Overview of restaurant results in the first quarter: MCD, CMG, DPZ

Pedestrians carry McDonald’s bags in New York, U.S., on Wednesday, April 6, 2023.

Victor J. Blue | Bloomberg | Getty Images

As restaurants prepare to report their first quarter results, investors are expecting strong results.

But the rest of the year could prove more bumpy for the sector.

McDonald’s, Chipotle Mexican Grill and Domino’s Pizza will all announce their quarterly results next week. The following week, Starbucks, Burger King’s parent company, Restaurant Brands International, and Taco Bell owner, Yum Brands, are due to report their results.

When restaurants released their fourth quarter reports in February, many touted impressive sales growth in January. But those results were easily comparable to weak sales a year earlier, when Covid omicron outbreaks caused staff shortages and forced more consumers to stay home.

The industry experienced less impressive growth in February and March. Same-store sales rose 6.8% in February and 3.2% in March, compared with a 14.1% increase in January, according to Black Box Intelligence, which tracks restaurant industry metrics .

According to data from Bank of America, based on its customers’ credit and debit card transactions, fast-food and casual restaurants saw the largest month-over-month declines in sales.

As inflation accelerated over the past year, investors worried about consumers’ propensity to spend at restaurants. Certain segments, such as fast food and cafes, generally fare better during tough economic times, due to their relatively cheap prices and perception of being an affordable luxury.

But even as inflation cools, some diners continue to cut restaurant spending.

Investors will likely look to April for a better sense of consumer spending trends, Bank of America Securities analyst Sara Senatore wrote in a research note released Wednesday.

But even if consumer buying habits hold, same-store restaurant sales growth won’t be as impressive for the rest of the year as the like-for-like numbers from a year ago become more challenging. to exceed.

The first quarter of this year “is probably the last quarter of outsized pandemic-era comps.“, Morgan Stanley analyst Brian Harbor wrote in a note to clients on Monday.

Starting in the second quarter, restaurants will face comparisons to last year’s sales surge due to double-digit price increases, so they will have to rely on higher traffic to drive sales growth. . Low traffic numbers have been an ongoing problem for many restaurants, with some notable exceptions like McDonald’s.

Companies could also delay raising their sales forecasts despite a strong first quarter, given the growing consensus that a recession will occur later in 2023, Stifel analyst Chris O’Cull said in a statement on Friday. research note.

Kevin McCarthy, portfolio manager of Neuberger Berman’s Next Generation Connected Consumer ETF, acknowledged that his outlook on restaurants is more negative than it has been in some time. He said McDonald’s and Chipotle were two names capable of being aggressive and gaining market share, despite a difficult environment.

The relatively high valuations of restaurant stocks are a downside for the industry, McCarthy said. McDonald’s, Starbucks, Chipotle, Papa John’s and Yum are all trading at more than 30 times their price-to-earnings ratio, according to Factset data.

“Valuation isn’t cheap anywhere. It’s probably a standard deviation above anything I would consider value. So we’re not sniffing out value and we don’t really have growth,” McCarthy said.

Even strong first-quarter results could weigh on restaurant stocks, particularly if executives stick to their conservative forecasts or adopt a vague tone during conference calls with analysts.

Morgan Stanley’s Harbor wrote that stocks could fall even on strong results “if the way forward is less clear.”

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