Pedestrians carry McDonald’s bags in New York, U.S., Wednesday, April 6, 2023.
Victor J. Blue | Bloomberg | Getty Images
As restaurants prepare to present their first quarter results, investors expect strong results.
But the rest of the year could prove more bumpy for the sector.
McDonald’s, Chipotle Mexican Grill and Domino’s Pizza will all announce quarterly results next week. The following week, Starbucks, Burger King’s parent company Restaurant Brands International and Taco Bell’s owner Yum Brands will report their results.
When restaurants released their fourth-quarter reports in February, many were suggesting impressive sales growth in January. But those results faced easy comparisons with weak sales a year earlier, when the Covid omicron outbreak caused staffing shortages and forced more consumers to stay at home.
The industry had less impressive growth in February and March. Same-store sales rose 6.8% in February and 3.2% in March, compared with January’s 14.1% increase, according to Black Box Intelligence, which tracks restaurant industry metrics.
Fast-casual and casual restaurants saw the biggest sales declines month over month, according to Bank of America data, based on customers’ credit and debit card transactions.
As inflation picked up over the past year, investors worried about consumers’ willingness to spend at restaurants. Some segments, such as fast food and coffee shops, usually fare better in tough economic times, due to their relatively cheap prices and perception of being an affordable luxury.
But even as inflation eases, some diners are still pulling back on restaurant spending.
Investors will likely look to April to get a better idea of spending trends, Bank of America Securities analyst Sara Senatore wrote in a research note published Wednesday.
But even if consumer buying habits remain stable, the restaurant’s same-store sales growth won’t look as impressive for the rest of the year as comparable numbers from a year ago become harder to top.
The first quarter of this year “is probably the last quarter of oversized companies from the pandemic era“ Morgan Stanley analyst Brian Harbor wrote in a note to clients on Monday.
Starting in the second quarter, restaurants will face comparisons to last year’s sales boom driven by double-digit price increases, so they will have to rely on higher traffic to drive sales growth. Weak traffic numbers have been an ongoing problem for many restaurants, with some notable exceptions like McDonald’s.
Companies may also hold off on raising sales forecasts despite a strong first quarter, given the growing consensus that a recession will hit later in 2023, Stifel analyst Chris O’Cull said in a research note on Friday.
Kevin McCarthy, portfolio manager for Neuberger Berman’s Next Generation Connected Consumer ETF, acknowledged that his view of restaurants is more negative than it has been in some time. He said McDonald’s and Chipotle were two names that can play offense and gain market share, despite the tough environment.
The relatively high valuations for restaurant stocks provide a downside for the industry, McCarthy said. McDonald’s, Starbucks, Chipotle, Papa John’s and Yum all trade at more than 30 times the price-to-earnings ratio, according to Factset data.
“Valuation is not cheap anywhere. It’s probably a standard deviation over everything that I would consider to be value. So we’re not value sniffing and we don’t really have growth,” McCarthy said.
Even strong first-quarter results can weaken restaurant stocks as a result, especially if executives stick to their conservative forecasts or strike a vague tone on conference calls with analysts.
Morgan Stanley’s Harbor wrote that shares could fall even on solid results “if the way forward is less clear.”