Costs Taking a Bite Out of Restaurant Stocks – Industry Outlook

With the onset of spring, the restaurant industry finally has something to cheer about after a dismal run last quarter. People are now more than willing to leave the confines of their homes and spend on dining out. Though the cautious spending mindset of consumers persists overall, the restaurant industry can breathe a sigh of relief in view of this encouraging trend. Leaving behind the woes of last year and the inclement weather in Jan and Feb 2014, the U.S. restaurant industry began the second quarter of the year on a rather positive note.

According to Black Box Intelligence and People Report, the restaurant industry reported positive same-store sales in the months of March and April, a relief from the negative comps seen since Nov 2013. Comps increased 0.7% and 0.6% in March and April, respectively, owing to improved weather.

Moreover, improving Restaurant Performance Index and the Current Situation Index reflect accelerated economic expansion and underlying strength in the industry. The strength in the U.S. restaurant industry is backed by pent-up demand from consumers to live and eat well.

Going forward, we expect the outlook for the restaurant industry to get better driven by innate fundamental strengths, reflecting an improving economic backdrop. Statistics bear out this relatively favorable environment. Restaurant-and-foodservice sales are anticipated to be $683.4 billion in 2014, up 3.6% year over year, as per the National Restaurant Association. In real terms, this will mark the fifth consecutive year of growth in restaurant sales.

However, the industry has its share of challenges, the most concerning being the rise in food costs. Food costs were up 0.4% in April, the fourth straight month of increase. Moreover, meat prices increased 8.4% in April this year. These factors indicate that inflation may be creeping up.

The overall economic environment is improving. However, the year-over-year decline in guest count remains a concern. Though up sequentially, same-store traffic for the month of April declined 1.1% year over year. As per media reports, the industry has yet to achieve an improving same-store guest count since the end of the recession.

Meanwhile, the industry is dependent on broad macroeconomic factors, with dining out being a largely discretionary activity. The economic climate largely influences restaurant choices for customers. The Consumer Confidence Index declined sequentially in Apr 2014 as consumers deemed current business and labor market conditions less favorable. Further, we believe issues related to "Obamacare," volatility in housing data and fuel prices and excess supply may continue to cast shadows on the long-term picture.

OPPORTUNITIES

Domestic and International Unit Expansion

After emerging from a lackluster economy that lasted for three years, most of the companies had stepped up their pace of restaurant openings. Not content with domestic expansion alone, the companies were looking to test waters as well as developing taste buds in foreign shores. Restaurateurs are primarily concentrating on emerging markets that provide ample opportunities for expansion.

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Costs Taking a Bite Out of Restaurant Stocks - Industry Outlook