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The restaurant sector is struggling as consumer belts tighten and overheads rise. Russ Mould serves up some words of warning

In the eponymous series, Gordon Ramsay’s Kitchen Nightmares the master chef and businessman often makes running a restaurant look easy. It isn’t. Just ask the bosses at Clapham House (CPH:AIM), whose share price plunged by more than 40% after last week’s profit warning.

Executives blamed potential food price increases, economic uncertainty and rising rents, in addition to rotten trading at its Tootsies sites. Shares in the firm, which also owns the Real Greek and Gourmet Burger Kitchen chains, subsequently rallied when management began to buy stock later in the week.

But investors should not be lured in, not least as Clapham House was not the first restaurateur to dish up bad news this year. Domino’s Pizza (DOM:AIM) gave its shareholders indigestion when it blamed soaring cheese and wheat prices for November’s profit alert, which pushed its shares to 262.5p, an eighteen month low.

FishWorks (FSH:AIM) has also found it harder to net customers. The restaurant and fishmonger chain’s shares are beached at 6.75p, compared to last year’s 50p all-time high. Heavy operating losses have forced the closure of a branch in Notting Hill, the deceleration of an expansion programme and emergency fund raising.

Each of this trio cited a different problem, yet the net result of disappointing profits is the same. Nick Stevenson, of equity strategy think tank Mirabaud Securities, thinks darker forces may be at work than simply the rising cost of mozzarella.

‘If the UK fast-food and “informal dining” sector hadn’t expanded so massively over the last five years, and there hadn’t been a run on a retail bank over the summer and property prices hadn’t recently turned down, then the on-the-street price of pizza in the UK would presumably have risen sufficiently to offset the rise in input costs,’ he argues.

This caustic assessment highlights how the restaurant chains have become the meat in a very unpleasant sandwich, with rising input costs on one side and price competition on the other.

At least Carluccio’s (CARL:AIM) reassured investors with robust full year results last week. Shares in chain of Italian restaurants and delis held firm at 157p when management served up an 18% increase in sales and 28% increase in adjusted pre-tax profit.

But even Carluccio’s declined to reveal like-for-like sales growth. This reticence suggests top line progress would perhaps have been less impressive without six new site openings, which took the group’s total number of outlets to 32 by the end of its September financial year.

Investors with an appetite for food stocks should perhaps focus on the simpler pleasures in life, such as those offered by Greggs (GRG). October’s trading statement revealed the bakery firm, which has over 1,300 outlets in the UK, was able to cover rising raw material costs with 4.5% price increases in the sixteen weeks to October.

‘It’s hard to see cash-strapped UK consumers trading down from sandwiches and sausage rolls,’ concludes Mirabaud’s Stevenson.

The nation’s shoppers still have to buy groceries, too. Tesco (TSCO) and Sainsbury (SBRY) may not be able to pass on all input cost increases but food inflation should still drive top line and profits growth for the big supermarket chains.

Shares says:

BUY Greggs, Tesco, Sainsbury

AVOID Clapham House, FishWorks

HOLD Carluccio's