As the fourth-quarter earnings period winds down, a better picture is emerging of what lies ahead for the restaurant industry.
Here, analysts who have spent more than a few hours listening to conference calls, talking with management teams and dissecting results share their thoughts on taxes, consumers and which brands are poised for growth.
Piper Jaffray & Co.
In a Feb. 1 industry note:
“As it relates to future dining occasions, proprietary consumer survey data from AlixPartners suggests planned dining occasions could be on track to continue their trend of steady increases started in early 2012. Over the next 12 months 19 percent of respondents intend to increase their planned dining occasions, up sequentially from 16 percent in the first quarter of 2012. That said, concern around the broader macro condition continues to leave the value proposition front and center in the minds of consumers, indicated by the intended spend per meal being down approximately 5 percent on average. …
“As a result of ongoing investments and initiatives around improving the guest experience, we believe the traditional lines between segments and perceived value propositions are blurring, with the most recent examples occurring on the limited-service side of the industry. Through upgraded food quality, new prototypes, opportunities for customization and significant menu revamps, we believe the QSR industry has taken several notes out of the typical fast-casual playbook to make substantial progress in winning back dining occasions. Fast-casual operators are now increasingly focused on speed of service; value offering, including discounts; and large-scale advertising through TV and other media forms — arguably tactics historically championed by QSR operators. …
“Despite what we believe to be a lackluster start for the industry in January, we continue to look for outperformance among companies with compelling value propositions, consistent execution and brand equity. Further, those with an asset-light growth opportunity via high-quality franchising or license arrangements should be particularly well-positioned in this next cycle as we continue to benefit from increasing consumer demand and, overall, less supply in capital market terms.”
Still, in a Feb. 8 note, the Piper Jaffray team observed that repercussions from the fiscal cliff are having an impact:
“We believe delayed federal income tax refunds are weighing on late January and early February sales for retailers serving the middle- to lower-income consumer. Through [Feb. 6], federal individual income tax refunds have totaled $18 billion since early January, $39 billion less than this time last year. Refunds are well below last year’s level, but we expect much of the shortfall to be recaptured over the coming months, which could limit some fourth-quarter upside, but help to provide a mild boost to difficult first-quarter comparisons. However, given the unknown timing of when tax refunds will catch up to last year, we believe fiscal first-quarter guidance and quarter-to-date commentary could be relatively weak on upcoming earnings calls, and this uncertainty could weigh on shares until sales show up at stores or online.”
Finally, a Feb. 10 industry note outlined several favorable trends for the restaurant industry:
“Looking forward, we view 2013 as the continuation of a cycle we are calling, ‘the year of the restaurant,’ whereby we believe a series of favorable trends will create an opportunity for investors to realize outperformance. We believe certain companies within the industry will be generally well-positioned to benefit from: 1) consumers continuing to spend dollars on food away from home, 2) a scarcity of growth concepts, 3) ongoing investment in technology, and 4) increased opportunities for the development of meaningful supplementary sales.”
RBC and Barclays weigh in
RBC Capital Markets LLC
In a Feb. 14 industry comment:
“There was a lot of noise in the numbers in January, as evidenced by volatile weekly trends and the reasons cited for slowing sales, which included weather, holiday shifts, gas prices, tax refund delays and higher payroll taxes. The slowing two-year trends for the industry and for every restaurant segment suggest it may be less the temporary factors, such as weather or holiday shifts, and more the longer-lasting factors, like higher payroll taxes. …
“Those planning to spend more incrementally cite rising incomes and more entertainment, while those spending less — three times as large a group — cited lower income and a higher cost of living. All restaurant categories rose, with fast food gaining the most — 700 basis points — and moderate casual dining the least — more than 100 basis points. Consumer spending plans rose the most at McDonald’s; Sonic, [America’s Drive-In]; Pizza Hut; The Cheesecake Factory; Bonefish Grill; and Carrabba’s [Italian Grill], and fell the most at Applebee’s, Taco Bell, Joe’s Crab Shack and Red Lobster.”
Jeffrey Bernstein, Barclays Capital
In the February edition of his “Bernstein’s Burgers & Brew: What’s on Investors’ Minds”:
“[NPD data showing that the industry’s unit growth budged up 0.7 percent in 2012 after being flat in 2011] directionally highlights/reinforces the ongoing concern of oversaturation, primarily in casual dining. With that said, chains continue to take share from independents, a net positive. Importantly, with 2012 real sales growth, excluding inflation, from Technomic of 1.7 percent, or nominal 4.3 percent, this supports implied positive comp, or real sales growth less unit growth. Said another way, there is an easing of pressure on the restaurant industry supply/demand equation. Similar favorability is expected in 2013. …
“Surprisingly, growth is from saturated segments such as sandwich/burgers, along with less saturated chicken. At the top of the list — most of the top 10 concepts have a 10-percent five-year compound annual growth rate, or CAGR, on both sales and units — are several well-known concepts, led by Five Guys Burgers and Fries, with 57-percent growth in system sales, driven by 48-percent growth in units. Interestingly, three years ago all of the top 20 [brands] had 10-percent annual unit growth, relative to today, where only about 10 can claim the same. …
“Interestingly, in looking at the chain versus independent mix within categories, chains dominate the chicken and burger/sandwich categories, while independents dominate the Asian, Italian casual-dining, and varied menu/bar and grill categories, each representing about 75 percent or more of total units in their respective categories, … with the latter independent domination demonstrating the fragmented nature of those segments. As for recent growth trends, chicken has seen the most aggressive growth over the past five years — about 3 percent CAGR — while seafood, family, casual dining and Italian have seen the least — each [registering a] CAGR of down about 0.5 percent to 1 percent.”
Contact Robin Lee Allen at [email protected].
Follow her on Twitter: @RobinLeeAllen.
