This Important Restaurant Metric May Signal Even Worse Times Ahead for the Economy

With no more excuses available, restaurants may be the bellwether for the economy.

Jul 15, 2014 at 12:06PM

Images

Uh-oh. The realization that poor restaurant performance has not been due to weather may at last be sinking in, and analysts may finally have to admit that a lousy economy is serving to drag the industry down.

The latest numbers from the Black Box Intelligence and People Report show that same-store sales at restaurants open at least a year turned negative in June, while traffic at those stores continued its downward drop. The industry hasn't posted a single quarter of same-store traffic growth since the recession. Further, with second-quarter 2014 comps barely inching 0.3% higher, it calls into question whether the recovery Wall Street was expecting in the back half of the year will actually materialize.

Screen Shot

Source: Black Box Intelligence and People Report, and Nation's Restaurant News.

From restaurants to clothing stores, the harsh winter weather allowed retailers to lay blame on the supposedly strange "snow in winter" phenomenon as the cause for all their malaise. McDonald's (NYSE:MCD) said "severe winter weather" was partially to blame for a sharp drop in comps in January, Wal-Mart pointed the finger at "eight named winter storms (that) resulted in store closures" as the cause of its poor performance earlier this year, and carmakers Ford and General Motors said they saw sharp declines in monthly sales because of "extreme weather" patterns.

Even Janet Yellen at the Federal Reserve sought to misdirect attention from the shabby state of the economy by blaming disastrous first-quarter results on Old Man Winter, numbers that were most recently revised sharply downward again, this time to a near 3% contraction, as opposed to the slight expansion that was originally reported.

But with the second-quarter restaurant numbers now also showing persistent weakness -- weakness that was evident last year but was ignored for a variety of excuses companies used en masse to hang their hats on -- it's clear the industry has run out of excuses, and that doesn't bode well for the rest of the year.

The Black Box report goes on to note that over a two-year period, customer ticket values have grown at more than 2% in the second quarter, suggesting that whatever gains restaurants are making is the result of rising prices, not more people who are going out to eat. Even so, they're not fully benefiting from the increases, because falling traffic is offsetting the gain.

Now restaurants are caught in a dilemma of higher input costs. Beef and pork prices are at record levels, and now poultry, which has enjoyed higher demand as a result, is seeing its prices go up, too. Restaurants such as Chipotle Mexican Grill (NYSE:CMG) are being forced to raise their prices to compensate for the greater costs for meat and commodities, a yellow flag that it may cause consumers to pull back even more from eating out.

According to restaurant supply chain co-op SpenDifference, just about everything is more expensive:

  • Cheese, butter, and whey cost 15% or more than they did last year.
  • Beef prices are 15% higher.
  • Pork sausage is up 21%, though pork bellies, which are used for bacon, are only 2% higher, but that's after a year that also recorded record high prices.
  • Liquid egg whites have surged 57% over 2013.

The only bright spot is corn, where prices are falling. Although that would normally help poultry producers increase their supplies, the world's biggest chicken breeder, Aviagen Group, reports that it messed around with its roosters' genetics and caused them to overfeed, resulting in lower fertility. Sanderson Farms (NASDAQ:SAFM), which is the third largest poultry producer in the U.S. and one of Avigen's biggest customers, said 17% of its eggs failed to hatch (15% is the normal failure rate) and the USDA cut its egg production rate for 2014 by 75% from the long-term average because there's a short supply of breeder birds.

Yet unlike McDonald's, which is suffering from both lower comps and traffic but may need to raise prices as much as 3% this year to compensate, further affecting sales and profits, Chipotle continues to gain. Analysts conducting channel checks recently found that the chain's price increases are higher than the average 5% to 6% increase but aren't affecting traffic at its restaurants. 

That's probably because it's the leading chain in the resilient fast-casual dining segment, the only industry niche that's consistently been able to record any growth for the past few years. But the new numbers coming out may call that resilience into question, as there may be only so far consumers are willing to go in paying more at the register.

But even if a Chipotle can weather the storm, other restaurants in the fast-food, casual, or family dining segments may not fare so well. And as more retailers in and out of the industry own up to the fact that there are no more excuses to use, the economic harm will be all too apparent. Investors, therefore, may want to tread carefully before putting any of their money into this ailing sector, no matter how cheap stock prices may look.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Ford, General Motors, and McDonald's and owns shares of Chipotle Mexican Grill, Ford, and Sanderson Farms. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers