On the Margin
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Restaurant stocks surge, even as sales fall

Blog: Investors are pouring money into restaurants, even though sales remain weak

This post is part of the On the Margin blog.

Restaurant stocks have surged after President Donald Trump’s victory in November, much like Wall Street as a whole, and they’ve continued their winning ways early in 2017. Restaurant stocks are up 6 percent so far this year, according to the NRN Restaurant Index.

Meanwhile, restaurant chains have submitted a pretty long string of depressing tales about their traffic numbers.

A series of restaurant chains have reported weak same-store sales and traffic, from Potbelly Corp. to Starbucks Corp., and even McDonald’s Corp., as well as Applebee’s owner DineEquity Inc. and Outback Steakhouse owner Bloomin’ Brands Inc.

While there have been a few exceptions, in general the industry is confirming that 2016 ended on a sour note.

What’s more, it doesn’t appear to be improving all that much. Potbelly, for instance, said that January traffic was similar to December. The MillerPulse restaurant index reported a 1.5-percent same-store sales decline in January. That was better than December, but remained the second-lowest performance for the index in the post-recession era. 

To be sure, investors are betting the industry has hit bottom and should start coming back up. You don’t buy stocks based on how companies are performing now, after all, but on how you think they’ll do in the future. And if you think the industry is on the verge of a strong comeback, then now is indeed the time to buy.

Here’s the problem: It’s not entirely clear what will actually bring the industry back at this point. Some of the problems that hit restaurants last year appear to be systemic, rather than episodic, and the proposals coming out of Washington might not help.

First, a caveat: Sales should improve this year, especially after the first quarter. Comparisons are easier. But two-year trends won’t improve. And the bigger issue at this point is traffic. Consumers are simply dining out at restaurants less often.

Think about this for a second: Traffic has been down for 21 of the past 24 months,according to MillerPulse. The best number came in February 2016, when we had an extra day because of Leap Year. That’s basically two straight years of traffic problems.

The first of those years, by the way, came along with the benefit of low gas prices. And both of those years came as unemployment fell to the point where it’s pulling up wages.

Washington could inject the economy with some spending by passing tax reforms that put money into the pockets of middle-class earners — the ones who have cut spending the most in recent years, and who are also more likely to spend tax savings or rebates on a few extra restaurant visits. 

The regulatory environment should ease, reducing concerns over new overtime pay rules, health insurance requirements and joint-employer rules. But limits on immigration could also drive up labor costs in an industry that finds itself paying increasingly high rates for workers in many markets. Border taxes could hit restaurants that import vegetables. 

Regardless, it’s difficult to look at the past year and not come away with some sense that the industry is facing broader, challenging trends. Consumers feel pinched. They’re dining out at independents more often. Maybe they’re spending too much on other things like cell phones and Netflix subscriptions and college loans.

Or maybe they just don’t want to leave the house as much as they once did.   

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

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