Restaurant stocks have been performing exceptionally well this year, driven by the strong demand for in-person dining experiences. The AdvisorShares Restaurant ETF (ticker: EATZ) has surged 24% year-to-date, outperforming the 18% gain of the S&P 500.
However, the question on everyone’s mind is: How sustainable is this momentum in the restaurant sector?
According to a note from Wells Fargo analyst Zachary Fadem, recent data indicates a slowdown in revenue growth during the last quarter. Fadem also noted that foot traffic has been more unpredictable in recent months.
The latest retail sales data reveals that sales at food services and drinking places only increased by 0.1% in June, compared to a solid 1.2% gain in May. Furthermore, data from Placer.ai indicates a 0.3% decline in restaurant foot traffic during the second quarter.
One contributing factor to this slowdown is the still high cost of dining out. In June, prices for food away from home rose by 7.7% compared to the previous year, while grocery prices increased by 4.7%.
Katie Thomas, lead of the Kearney Consumer Institute, stated that consumers are becoming increasingly less concerned about gas prices and more concerned about the rising costs of restaurants and travel. She explained that although a strong labor market and declining inflation in essential goods have enabled consumers to spend discretionary income, they are now more aware of the increased expenses.
Despite these concerns, there hasn’t been a significant decrease in restaurant spending just yet. While restaurant sales only saw a modest 0.1% increase in June compared to the previous month, they have surged by 8.4% compared to the same time last year. This is much higher than the overall retail spending increase of 1.5%.
Investors are optimistic about solid quarterly results from most restaurants, as top performers are anticipated to exceed expectations.
The Upside for the Restaurant Industry: Earnings Season Outlook
Analysts are optimistic about the restaurant industry’s performance this earnings season, projecting it to outperform other retail sectors. LPL Research forecasts double-digit earnings growth for the consumer discretionary sector, attributing this boost to companies in the entertainment, hotel, restaurant, and leisure businesses.
Shifting consumer preferences towards experiences rather than material possessions seem to support this idea. Citi analyst Jon Tower concurs, stating that restaurants are leading the charge in this trend.
In addition, lower commodity prices and reduced wage inflation are expected to positively impact restaurant profits and margins this quarter. This is particularly significant as many restaurants have recently raised their prices.
However, conflicting data points raise questions about consumer behavior. Will they prioritize dining out, embracing the experience, or try to save money by cooking at home?
Interestingly, a compromise seems to be emerging – consumers are gravitating towards cheaper and more casual restaurant options.
This preference is expected to benefit fast-food and fast-casual chains, while sit-down restaurants with higher price points may face challenges. According to Placer.ai, fast food and fast casual restaurants accounted for 60.4% of total restaurant visits in the second quarter, in contrast to full-service restaurants which only made up 33.6%.
Andrew Charles, an analyst at TD Cowen, highlights that consumers will continue to seek value from restaurants, potentially leading to a trade-down into quick-service establishments.
In summary, while the restaurant industry shows promise this earnings season, the evolving dining preferences and economic factors will likely shape its performance in the coming months.
