It's been a tough start to the year for restaurant chains. People are scaling back on spending due to uncertain economic conditions, and restaurants aren't able to simply rely on price hikes to boost their top lines anymore. The last quarter of 2024 showed signs of weakness already, and things may deteriorate further in the months ahead. It may ultimately depend on how tariffs affect customers and businesses.
Some major restaurant chains, including McDonald's (MCD +0.18%) and Chipotle Mexican Grill (CMG 4.49%), are expecting stronger numbers as the year goes on. But that's by no means a sure thing. Here's why they could be wrong, and why investors may want to exercise caution when looking at buying restaurant stocks right now.
NYSE: MCD
Key Data Points
Sales growth has been slowing, but companies are optimistic
For investors, the big number to keep an eye on when it comes to restaurant stocks is not necessarily sales but comparable sales growth, which tells you how well the business has been growing organically. The comparable figure excludes the effect of new store openings and closures, so it provides more of an apples-to-apples comparison.
And that's a problem. For the last three months of 2024, McDonald's comparable store sales rose by just 0.4% globally. In the U.S., they were down 1.4%. Chipotle, which is smaller in size but known for being a top growth stock, reported comparable sales growth of 5.4% during the same timeframe. That's better than McDonald's, but a year ago, that growth rate was 8.4%.
Despite the concerning figures, both McDonald's and Chipotle are expecting things to improve as the year progresses. Ian Borden, chief financial officer at McDonald's, says that the company expects "gradual stabilization of the macroeconomic and consumer environment." Chipotle also expects things to improve in the second half, when they'll go up against weaker comparable numbers from the previous year. Neither company appears to be bracing for a big economic slowdown.
NYSE: CMG
Key Data Points
Why investors should remain cautious
No one wants to predict the worst, but the reality is that trade wars and worsening economic conditions could have a devastating effect on both sales and profits for restaurants. Even though these chains may offer discounts to lure in customers, another alternative may involve simply eating at home.
Costco Wholesale recently reported its earnings, and it has noted a change in consumer habits -- they're spending more on food at home, which can include things like prepackaged food items and frozen meals. Management sees people simply being more careful in what they are spending their money on.
This isn't surprising given the concerns about tariffs, but this is still in the early stages. President Donald Trump has paused some tariffs until next month, which means prices could get a whole lot higher for restaurants and consumers alike. On one end of things, costs may rise for restaurant chains, and on the other, people may have less discretionary income.
Given the level of uncertainty around how many tariffs may be put in place and how long they may last, it could be a risky proposition for investors to believe that macroeconomic conditions will improve later this year. They could instead get much worse.
Should you avoid investing in restaurant stocks?
Top restaurant chains such as McDonald's and Chipotle can be good long-term positions to hold, but it's important to temper your expectations right now. Things could be challenging for restaurants for the foreseeable future, at least until economic conditions look more favorable. Under those circumstances, you may want to ensure you're buying a stock at a discounted valuation to compensate for that uncertainty, and to have a good margin of safety in the event things don't go as you hope.
However, the safest option at this point may be to take a wait-and-see approach with restaurant stocks for the time being. There could be a lot of room for them to fall this year, especially if their results don't align with their optimistic expectations.
