October Was a Tough Month for Stocks
During October, the S&P 500 declined -2.2% & the Russell 2000 (small caps) was down nearly -7%. The good news is that Bitcoin was up almost +30%! There is a lot to worry about given all the war mongering around the world, with a growing number of hotspots that adds the Middle East to the Ukraine & Taiwan. There is also growing consternation about the porous U.S. southern border and we got a new Speaker of the House who has got right to work on lining-up billions to ship overseas. Did we forget to mention that the 10-year yield made a big move higher during October & actually had the temerity to test the forbidden 5% red line.
Interest Rates
- While we still have an inverted yield curve, the gap between the 2-year and the longer dated Treasuries have started to narrow. Further, we have a 10-year yield which finally exceeds the 5-year. Ordinarily, these trends would suggest a strengthening economy, but it may just suggest market expectations that the Fed is done hiking rates. In our opinion, we would like to see the Fed cut rates (see this post) – ok, hope springs eternal…
Restaurant Stock Performance
- Public restaurant players are beginning to report 3Q23 results which continue to reflect comp sales growth mostly driven by menu price increases. Notably, going forward menu price increases are set to subside along with retreating food & labor inflation. While this suggests slowing top-line growth prospects for the industry, at least industry profits benefit from menu price levels which remain elevated at a time when operators are finally beginning to enjoy some long-overdue cost relief.
- Importantly, we are beginning to hear that industry sales have begun to recover in October after trending down sequentially during Q3. This is good news & suggests that the consumer still has some life left…
- In any case, it seems evident that macro trends currently bear more clout on stock performance than the earnings of individual companies and this is likely to continue until we get through the 2024 election cycle.
3Q23 QSR Company Results
MCDONALD’S CORP. 3Q23: REVENUE +14% Y/Y, U.S. COMP +8.1%, OP INC. +16%
While McDonald’s top-line growth continues to moderate because of ongoing consumer spending pressure, the brand’s leadership in value & affordability is driving sales outperformance. In any case, high inflation, elevated fuel costs & interest rates, and housing affordability pressures continue to prompt consumers to discriminate about what & where they spend.
CHIPOTLE 3Q23: SALES +11% Y/Y, COMPS +5% (INCLUDING +4% TRAFFIC), EBITDA +16%
Chipotle reported that it continues to do well across all income levels, with sales to lower-income consumers performing at about the same level as medium & high-income guests. This success is attributed to Chipotle’s attractive value equation (the chain has not raised prices in 1+ years until a recent price hike). Urban stores are outperforming by +1% although the gap is narrowing.
DOMINO’S 3Q23: U.S. COMPS -0.6% Y/Y, REVENUES -3.9%, INCOME FROM OPS +7.4%
The pizza segment should continue to grow +1% to +1.5% per year. Domino’s is well positioned as regionals & independents, which have a 40% share of the pizza category, lack scale in advertising & supply chain. Management expects the cost-effective carryout category will continue to gain share from the more expensive delivery channel.
3Q23 FSR Company Results
BJ RESTAURANTS, INC. 3Q23: COMPS +0.4%, REVENUES +2.3%, EBITDA +29%
BJ reports no change to consumer order patterns & an increase in late-night business (which generates a lower overall check average). Management also reported that minimum wage increases have not been impactful in driving its sales (as suggested by some economists).
TEXAS ROADHOUSE, INC. 3Q23: COMPS +8.2% Y/Y
Texas Roadhouse is not calling for a recession but rather sees a benign economic situation. The consumer has remained resilient in their desire to dine at restaurants offering quality products with a high level of value, service & hospitality. The chain’s restaurant margins & dollar profits should continue to improve assuming the continuation of moderate pricing & a steady macro environment.
