Investors sure seem to be betting on a restaurant revival come 2017: Industry stocks since the election have increased more than 13 percent.
But analysts see a disconnect between those prices and reality. Indeed, many analysts — and sales forecasters — predict that 2017 won’t be all that much better than 2016.
To be sure, this is not an industry consensus. Some analysts see improvement starting this spring as the industry starts lapping easier comparisons and the price gap with grocers narrows.
Still, analysts say it’s a good bet the industry in 2017 will experience similar sales and traffic headaches that plagued restaurant executives in 2016.
“We see a huge disconnect between current restaurant sales trends and investors’ post-Trump euphoria,” Stifel Analyst Paul Westra wrote in a note this week.
So far, predictions for sales in 2017 are modest. Fitch Ratings believes, for instance, that restaurant sales will slow this year, growing 4 percent, versus the 5 percent last year.
NPD Group, meanwhile, expects traffic will be flat this year, with a 2-percent decline at dine-in restaurants offsetting a 1-percent increase at quick-service concepts.
Cowen Analyst Andrew Charles sees three headwinds the industry will face in 2017: Continued commodity deflation that will enable grocers to keep their prices low; various consumer spending pressures and an oversupply of restaurants.
Several factors could play a role in eating into consumers’ discretionary income next year, including gas prices that are increasing again along with health insurance cost increases. And don’t discount other factors, like more consumers buying cars and taking on the debt to pay for them.
Many analysts consider the oversupply of restaurants to be a major factor in same-store sales weakness in 2016. The industry has been building units in recent years and adding jobs. The new units are coming at a time when total traffic isn’t growing much, if at all, which is hurting same-store sales at many concepts
Continued commodity deflation is another potential factor, though there is some disagreement among analysts as to the potential impact on restaurants this year.
Commodity deflation is generally a good thing for the industry because lower prices for beef and other proteins can improve profitability. Yet last year that deflation enabled grocers to lower prices, and combined with rising prices at restaurants the result was the widest gap in inflation between the two major purveyors of food to consumers in years.
Charles believes continued promotions at grocery stores, thanks to those lower commodity prices, could lead to aggressive promotions in 2017 and “an unhealthy industry dynamic.”
Others, however, believe commodities won’t be so big of a problem. Bernstein Research Analyst Sara Senatore believes demand should improve “modestly” this year in part because the inflationary gap between grocers and restaurants should narrow. Senatore believes that gap was the primary reason for same-store sales weakness in 2016.
Senatore isn’t the only one who expects some same-store sales improvement in the coming year. Baird Analyst David Tarantino expects better industry demand, especially after the first quarter once the industry compares itself to weak sales the year before.
Tarantino believes the industry should then move through some of the headwinds that caused those problems. He also believes that tax reform under the Republican Congress and the Trump administration could provide a catalyst to generate sales this year.
“We are optimistic industry [same store sales] can start to improve,” Tarantino wrote.
Still, the question from the analysts’ perspective is whether that environment can improve enough to justify the increase in industry stocks that followed the election. Many analysts doubt that.
Jefferies Analyst Andy Barish said he is “cautious” heading into 2017. He believes that same-store sales challenges persisted in the fourth quarter. He also believes that investments many brands are making, along with higher labor costs, could put pressure on profits.
Barish said that valuations in the industry are currently “stretched,” and that the recent rally in restaurant stocks brought those valuations to historical highs.
Westra, meanwhile, believes consumers are still holding back on spending even if they’re saying they’re confident in the economy. He cited high numbers from surveys on consumer confidence, coupled with weak sales at many restaurants and retailers.
He said that the coming ICR consumer conference, in which several public and private restaurant executives will make presentations, will “awaken investors to the incredibly wide gap between what consumers are saying … and what consumers are actually doing.”
Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze
