If inflation doesn't already loom large in investors' minds, it should. Increasing commodities costs will further complicate business for many consumer-facing companies, particularly in the restaurant industry. Investors should check the menu carefully before digging into these stocks.
Fast and in fashion
Many investors have gravitated to Yum! Brands because of its China exposure, and a 13% surge in same-store sales there didn't exactly hurt that thesis. However, not all of Yum!'s quarter proved quite so tasty.
The company's U.S. business, which includes KFC, Taco Bell, and Pizza Hut, isn't faring so well. The company admitted to an unexpected 13% decline in U.S. profits, weighed down by commodity inflation. Yum! also said "false claims made about our food quality" caused negative publicity that contributed to significantly stunted sales at Taco Bell. The well-publicized lawsuit pertaining to Taco Bell's meat has since been dropped.
Costs are creeping up
Investors should exercise discrimination as they assess restaurant stocks. Yum! Brands shares surged on the earnings news, yet it missed analysts' quarterly profit expectations by a penny. Its 1% decline in U.S. comps should have tempered investors' China-driven enthusiasm a bit.
Profit margins are the big story at restaurant companies, including Chipotle
McDonald's discussed rising costs, too, and expects that trend to continue. Mickey D's predicts a 4% to 4.5% increase in food costs in the U.S. and Europe this year. It's already increased menu prices by 1% this year, and it may have to do so again.
Rising food prices and the challenges they present are hardly limited to these companies. They're not even limited to the restaurant business. Giant Kimberly Clark
Clearly, when increased costs for household necessities stretch consumers' pocketbooks too thin, the restaurant industry could suffer greatly. Eating out is always a relatively easy expense to eliminate.
Defense is on the menu
Whatever challenges face McDonald's, Yum!, and Chipotle, they're still safer stocks than those involved in the more expensive side of dining, like Ruth's Hospitality
The cheap-and-fast players' existing bargain mentality could give them a defensive edge as many consumers spend less on higher-end evenings out. Still, investors should factor in the impact of higher commodities costs on consumer spending, and on restaurant companies in general, before buying in.
What do you think? Use the comments box below to let us know whether you think there are good opportunities in this segment, or whether you wouldn't touch it with a 10-foot fork right now.
Chipotle is a Motley Fool Rule Breakers selection and a Motley Fool Hidden Gems pick. Kimberly Clark and McDonald's are Motley Fool Income Investor selections. The Fool owns shares of Chipotle and Yum! Brands. Try any of our Foolish newsletter services free for 30 days.
Alyce Lomax does not own shares of any of the companies mentioned; for more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not 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.