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Back in July and August, when it was clear that US GDP growth was above 4% for the second quarter, many economists were predicting a continuation of that kind of growth. We reiterated that our experience, following the dining habits of US consumers over four decades, did not confirm the optimism of the PHD economists. (There are over 300 PHD economists working at the US Fed. How do 300 economists ever agree on anything?) Summarizing what some people would call our “anecdotal” observations: people have to eat just about every day, and dining habits are about the easiest thing to expand upon or cut back, long before hard earned dollars are spent on autos, vacations or home improvements. So: regarding the “meals prepared away from home” industry, which these days must include delivery and takeaway, Q2 and the beginning of Q3 showed that with just a few exceptions, same store sales at the publicly held restaurant companies were barely positive,  traffic trends were still negative, and that supported our doubt that the economy was about to take off.

However, we have to admit that we had a just a bit of concern that restaurant sales and traffic, as a tried and true leading indicator may have seen its best days. After all, we are living through some major long term cultural changes in consumer behavior, driven by Amazon, Netflix, Domino’s and social media giants such as Facebook and Google, all of which have  clearly changed the world. We are old enough to know that nothing is forever, not even restaurant sales as an indicator of the broader economy.

Our concern, at least for the moment, has been allayed. As we suspected back in the summer, the 4%+ GDP growth is now in the rear view mirror, Q3 will be closer to 3% than 4%, and growth in 2019 is expected (by the 300 PHDs) to be closer to 2% than 3%. The question now becomes: what is the restaurant industry showing us today. According to Miller Pulse, Restaurant Traffic, after PEAKING at a NEGATIVE 1% in August, FELL BACK to OVER 2% NEGATIVE in September. Also according to Miller Pulse, two year stacked same store sales, after peaking at plus 2% in June, has fallen steadily to be virtually flat in September. So this time the PHDs are on the right track, at least for the moment. A broader implication here is that Jay Powell, Chairman at the Fed, had best tread carefully with the continuous interest rate increases, lest the economy tip into recession, and the deficit really explode with higher interest rates on $21.5 trillion and lower tax revenues.

We will know even more about sales and traffic trends in the next ten days. McDonald’s reports Q3 tomorrow morning and there is no reason to think they will  lose (or gain) any large portion of their recent momentum. Noodles reports tomorrow evening and Chipotle Wednesday evening, both of which are in the middle of turnarounds. Dunkin’ Donuts reports Thursday morning, and their traffic will likely still be challenged .

Next week will provide many more data points. We will report again to you next Wednesday, 10/31, after Blooming Brands, Texas Roadhouse, Wingstop, Papa John’s, Cheesecake Factory, BJ’s, Habit, Denny’s, IHOP, Applebee’s, and Yum Brands, have all reported their most recent quarter. We should have a decent picture at that point how sales and traffic trends exited Q3 and began Q4.

Keep in mind that the lackluster sales and traffic trends are in spite of aggressive promotion, and an incremental contribution from delivery (with lower margins)  and takeaway. Since labor costs continue upward, commodity costs no longer help, nor do higher rents, construction costs, insurance, trash collection and other operating expenses. It will continue to be very difficult to maintain, let alone improve, current operating margins, considering the ongoing traffic challenges. This year’s often improved after tax earnings per share have been more a function of reduced shares outstanding and lower tax rates than operating progress.

Roger Lipton