1Q23 results from the major public retail chains painted a picture of low-income consumers struggling with inflation, higher interest rates and lower Snap payments & tax refunds. Consumer stress is also evident by theft rate increases.
Strong Sales & Lower Commodity Prices Bolster 1Q Margins
It looks like we may get the promised “soft landing” for the restaurant industry as employed consumers continue to have some money to spend while restaurant operators are poised to enjoy some well-deserved margin relief.
As lower inflation (relative to grocery stores) has provided an important tailwind for restaurant industry sales since 2022 (as it provides consumers with a greater reason to eat-out relative to home cooking), it is important to monitor this gap going forward.
A check-up on restaurant stock performance through March 2023 reveals a favorable industry outlook.
4Q:22 margins improve sequentially & Y/Y. 2023 operating costs are moderating, but still above average.
You couldn’t tell by February’s restaurant stock performance, but the industry is holding its own for now.
With restaurant stocks through the roof in January, it seems that investors are expecting a material improvement in unit-level profitability for 2023.
Bullish investors’ sentiment towards restaurant stocks during January reflects an outlook for continued consumer resiliency and moderating costs. Notably, this seems somewhat contrary to McDonald’s base case for a mild to moderate recession this year.
After a ruinous 2022 in terms of food cost inflation, moderating 2023 inflationary prospects will still leave food input costs at extremely elevated levels. Fortunately, moderating labor costs suggest that restaurants will not have to pass along as much pricing in 2023 to restore margins. Also, it is notable that restaurant sales benefit from more discipline in terms of price increases relative to the grocery stores.
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