It’s almost like those of us who cover the restaurant industry get a Christmas-like experience every quarter as we unwrap earnings reports. These reports allow us to peel back a few more layers than what we normally get from press releases or statements, and they enable us to put some pieces together, both for the companies we cover and the industry at large.
Most restaurant companies’ second quarter earnings calls are on deck, with some of the big boys kicking things off next week – namely Domino’s, Chipotle, McDonald’s, Sweetgreen and Texas Roadhouse.
This quarterly overview follows a first quarter that took many of us – on and off Wall Street – by surprise. A lot of expectations were exceeded, especially as consumers continued to show their willingness to pay higher menu prices across the board, and as the labor picture continued to recover from a dismal 2022. Consider Wingstop, for example. Its same-store sales were up over 20% driven largely by traffic growth.
Granted, Q1 come with a tiny asterisk as it lapped an anomalous year hindered by the omicron variant. That said, Q2 is likely to provide a clearer picture on the state of the industry as it applies to large, public companies, and the state of the consumer, which could apply to any restaurant concept, really.
Indeed, one of the big things we listen for on these calls is consumer sentiment. Few people on the planet have the unique perspective of major restaurant executives, who run businesses dependent on consumer behavior and, oftentimes, their discretionary spending habits.
So, what are we looking for this go-round? For starters, we’re curious to see if consumers are becoming more inflation-weary; menu prices have shown some signs of cooling, though not until last month. What will traffic patterns be like at the concepts that have kept much of their 2022 pricing strategies in place? Will we see more evidence of trade down activity that began picking up a couple of quarters ago?
Last quarter, for instance, McDonald’s executives noted their customers are increasingly forgoing fries with their meal. Few American companies provide as strong of a consumer pulse as McDonald’s, and few fries are as craveable as McDonald’s, so we will look to see if trends like this one are continuing or even exacerbating. Pricing activity is the focal point here.
We’ll also look to see if restaurant brands are continuing to chip away at the labor shortages that haunted them throughout much of last year, compromising operational hours and service and therefore leaving money on the table. We’ll listen in for food costs, which finally started to show some relief last quarter. Along those lines, we’ll expect margins to continue to improve.
Drilling down to the brands themselves, we’ll see if Chipotle’s “Project Square One” initiative, focused on operational improvements, continue to provide a boost, as it did in Q1, helping to drive a 4% jump in traffic.
Last quarter, we learned that Brinker pulled the plug on one of its virtual brands as the company looks to simplify its business. We also heard about the company’s return to “mass advertising” and will look for a tailwind there.
We’re interested in updates about Noodles & Company’s loyalty program upgrades, and Sweetgreen’s loyalty program rollout (which happened in April) and maybe we’ll get a glimpse of Cheesecake Factory’s rewards program, which debuted in June. Speaking of Sweetgreen, the company is getting closer to achieving profitability, so we’re super interested in hearing that progress (no doubt, as are investors).
We’ll hopefully get an idea of how IHOP”s “largest menu evolution” is performing. That menu was introduced in late March. Along those lines, we’ll see if Starbucks has an update on its Oleato (olive oil-infused) drinks platform, which debuted in some markets Q1 and was called “transformative,” “alchemy” and a “game-changer” by founder Howard Schultz.
We’re hoping for an update on Domino’s delivery business on the heels of the company’s somewhat surprising announcement that it is partnering with Uber Eats after holding out on third-party aggregates. Last quarter, Papa John’s also struggled with sales and traffic last quarter, while Pizza Hut spiked. We’re interested in who won the Q2 public pizza company competition.
From McDonald’s, we’ll expect updates about its chicken sandwich expansion and its Grimace Shake promotion, which launched in early June and drove a material increase in traffic. From Yum Brands, we’re looking to see how Taco Bell’s breakfast is doing after recruiting actor/comedian Pete Davidson a second time, while we’re also expecting a lift at KFC from its chicken nugget introduction in late March. Oh, also, Yum Brands’ digital business grew by over $1 billion in the past year, so we’re interested in an update there, especially as the company aspires to achieve 100% digital transactions.
We’re looking for progress on Burger King’s $400 million “Reclaim the Flame” investment, announced in early September, particularly after a couple of franchisees declared bankruptcy earlier this year. And, we’ll look for updates on Red Robin’s North Star plan, which helped yield 700 new sales records in Q1.
We’ll see if Texas Roadhouse and Olive Garden and Outback Steakhouse have continued their momentum as consumers seek out affordable luxuries. And we’ll also see if concepts like First Watch and Dave & Buster’s continue to gain traffic as consumers seek out experiences. And, we’ll see what Darden has to say about its Ruth’s Chris integration.
Of course, this is just the surface. We haven’t talked about Jack in the Box or Shake Shack or Dutch Bros. or Potbelly, Denny’s, Portillo’s, and so forth. There is at least a dozen more restaurant brands slated to report updates in the coming weeks, and we’ll be here with our highlighters, trying to distill those updates as best as we can. Stay tuned.
Contact Alicia Kelso at [email protected]