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Industry Outlook

Are Restaurants Losing Their Bite Due to Slow Comps Growth?         

The first half of 2016 has gone by and same-store sales growth has been rather dull in the restaurant space, given the difficult sales environment. Despite economic growth, somewhat lower energy prices, and higher income, consumers have increased their spending only modestly on dining out, which has resulted in low consumption over the last few months. The situation has taken a worse turn, thanks to higher health care costs and tightened credit availability in the U.S.

Moreover, unfavorable currency, a cooling Chinese economy and a tightening labor market have compounded woes for the restaurateurs. Traffic has been weak as well.

Nonetheless, restaurateurs are undertaking various sales building as well as digital initiatives to drive traffic and comps. Further, increased focus on refranchising bodes well while remodeling efforts should enhance guest experience.

What Do the Numbers Say?

The industry metrics point out to a mixed outlook for restaurant operators.

Same-store sales for the month of July declined 1.4%, representing the weakest performance since Dec 2013, per TDn2K’s Black Box Intelligence. The decline also compared unfavorably with the 1.1% dip recorded in June.

Meanwhile, another report by TDn2K’s Black Box Intelligence stated that the second quarter of 2016 was the second consecutive quarter in which the restaurant industry failed to produce positive comps growth. Same-store sales during the quarter dipped 0.7% year over year, following a 0.2% decline in the first quarter of 2016. This highlights persistently low sales with no turnaround.

Nonetheless, the Restaurant Performance Index (RPI), which tracks the health and outlook of U.S. restaurants, stood at 100.6 in July, up 0.3% from June. According to National Restaurant Association, although RPI registered a modest increase in July, same-store sales and customer traffic levels remained somewhat bumpy.

Meanwhile, the Current Situation Index that measures trends in four industry indicators — same-store sales, traffic, labor and capital expenditures — stood at 100.4 in July, up 0.4% from June levels. Notably, the index has crossed 100 in five of the last six months.

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

Zacks Industry Rank

Within the Zacks Industry classification, we rank all the 260-plus 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.

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-Restaurants industry currently stands at #195. This puts the industry in the lower third of all industries, corresponding to a negative outlook. Most of the restaurateurs have been witnessing sluggish comps and traffic growth over the past few months, which possibly had an adverse impact on the industry rating.

Earnings Trends

The restaurant industry falls under the broader Retail-Wholesale sector, and has not fared well in the Q2 earnings season relative to the recent past.

In spite of the high expectations for the group, most of the stocks reported below-par figures as they struggled with the top line, given lower comps growth.

Limited revenue growth has hurt the performance of major players in the space like Yum! Brands, Inc. (YUM - Free Report) , McDonald's Corp. (MCD - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) , Starbucks Corp. (SBUX - Free Report) , Dunkin' Brands Group, Inc. (DNKN - Free Report) among others.

If we look at the overall results of the sector, earnings grew 4.5% in the June quarter while total revenues rose 4.3% in the quarter. Meanwhile, for 2016, both earnings and revenues are expected to rise 4.9% and 6.4%, respectively.

For more details about earnings for this sector and others, please read our ‘Earnings Trends’ report.

Bottom Line

Consumer behavior has been volatile and their willingness to spend in restaurants has diminished as evident from the first half of 2016 results.

However, this may turn out to be only transitory as the economy remains robust on the back of growing income and solid employment numbers. Consumer spending has also been in fine fettle of late, although sluggish spending trends in the restaurant space and slowing comps growth make it hard to bank on a strong revival.

Nevertheless, 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 grapples with several global economic concerns. Moving ahead, it remains to be seen how the restaurant companies succeed in dealing with the headwinds coming their way.

 

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