Restaurant stocks have been thriving this year due to high demand for in-person experiences. The AdvisorShares Restaurant ETF (EATZ) has seen a remarkable 24% increase, surpassing the 18% gain of the S&P 500.
However, the real question remains: how long will this momentum last for the restaurant sector?
Wells Fargo analyst Zachary Fadem discussed recent data that shows a slowdown in revenue growth and choppier foot traffic during the last quarter. According to the latest retail sales data, sales at food services and drinking establishments only went up 0.1% in June, compared to May’s 1.2% increase. Additionally, Placer.ai’s data indicates a 0.3% decline in restaurant foot traffic during the second quarter.
One reason for this slowdown is the continued high cost of dining out. In June, prices for food away from home rose by 7.7% compared to a year ago, while grocery prices increased by 4.7%.
Katie Thomas, lead of the Kearney Consumer Institute, explained that consumers are becoming less concerned about gas prices and more concerned about the steep prices of restaurants and travel. Although consumers have been able to spend more freely due to a strong labor market and decreasing inflation in essential goods, they are noticing the increased costs.
Despite these concerns, there hasn’t been a significant decrease in spending just yet. While restaurant sales only saw a 0.1% monthly increase in June, they are up 8.4% from a year ago. This outperforms the 1.5% increase in spending across all retail categories.
Investors remain optimistic about solid quarterly results for most restaurants, with top performers expected to exceed expectations.
The Restaurant Industry Expected to Outperform Other Retail Companies
Analysts Optimistic About Restaurant Industry Performance
Analysts who are bullish on the restaurant industry point out that the sector is likely to perform better than other retail companies this earnings season. LPL Research projects double-digit earnings growth for the consumer discretionary sector, and companies in the entertainment, hotel, restaurant, and leisure businesses are expected to contribute to this boost.
Consumers Choosing Experiences Over Possessions
According to Citi analyst Jon Tower, there is increasing evidence to support the idea that consumers are prioritizing experiences over material possessions, with restaurants leading the way in this trend. Lower commodity prices and softening wage inflation are also expected to help restaurants increase profit and improve margins this quarter. Many restaurants have raised prices in recent months, which could further contribute to their profitability.
Consumers Face a Dilemma
However, conflicting data points suggest that consumers may be at a crossroads. Will they prioritize spending on the experience of dining out, or will they try to save money by cooking at home? Many consumers have found a compromise by choosing to eat out at cheaper, more casual restaurants.
Fast Food & Fast Casual Chains Likely to Benefit
This preference for cheaper, more casual dining options could benefit fast-food and fast-casual chains while potentially hurting sit-down restaurants with higher price points. According to Placer.ai, fast food and fast casual restaurants accounted for 60.4% of total restaurant visits in the second quarter, while full-service restaurants only represented 33.6% of visits.
Value-Seeking Consumers Favor Quick Service
Andrew Charles, an analyst at TD Cowen, predicts that consumers will continue to prioritize value when dining out, potentially resulting in a higher risk of “trading down” into quick-service restaurants.