Restaurant Earnings Preview in Q1: MCD, CMG, DPZ

Pedestrians carry McDonald’s bags in New York, US, on Wednesday, April 6, 2023.

Victor J. Blue | bloomberg | Getty Images

As restaurants prepare to report their earnings in the first quarter, investors are expecting strong results.

But the rest of the year could be bumpier for the sector.

McDonald’s, Chipotle Mexican Grill and Domino’s Pizza will all report quarterly results next week. The following week, Starbucks, Restaurant Brands International, parent company of Burger King, and Taco Bell owner Yum Brands are set to present their findings.

When restaurants released their fourth-quarter reports in February, many touted the impressive sales growth in January. But those results drew easy comparisons to the poor sales of a year ago, when the Covid omicron outbreak caused staff shortages and forced more consumers to stay home.

The industry saw less impressive growth in February and March. Same-store sales rose 6.8% in February and 3.2% in March, compared to January’s increase of 14.1%, according to Black Box Intelligence, which tracks metrics for the restaurant industry.

Fast and casual restaurants had the largest decline in sales month over month, according to Bank of America data, based on their customers’ credit and debit card transactions.

While inflation has accelerated over the past year, investors have been concerned about consumers’ willingness to spend at restaurants. Some sectors, such as fast food and coffee shops, usually do better during tough economic times, due to their relatively cheap prices and perception of an affordable luxury.

But even as inflation slows, some diners are still withdrawing their spending on restaurants.

Investors will likely look to April to get a better idea of ​​consumer spending trends, Bank of America Securities analyst Sarah Senator wrote in a research note published Wednesday.

But even if consumers’ buying habits hold steady, same-store sales growth in restaurants won’t look impressive for the rest of the year as similar numbers from last year become more difficult to top.

The first quarter of this year “is probably the last quarter of the epidemic era megacompanies“,” Morgan Stanley analyst Brian Harbor wrote in a note to clients on Monday.

Starting in the second quarter, restaurants will face comparisons to last year’s sales bump driven by double-digit price increases, so they’ll have to rely on higher traffic to drive sales growth. Poor traffic numbers have been an ongoing problem for many restaurants, with some notable exceptions such as McDonald’s.

Stifel analyst Chris Uckel said in a research note Friday that companies may also be holding off on raising their sales forecasts despite a strong first quarter, given the growing consensus that a recession will hit later in 2023.

Kevin McCarthy, portfolio manager for Neuberger Berman’s Next Generation Connected Consumer ETF, admitted that his view of restaurants is more negative than it has been for a while. He said McDonald’s and Chipotle are two names that could play a role in the abuse and gain market share, despite the harsh environment.

McCarthy said the relatively high valuations of restaurant stocks bring a downside to the industry. McDonald’s, Starbucks, Chipotle, Papa John’s and Yum all trade at more than 30 times the price-to-earnings ratio, according to Facttest data.

“Valuation isn’t cheap anywhere. It’s probably a standard deviation above anything I consider valuable. So we don’t sniff out value, and we don’t really have growth,” McCarthy said.

Even strong first-quarter results could weigh on restaurant stocks as a result, especially if executives stick to their conservative forecasts or use an ambiguous tone on conference calls with analysts.

Stocks can fall even on strong results, Morgan Stanley Harbor writes, “if the way forward is less clear.”