WALL STREET CELEBRATES – WHAT’S HAPPENING ON MAIN STREET
The US election is six weeks in the rear-view window. We’ve resisted commenting on the economic trends until enough data points have been revealed. As we have pointed out many times, the restaurant industry has invariably provided a window into the general economy. Consumers can adjust their “meals prepared away from home” expenditures much more easily than finding the funds for a new car, renovating their home or going to Disneyworld.
There is little question that the new administration will provide a more business friendly environment, including less upward pressure on the minimum wage and regulatory hurdles. Lower business taxes will also help corporate after tax earnings, and a great deal of money will likely be repatriated with a modest tax rate, presumably to be re-invested in the US economy. More effective border control should provide more job opportunities for US citizens, though costs will go up for the employers, followed by higher prices to be paid by consumers.
The stock market has moved straight up since the election, the averages by about 10%, restaurants and retailers by 20% or more. Quite a few financial commentators, including money managers and economists have expressed their optimism. The problem is that facts “on the ground” do not (yet) provide any positive confirmation that the economy will prove the stock market correct. In particular: (1) We hear from our numerous contacts around the restaurant industry that traffic is not materially better since the election. (2) The Miller Pulse survey has reported that the restaurant industry as a whole had same store sales up 0.3% (traffic still negative) YTY in November. That was an improvement from the 0.5% sales decline in October, the low point of the year, but obviously only an improvement MTM of 0.8%. Quick Service Restaurants (QSR) carried the day with a 1.3% increase (traffic still flat to down), an improvement from the year’s low point of minus 0.5% in October. That was driven by a continuation of all kinds of low priced value promotions. (4:4 at Wendy’s, 5:4 at BK, $4 and $5 buckets at chicken chains, $2.50 triple cheeseburger at MCD, etc.etc.) This is not a sign of new found strength. Additionally, as compiled by Miller Pulse, Casual Dining chains showed a 0.8% SSS sales decline in November (with a check increase of 2.2%) so traffic was down 3.0%. Even the two year “stacked” trend in casual dining was down, minus 0.5%. So “fuel” is still being consumed, primarily at lunch, in the QSR segment, but consumers are still “strapped” sufficiently to be restricting the evening dining experience. (3) Black Box research confirms that casual dining same store sales were down 1.8% in November with traffic down 4.0%. (4) From a broader retail standpoint, Black Friday kicked off the holiday shopping season, and overall sales were up just modestly. Brick and mortar sales were down about 4%. Internet sales were up over 20%, saving the day, but all sales were promotionally driven. There is no reason to conclude, based on Black Friday results, that the holiday shopping season as a whole will be materially better than in recent years.
We believe that the pundit commentary is largely retroactively matching their supposedly fundamental opinions to what they believe the charts have been showing. As one example, we listened to Tilman Fertitta, the hugely successful hospitality entrepreneur (restaurants, hotels, casinos, etc.) tell CNBC that everything changed on November 9th. There is nothing wrong with supporting the new administration’s programs but we think he was confusing “hope” with, at least, the current reality. We have to express our amazement with how many prominent business executives and investment professionals are now speaking loudly of their confidence in President-Elect Trump’s programs. These guys and girls were few and far between two months ago. It’s good to be king.
Our conclusion is that “hope and change” has been put in place, but, at best, it will take time. Relative to our expectation for consumer spending trends, for 2017 in particular: we believe consumers are feeling better today than they are going to feel over the next six to twelve months. The hope will give way to reality as it becomes clear that everything takes time. Adjustments within health care, corporate response to less of a legislative burden, infrastructure construction programs, corporate investment and hiring as a result of lower taxes and repatriation of overseas funds, inner city development projects, and so many other potential initiatives all take many months, if not years, to put in place. Meanwhile, consumers continue to be stretched by health care costs, high rents, education costs, even gas prices that are rising once again. Good jobs are still hard to come by, seniors are still burdened by very low interest on their savings accounts. The still low rates have increased enough to put a crimp in the housing and auto industries, and the very strong dollar will affect exporters’ sales and earnings. Since over 40% of the sales of the S&P 500 companies come from exports, this is a material issue. Putting it all together, we have a complex, interconnected worldwide economy, and the programs of the new administration will not solve all, or even most, problems quickly. We are optimistic over the long term, but believe it will be far from a straight line move, and would plan accordingly.