Restaurant/Retail – Why Bother?

Restaurant Finance Monitor

Very few investors, securities analysts, economists or newscasters have specialized in the restaurant industry. They, and you, might not realize what an effective window into economic prospects restaurants and retail vendors provide. The value of following publicly held companies from McDonalds and Del Friscos (restaurants) to TJ Maxx and Tiffany (retail) goes far beyond the individual corporate results. The logic is as follows:

  • Approximately 70% of the U.S. economy is consumer driven. If consumer confidence and spending is soft, the general economy will suffer accordingly.
  • The restaurant industry, in particular, has proven for many decades to be an effective leading indicator on the economy as a whole. Meals, bought and/or consumed, away from home are an entrenched part of our life style. Since the expenditure is a relatively small ticket compared to travel spending, automotive or housing spending, computer purchases, even cell phone expenses, consumers can adjust this spending easily with frequency and average ticket. The typical family will adjust the frequency of an appetizer or dessert well before they will take a vacation (or not), buy a new car (or not) or renovate their home (or not).
  • Transparency within this industry is unique. Inventories turn weekly, so inventory building or drawdown does not affect the results, as opposed to measurement of so many elements of the GDP. An analyst following same store sales, traffic trends adjusted for pricing is not going to be badly misled. When the largest retailer on the planet, WalMart again reports flat same store sales,  and Tiffany (on the high end) is also troubled, you can probably conclude that the economy is not in great shape.
  • Approximately 14 million adults are employed by the retail/hospitality industry (80%-90% in restaurants) in the U.S., approximately 10% of the U.S. workforce. Wage trends, health care cost trends, and employment trends (such as adjusting weekly hours to meet ACA requirements) are significant windows into national employment trends, and inflation expectations.
  • Cost of goods (beef, chicken, seafood, paper costs,etc.) at restaurant chains approximates 30% of sales so frequent reporting by publicly held restaurant chains provides a window into inflation expectations.
  • Corporate transparency is unique. Traffic trends, quality standards in terms of price/value, service at the store level, cleanliness of facilities, etc. are visible meal by meal. A visit to the mall or dinner at a restaurant chain can pay dividends. Every stock you buy may not enrich you, but will not impoverish you if you pay attention.
  • Restaurant industry is relatively recession resistant. Trite though it might be, people have to eat, meals away from home are entrenched as a lifestyle and will remain so. Traffic trends and average spending fluctuate but not hugely. Well run restaurant chains, and even some that aren’t so well run, can survive over the long term. The good ones can grow spectacularly, like McDonalds (for a long time), more recently Starbucks. Overall, however,individual  investments in restaurants and retail should be monitored, not “put away” long term. More companies suffer serious periodic stumbles than produce reliable results year after year. This is particularly true in retail, rather than restaurants, where an apparel company can be only as good as their latest “floor set”. Quality standards in a well run restaurant company will not normally  change much on a very short term basis.

For these reasons, and more, the restaurant/retail industry is not just about burgers, tacos, or even  apparel, furniture, or smart phones.  The study of retail consumer trends  gives us a  window into far more general economic trends.