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Restaurant Finance Watch: Positive August sales bode well for industry

Restaurant Finance Watch: Positive August sales bode well for industry

NRN editor and restaurant finance expert Jennings breaks down what you should be watching in the industry this week. Connect with her on the latest finance trends and news at @livetodineout and [email protected]. RELATED: • Report: Restaurant sales rose, traffic slid in August • Report: Restaurant same-store sales up 2.9% in August • More restaurant finance news

Accelerating same-store sales among restaurant chains in August bode well for improving trends in September, according to a Wall Street analyst’s report out Tuesday.

David Tarantino of Baird Equity Research issued a report on restaurant chain surveys that indicated August comparable sales improved over July. The survey participants included 37 private restaurant chains in the U.S. and franchisees of some public chains, with aggregated annualized revenue of about $6 million.

Overall, August same-store sales rose between 3.5 percent to 4 percent on average — the highest monthly comps since November 2012, and an improvement over the 2.5-percent increase recorded in July and the 1.5-percent increase during the second quarter.

On a sales-weighted basis, half of the chains surveyed indicated stronger comparable sales in August compared with July, while only 11 percent reported softer trends, he said.

Same-store sales improved sequentially for all segments, including fast casual, which rose nearly 4 percent to 4.5 percent compared with July’s increase of 3.5 percent for the segment.

Same-store sales at quick-service restaurants rose 6.5 percent to 7 percent in August compared with the 5-percent to 5.5-percent increase seen in July.

Casual-dining chains surveyed reported a comp increase of 1 percent to 1.5 percent, compared with a decrease of 1 percent in July. For the casual-dining segment, it was the first positive month since October 2013, according to the Baird survey.

For September, survey participants projected a same-store sales increase of 3 percent, a downtick from August, in part because some large quick-service players are assuming more modest trends against tougher comparisons with last year, Tarantino noted.

McDonald’s Corp. reported its worst monthly decline in a decade in August, with global same-store sales falling 3.7 percent. For the second quarter, McDonald’s same-store sales were flat, with traffic declines offsetting increases in average check.

A 3-percent same-store sales increase in September, however, would suggest that chains will see a 1.5-percent improvement in comps for the third quarter on average, compared with second-quarter results.

Tarantino pointed to several macroeconomic indicators that give reason for optimism, including improving consumer confidence, favorable housing and credit market conditions, and relatively low stock market volatility.

More recently, gas prices have dropped and experts are predicting fuel prices will remain low through the winter.

And retail sales improved in August, rising a seasonally adjusted 0.6 percent from July, according to the U.S. Commerce Department.

“With nearly all of these factors expected to continue trending positively year-over-year, we believe the demand environment can remain healthy, allowing most companies to manage through modest input cost inflation and to meet/exceed current comps/earnings per share estimates in the third quarter and in upcoming quarters (when the industry will be cycling easy weather comparisons),” Tarantino wrote.

In addition, the report pointed the Knapp-Track index on casual-dining chains, which reported that same-store sales rose 0.6 percent in August, the best month since March 2013.

The Black Box Intelligence index reported August same-store sales rising 2.1 percent across all segments, though traffic fell 0.5 percent.

The NRN-MillerPulse index showed August same-store sales industrywide increased 2.9 percent, with traffic rising a meager 0.1 percent.

Looking at challenges ahead, Tarantino said the geopolitical environment is worth monitoring.

“Meaningful political uncertainty (related to mid-term election cycle, ongoing continuing resolution debates) could serve to disrupt the positive trends for consumer confidence,” he wrote.

Potential health care cost increases, including rising premiums and penalties related to the Affordable Care Act, are another risk factor going into 2015, he said.

Survey participants also said they expect commodity inflation of about 2 percent in 2015 on average, slightly lower than the 2.5-percent increase projected in a June survey. As a result, survey participants projected menu price increases of roughly 2 percent next year.

Quick service might be hit a bit harder because of exposure to beef costs, he wrote, but 2-percent inflation “seems like a level that would be manageable with relatively modest pricing,” the report said.

Contact Lisa Jennings at [email protected].
Follow her on Twitter: @livetodineout

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