The Federal Reserve stole took the spotlight on December 14 with the second interest rate hike since the Great Depression. Overlooked, though, was the U.S. Census Bureau's important report on retail sales for the month of November. With it came valuable information on the restaurant industry and consumer spending trends.
The beat goes on in November
November showed a slowdown in eating out when compared to October's figures, although this is typical when considering the Thanksgiving holiday. When adjusting for that, the Census Bureau actually showed an increase of 0.8% over October.
The more telling story is when we compare the figures to November of last year. Restaurant sales increased 5%, to $52.7 billion year over year. With 11 months logged for 2016, total sales on the year are up 6% from 2015. This caps off a multi-year run-up in American's discretionary spending on going out to eat.
It hasn't been a straight line going up, though. U.S. restaurant sales had a rough summer and fall with many chains reporting slowdowns in foot traffic. As a result, many stocks in the industry took a beating from the negative sentiment.
What's important to remember is the seasonality that restaurants experience. Certain times of year tend to be busier, with the summer and winter holidays tending to be a little slower. The longer-term trend, though, shows the resilient interest of Americans in having someone else cook for them.
The 2017 outlook
Some reports see foot traffic continuing to be flat in 2017. If that transpires, the fight to capture market share that cropped up earlier this summer could resume. As always, the restaurant industry will be hyper-competitive as different names vie for attention from diners.
However, a combination of menu price increases and falling food costs could help the average dining establishment run at a higher profit, offsetting rising costs of labor and wages. That could mean 2017 is another good year for the industry. But who stands the best chance of winning?
When buying a restaurant...
Diners are always looking for good value, but the price of the meal alone isn't the whole story. Fresh and natural food has been a growing trend over the last few years that is expected to continue.
Capitalizing on the 'fast-casual' concept popularized by Chipotle is the better burger upstart Shake Shack (NYSE:SHAK) and the Mediterranean-fresh Zoe's Kitchen (NYSE:ZOES). Both chains are still small, but have had success in quickly growing their number of locations.
Just a few years ago, Shake Shack only had about 60 locations. Today, that number is 109 with another 30 or so slated to open in the next year. Zoe's Kitchen is a similar story, having opened 36 new locations in the last 12 months, a 22% increase in the number of restaurants in its base. Both companies have been able to drive more traffic, as well, an enviable position considering the headwinds the competition has faced this year.
Looking for a proven winner rather than betting on a newer chain? Both Texas Roadhouse (NASDAQ:TXRH) and Buffalo Wild Wings (NASDAQ:BWLD) are playing the improving profitability game while continuing to open new stores.
B-Dub's goal is to increase profits by an average of 15% each year, which so far has happened. The company grew profits by 23% last quarter, even while revenue increased only 8.5%. Texas Roadhouse is also slowing down in its expansion efforts, but the company has also seen increasing foot traffic in the last year and profitability is up 28% so far this year over 2015's numbers.
The news for the industry this year may have waivered back and forth, but ultimately, Americans have proven their love of eating out. The year will end on a high note for restaurants, and the industry looks like it will offer further opportunities for investors going into 2017.