The 3 Worst Performing Restaurant Stocks of 2014

2014 hasn't been good for all restaurants. While the stock market makes new highs, many restaurants are struggling. The competition has eaten into their businesses, which has hurt their top and bottom lines. The three restaurant stocks that have been hurt the most this year are Potbelly , Panera Bread , and Krispy Kreme Doughnuts . Could these restaurants turn around and make a comeback in the second half of this year?

A very disappointing IPO
Potbelly came public last year, and it's been downhill ever since for the sandwich maker, with shares down over 53% year to date. After looking at the company's latest earnings report, it's easy to see why shares are down for the year.

Source: Potbelly

In the first quarter, Potbelly's same-store sales dropped 2.2%. This comes as the majority of its shops are in Illinois and were affected by severe winter weather. Total revenue increased just 7.5% from last year. Mr. Market likes to see double-digit growth in order to be placed in the same category as Chipotle Mexican Grill. Here, Potbelly just isn't measuring up. The worst part of the report in my opinion was that Potbelly earned just $200,000 in the quarter. It's hard to justify a high stock price when a company is only earning that much a quarter.

Source: Potbelly

Potbelly shareholders were hoping for improvement in the second quarter--unfortunately, that does not appear to be the case. Potbelly just pre-released its second quarter numbers, and they're awful. Same-store sales are likely to be lower by 1.6%. Net income will be a little better than the first quarter, but will still come in at only $2 million.

This has really shocked the market and caused shares to drop over 23% after the announcement was made. Making the situation worse is that the full year outlook is now quite bearish. When Potbelly released its first quarter earnings earlier this year, the company was expecting same-store sales to be positive and in the low-single digit range. However, now the company is expecting that same-store sales will be flat to negative single-digits. Potbelly expects to earn $0.18 to $0.21 per share for 2014.

The problem for current shareholders is that if Potbelly earns $0.18, which is at the low-end of expectations, shares are trading at 61 times earnings. This still makes shares expensive even at $11 per share. Right now, the only thing going for shareholders is that about 20% of the company's float is sold short. Any positive surprise going forward could get shorts covering and investors buying. But until then, investors are best off on the sidelines until we see some good news from the company. 

Not looking so creamy in the short term
Shares of Krispy Kreme Doughnuts took a tumble last month after the company issued disappointing earnings guidance for 2014. The result is that shares are now down about 19% for the year. The company cited a number of factors for the weakness. For one, the winter weather had an impact on coffee and doughnut sales. On top of that, Krispy Kreme is seeing higher costs associated with its new enterprise resource planning system and executive compensation.

Source: Krispy Kreme Doughnuts

Krispy Kreme is still forecasting double-digit earnings growth, but earnings growth will be slightly lower for the year due to the loss of business in the first quarter. That's the problem with coffee and doughnuts: once you lose that business for the day, customers won't make up for it the next day. They'll still only buy their usual cup of coffee and a doughnut.

Source: Krispy Kreme Doughnuts

Longer term, I like Krispy Kreme Doughnuts. The company just brought in Tony Thompson, the former president of Papa John's International to be its new CEO. He has more than 25 years of food and beverage experience, and he helped build Papa John's digital-ordering platform. With former CEO James Morgan in the chairman's chair, I think Krispy Kreme has a great management team in place.

Retooling the business model
Panera Bread is working on improving its business model with Panera 2.0. Long customer waits during rush hours have led customers to go elsewhere. The result has been weakness in Panera's top and bottom lines. In the first quarter, same-store sales at company-owned locations increased only 0.1%, while net income was 12% lower than last year. Panera's aggressive share-buyback program lessened the impact on earnings per share, which came in 5% lower than last year. Shares are down more than 16% year to date.

Source: Panera Bread

CEO Ron Shaich is looking to change that by offering more ordering options, dedicated wait areas for to-go orders, and table delivery service by Panera employees. The goal is to eliminate long lines. The problem is that the rollout of Panera 2.0 is going to take some time. Also, retooling the business model is going to require store improvements, which cost money. Panera is looking at earnings being only slightly better than last year.

Source: Panera Bread

Panera is another stock with a high short interest. About 9% of its float has been sold short. Shares could see a pop if the company beats expectations. Panera is forecasting same-store sales to increase 2% to 3.5% this year. This means the company is expecting strong sales in the back half of this year. Panera also expects to open about 115 to 125 new locations this year.

Foolish final thoughts
It's a tough call trying to be a bottom picker. Usually I like to see a catalyst, or good news, before saying that the low is in. Fools should watch the next earnings report closely and see if there is improvement for Potbelly, Krispy Kreme, or Panera before jumping in. If one of these companies delivers better results, shares could jump and that could be a sign that the bearish sentiment is over. Until these companies report earnings, it's best to stay on the sidelines.