NASDAQ:PZZA [https://seekingalpha.com/symbol/PZZA]) shares are down 3% on Monday.

Brinker’s (EAT [https://seekingalpha.com/symbol/EAT]) successful turnaround of Chili’s which set in motion a “flywheel of better operations, more effective marketing, and healthier topline growth,” earns a Buy rating with a $192 price target, representing a 52% upside from Friday’s closing price.

Portillo’s (PTLO [https://seekingalpha.com/symbol/PTLO]) new $7 price target (from $14) reflects the increased competition from fast food hamburger chains and limited-service sandwich restaurants. The new price target and Neutral rating assume $1.7B in sales in FY25 (versus $8.2B previously), and $244M in EBITDA (versus $1.3B previously).

For Sweetgreen (SG [https://seekingalpha.com/symbol/SG]), its Infinite Kitchen technology offers the possibility of restaurant level margin expansion through more efficient labor deployment but with offsetting pressures from “muted” topline growth as the brand remains “indexed to more economically pressured consumer cohorts.”

Finally, Shake Shack’s (SHAK [https://seekingalpha.com/symbol/SHAK]) Underperform rating is based on a lingering challenged demand backdrop that will continue to offset tailwinds from product innovation, while margins will face increased pressure from competitors, and commodity inflation. BofA Securities sets an $86 price target on SHAK, a 42% cut from the prior PT.

MORE ON PAPA JOHN'S

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* Papa John's: Turnaround Story That Can Accelerate [https://seekingalpha.com/article/4814325-papa-johns-turnaround-story-that-can-accelerate]
* Papa John's International, Inc. (PZZA) Q2 2025 Earnings Call Transcript [https://seekingalpha.com/article/4810371-papa-johns-international-inc-pzza-q2-2025-earnings-call-transcript]
* Papa John's to return to India with 650 stores by 2035, Reuters reports [https://seekingalpha.com/news/4489096-papa-johns-to-return-to-india-with-650-stores-by-2035-reuters-reports]
* Papa John's raises international sales outlook to 2%-4% as transformation gains traction [https://seekingalpha.com/news/4481570-papa-johns-raises-international-sales-outlook-to-2-percentminus-4-percent-as-transformation]