After Dismal Fourth-Quarter Numbers, Restaurant Stocks Are Set for a Tough Start to 2020 – Nasdaq

Restaurant News

2019 is in the record books, and it will go down as yet another strong year for American consumer spending in the decade since the Great Recession. According to the U.S. Census Bureau, retail sales rose 3.5% over 2018, with what the government entity labels “food services and drinking places” putting up some of the strongest numbers with a 4.4% year-over-year increase.  

However, for those of you who follow the restaurant industry with me, that headline number printed by the Census Bureau can be misleading. While Americans are eating out like never before — sales at food services establishments were higher than at grocery stores in 2019 — much of the rise in spending can be chalked up to inflating menu prices. New restaurants are also opening up faster than new diners can fill them, cannibalizing traffic from existing locations. It adds up to a situation in which a healthy consumer willing to spend isn’t equating to a healthy restaurant industry across the board.

Case in point: Two of the world’s largest restaurant chains, McDonald’s (NYSE: MCD) and Starbucks (NASDAQ: SBUX), had two very different fates in 2019. The burger giant stock increased 11.3% last year, trailing the S&P 500‘s 28.9% gain, while Starbucks outpaced both with a 36.5% surge.  

After a mixed year for the restaurant industry, 2020 could get off to a rough start. According to industry researcher Black Box Intelligence (formerly TDn2K), comparable-store sales were back in decline during the fourth quarter of 2019, and foot traffic tanked, adding another negative period to the years-long downward trend. The especially bad numbers to close out the year could mean some post-2019 reporting headaches for restaurant chains. 

A hamburger, fries, and drink sitting on a red surface.

Image source: Getty Images.

A dismal end to a decent year

After a long stretch of declining comparable-store sales (a blend of foot traffic and average guest order ticket size, referred to as “comps” from here on out), 2018 offered a little relief for the industry with average comps returning to growth. That came to an end in the third quarter of 2019, though, according to Black Box. And a 2.1% and 5.7% tumble in comps and foot traffic, respectively, in December led to a 0.1% decline for comps and 3.3% fall for traffic in the final quarter of the year, eliminating any hope that strong consumer spending would lift results back into the positive for the year.

A chart showing declining foot traffic every quarter starting at the beginning of 2015 until end of 2019. Comps were positive until 2016 before turning negative, and returned to positive territory in 2018 and early 2019 before going negative again.

Data source: Black Box Intelligence. Chart by author.

Even though menu price increases have been concealing some serious problems on the foot traffic side, positive comps growth is great news as it means a generally rising profitability for restaurants. However, with inflation not enough to stave off the tide of rampant over-expansion of new stores, both metrics fell into the red at the tail end of the year. When restaurants begin reporting their fourth-quarter earnings, that could mean trouble for their stocks.

Look out below?

It’s too early to say who is going to take the brunt of any coming abuse, but declining comps and foot traffic doesn’t bode well for the bottom line of the industry overall. After all, lower foot traffic in stores means each location is less efficient, which in turn means lower profits. And we all know what lower profits means for stocks: a subsequent fall in share price.

Based on Black Box Intelligence’s study, though, it would appear that fast food continues to enjoy a resurgence in popularity and is holding up okay. Delivery has been a hot theme for food service, and fast food is well-suited for the trend. Fast casual, on the other hand, could be in for some hurt. Average comps for the higher-quality quick-service segment have been negative throughout 2019 and lagging behind the industry average. A glut of new locations and new fast-casual concepts have been one of the big culprits for the industry’s stubborn foot traffic problem. Casual table service establishments on average haven’t held up so well, either, taking hits as fast casual and its more convenient fare expanded.  

So what’s an investor to do? I’m putting the purchase of restaurant stocks on hold until after they report fourth-quarter earnings and provide some clarity on what’s in store for 2020. For chains that are still growing, though, especially those with a strong international pipeline like McDonald’s, Starbucks, and Shake Shack (NYSE: SHAK), plus consistently solid domestic performers like Texas Roadhouse (NASDAQ: TXRH), I’ll use any pullback in stock prices post-report to scoop up some shares. After all, the trend toward eating out is still alive and well around the globe. Though the restaurant industry isn’t exactly healthy as it continues to cope with over-expansion, some brands are finding ways to win and benefiting from consumers’ rising interest in someone else doing the cooking.

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Nicholas Rossolillo owns shares of Starbucks and Texas Roadhouse. The Motley Fool owns shares of and recommends Starbucks and Texas Roadhouse. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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