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Are Restaurants Losing Their Bite This Year?

So far this year, same-store sales growth has been somewhat dull for the restaurant industry. Despite economic growth, still-low energy prices and higher income, consumers are increasing their spending only modestly, which has resulted in low consumption over the last few months. The situation is further aggravated by higher health care costs and still-tightened credit availability in the U.S.

The restaurant industry continues to face headwinds in the form of high labor costs, unfavorable currency, a cooling Chinese economy and a tightening labor market. Traffic has been weak as well.

Industry metrics reflect the somber mood in the restaurant space. Same-store sales for the month of April declined for the second consecutive month, per TDn2K’s Black Box Intelligence. The decline also compared unfavorably with the 0.7% dip in comps in March.

Notably, the Restaurant Performance Index (RPI), which tracks the health and outlook of U.S. restaurants, stood at 100.7 for March, down 1.4% from February. Although according to the National Restaurant Association, March marked the 33rd consecutive month in which the RPI crossed 100, comps and traffic growth has been sluggish over the past few months.

Meanwhile, the Current Situation Index that measures trends in four industry indicators — same-store sales, traffic, labor and capital expenditures — was also over 100 for the 25th straight month.

In its 2016 Restaurant Industry Forecast, the National Restaurant Association revealed that it expects restaurant industry sales to reach $783 billion in 2016. Although this will mark the seventh consecutive year of real growth in restaurant sales, the rate of growth continues to be restricted.

Since the beginning of the year, consumer behavior has been volatile, and their willingness to spend on most goods, especially eating out, have showed signs of decline. This may turn out to be only temporary as the economy remains robust on the back of growing income and solid employment numbers. Household spending is anticipated to turn around as summer approaches, although sluggish spending trends make it hard to bank on a strong revival.

Zacks Industry Rank

Within the Zacks Industry classification, the restaurant industry is grouped within the broader Retail sector. We rank all 260+ industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank. https://www.zacks.com/stocks/industry-rank

As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral,' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'

The Zacks Industry Rank for the Retail sector currently stands at #98 among the other industries ranked, indicating the near-term neutral outlook.

Earnings Trends

The restaurant industry falls under the broader Retail-Wholesale sector, and we are halfway through the sector’s first-quarter earnings results.

First-quarter earnings grew 5.2% year over year, while on the revenue front the sector recorded a 10.2% increase. The beat percentage stood at 81.8% for earnings and 54.5% for revenues in the quarter.

Despite the positive reports, optimism surrounding the sector is not very remarkable, as expectations have come down, especially with the sluggish consumer spending trends. For more details about earnings of this sector and others, please read our ‘Earnings Trends’ report.

A Glimpse at Beats & Misses in the Sector

Among the companies in our coverage universe, quick-service bellwethers like McDonald's Corp. (MCD - Free Report) reported better-than-expected earnings and revenues for the quarter. Meanwhile, Yum! Brands, Inc.’s (YUM - Free Report) earnings beat the consensus mark while revenues missed.

On the other hand, fast-casual restaurants like Chipotle Mexican Grill, Inc.’s (CMG - Free Report) earnings beat the Zacks Consensus Estimate, while revenues disappointed expectations. Another cult restaurant, Shake Shack Inc. (SHAK - Free Report) posted robust results, wherein both earnings and revenues surpassed estimates.

Bottom Line

Despite the challenges, the restaurant industry is expected to sustain its general pace of recovery in the near term, albeit at a slower rate, as it contends with several global economic concerns. It remains to be seen whether the restaurant companies succeed in dealing with the headwinds coming their way.

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