Restaurants are gearing up to announce their first-quarter earnings, and investors are anticipating favorable outcomes. However, the year ahead might not be as smooth sailing for the sector. Leading chains such as McDonald’s, Chipotle Mexican Grill, and Domino’s Pizza are set to reveal their quarterly reports next week. The following week, Starbucks, Burger King’s parent company Restaurant Brands International, and Taco Bell’s owner Yum Brands are also scheduled to report their results.
First-Quarter Performance and Future Projections
While the fourth-quarter reports in February showed impressive sales growth in January, the comparison was against weak sales a year earlier when Covid-19 outbreaks resulted in staffing shortages and forced more consumers to stay home. The industry saw less growth in February and March, with same-store sales only increasing by 6.8% and 3.2%, respectively, compared to January’s 14.1% surge, according to Black Box Intelligence, which tracks the restaurant industry’s metrics.
Fast-casual and casual-dining restaurants observed the most significant sales declines month over month, based on Bank of America data, using its customers’ credit and debit card transactions. Even with inflation cooling down, some diners are still pulling back their spending on restaurants. Investors will be watching April closely to gain a better understanding of consumer-spending trends.
The first quarter of 2023 is likely the last quarter of outsized pandemic-era comps, according to Morgan Stanley analyst Brian Harbour. In the second quarter, restaurants will face comparisons to last year’s sales bump driven by double-digit price increases, and they will need higher traffic to drive sales growth. Weak traffic numbers have been an ongoing issue for many restaurants, except for some notable exceptions such as McDonald’s.
Companies might also avoid increasing their sales forecasts, even with a robust first quarter, given the consensus that a recession will occur later in 2023, said Stifel analyst Chris O’Cull. Some analysts have acknowledged that even with strong first-quarter results, restaurant stocks might face a decline, especially if executives stick to their conservative forecasts or strike a vague tone on conference calls with analysts.
In conclusion, restaurants are expecting strong first-quarter earnings, but the year ahead might not be as smooth. While leading chains like McDonald’s and Chipotle can play offense and gain market share, the relatively high valuations for restaurant stocks could bring a downside for the industry. Nonetheless, investors are keeping a close eye on consumer-spending trends and company projections to stay informed about future performances in the restaurant sector.
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