It is restaurant week on Wall Street, as
Domino’s Pizza
(ticker: DPZ),
Chipotle Mexican Grill
(CMG), and
McDonald’s
(MCD) prepare their latest earnings reports.
Restaurant stocks have been on a hot streak this year, buoyed by booming consumer demand for in-person experiences. The
AdvisorShares Restaurant ETF
(EATZ) is up 24% this year, trumping the 18% gain for the
S&P 500.
The bigger question heading into earnings is how long the sector’s momentum will last.
Recent data suggests revenue growth slowed last quarter, wrote Wells Fargo analyst Zachary Fadem in a Wednesday note to clients. Foot traffic was also “choppier” this quarter, he added.
Sales at food services and drinking places inched up 0.1% in June from the previous month, a slowdown from May’s 1.2% gain, according to the latest retail sales data. Restaurant foot traffic fell by 0.3% in the second quarter, according to data from Placer.ai.
Part of that slowdown comes from the fact that dining out is still expensive. Prices for food away from home were up 7.7% in June compared with a year ago, while grocery prices increased 4.7%.
“Consumers [are] increasingly less concerned about gas prices but more concerned about the price of restaurants and travel,” said Katie Thomas, lead of the Kearney Consumer Institute. “A strong labor market and declining inflation in core necessities has allowed consumers to spend discretionarily—but not without noticing the increased cost.”
It is possible the concern hasn’t yet translated to a significant pullback in spending just yet. While restaurant sales only gained 0.1% in June month-over-month, they’re up 8.4% from a year ago. That compares to a 1.5% increase in spending across all retail categories.
Indeed, investors seem to expect most restaurants to post solid quarterly results, with top performers on track to beat expectations.
Analysts who are bullish on the restaurant industry point out the sector may perform better than other retail companies this earnings season. LPL Research projects the consumer discretionary sector will record double-digit earnings growth this quarter, with companies in the entertainment, hotel, restaurant, and leisure businesses contributing to the earnings boost.
“We expect more evidence supporting the idea that consumers are choosing experiences over things, with restaurants at the forefront of this phenomena,” agreed Citi analyst Jon Tower, in a Friday note to clients.
Lower commodity prices and softening wage inflation could also help restaurants increase profit and improve margins this quarter, analysts say, especially since many have raised prices over the last couple of months.
The conflicting datapoints suggest that consumers are at a crossroads—do they prioritize spending on the experience of dining out, or do they try to save a penny or two by cooking at home?
Many have come to a compromise: eating out at cheaper, more casual restaurants.
That could help fast-food and fast-casual chains this quarter, and hurt sit-down restaurants with higher price points, analysts say. Fast food and fast casual restaurants comprised 60.4% of total restaurant visits in the second quarter, according to Placer.ai. Full-service restaurants only accounted for 33.6% of total visits in the quarter.
“Consumers will continue to seek value from restaurants, leading to risk of trade down into quick service,” wrote Andrew Charles, analyst at TD Cowen.
Write to Sabrina Escobar at [email protected]
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