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.
While 2022 was a bad year for restaurant stocks, 2023 could be much better as long as the labor market holds together.
Despite healthy comp growth prospects, unit-level P&Ls remain pressured by substantial food cost inflation (and labor inflation to a lesser extent).
Restaurant stocks had a good month in November as the market considers a soft landing for the economy.
Unit-level performance is stronger than expected given inflationary pressures.
Restaurant stocks reveal improving fundamentals, but there remains some major hurdles to overcome.
Improving sales and peak inflation offers hope for the future.
Waning consumer strength in an inflationary environment does not portend well for restaurant stocks or unit-level valuations, especially as the Fed remains focused on increasing unemployment.
• While 2Q comps for the $1B+ Chains increased +3.5% (+14% 3-yr. stack), RR’s consumer survey (which measures intentions to eat-out over the next month) continues to reveal a challenging 3Q sales outlook.
• Food prices continue to surge, breaking another record in July (+10.9% y/y & +14.8% 2-yr. stack).
• Recent passage of the California Fast Food Accountability & Standards Recovery Act increases QSR wages in the state by +40% to $22/hr. in 2023, aggravating labor inflation.
• Unit-level operating margins for the corporate owned stores of the publicly traded $1B+ Chain companies declined 4.5% to 16.5% during 2Q:22 vs. 2Q:21.
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