RESTAURANT INDUSTRY – PEOPLE HAVE TO EAT, DON’T THEY? – WHAT’S HAPPENING ON MAIN STREET?

While the restaurant stocks mark time this summer, at historically high valuations, it is a good time to consider the major trends within the group.

There has been little specific news, since quarterly earnings reports for the period ending 6/30 or 7/31 have yet to be released. However, we can surmise what’s happening in a general sense, and consider whether there have been any major “inflection points” that we can take advantage of. In short, though the general economy, as reported by our “business friendly” administration, is picking up steam, there is little in the hospitality sector, including restaurants and retail, that indicates there is any growing momentum.

To be sure, there is more comfort and confidence by consumers as well as restaurant operators than there was a few years ago and especially back in ’08 and ’09. The public is more secure in their employment, though wage increases are still lagging the numerical employment statistics. The general economy may be on the verge of 4% real GDP growth in Q2, but same store sales and traffic are showing very modest progress.

According to Miller Pulse, Fast Food (QSR) same store sales were up 2.2% in June, the same as May, up just modestly from 1.6% in April and an average of about 0.8% in Q1 which was negatively affected by winter weather.  Traffic has improved from a negative 2.7% in Q1, but is still negative every month in Q2, by an average of 0.8%.

It is the same story in Casual Dining, with traffic improving from an average of about 1.8% in Q1 but still negative every month in Q2, and down about 1.0% for the quarter. Same store sales were up about 0.8% in Q2, barely up from a positive 0.4% in Q1.

We have pointed out many times that the restaurant industry is a great leading indicator for the economy as a whole. If that theory prevails, there is no boom ahead. Though some industry observers are touting the better trends, we continue to hear the country western refrain: “Down so long, it looks like up to me”.

Anecdotally, we hear that consumers are feeling better, but still spending carefully, just as the  reported sales and  traffic results indicate. Job security may be better, but exposure (if not actual expenses) for health care is a substantial financial burden for many families. The housing and auto industries are increasingly sluggish as interest rates rise, and these are important portions of the economy. Gasoline prices are higher again than a couple of years ago and also help to absorb the discretionary spending from slightly higher wages. Restaurant operators are feeling better because sales have stabilized at least, but higher wage, occupancy and even commodity costs are conspiring to keep profits subdued even if sales are firming by point or two. Very few operators are building new stores, preferring to renovate and/or expand current facilities or acquire other operators. Quite a few chains, Jack in the Box, Dunkin Donuts and Chili’s have difficulty meeting return on investment hurdle rates with real estate costs so high, even though interest rates are historically so low. As interest rates rise, more operators will find themselves in the same boat, unable to afford new locations.

Among the restaurant companies that are doing relatively well, we can point to McDonald’s, Wingstop, Domino’s, the Darden concepts, Del Taco, and Texas Roadhouse. Companies that are “holding their own”, with varying degrees of difficulty, include Wendy’s, Burger King, Denny’s, Popeye’s, Cheesecake Factory, Chuy’s, Starbucks, Dunkin Donuts, and Bloomin Brands. There are quite a few companies,  more than the few listed first above, that are re-inventing themselves to some degree, including Bojangles, Jack in the Box, Habit, Famous Dave’s,  Sonic, Dave & Buster’s, Red Robin, Papa Murphy’s, Buffalo Wild Wings,  Tim Horton’s, Applebee’s, Ihop,  Chipotle, and Zoe’s, and others. You can read about almost all of these companies at the “corporate description” site on this website, accessed from our Home Page. None of the above listings are meant to be all inclusive, and managements are encouraged to give us a call if we have mis-categorized someone. These listing are meant to illustrate that there are more chains  that are currently challenged than are firing on all cylinders.

Earnings reports will start to come in for Q2 ending 6/30 in a couple of weeks. Based upon the apparently still sluggish trends, we see no reason why July and early August numbers will give management a reason to risk the prediction of a strong fall season. There is just no reason to stick their neck out. Guidance will likely be conservative, leaving room to UPOD (under promise and over deliver). We will do our best to read between the lines and report to you the “reality” rather than the “story”.

Roger Lipton