Why most restaurant stocks have surprised everyone in 2023

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with: I have been surprised by a few things at this juncture in 2023. First, I don’t appear to be aggressively aging three months or so into my new […]

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

I have been surprised by a few things at this juncture in 2023.

First, I don’t appear to be aggressively aging three months or so into my new role at Yahoo Finance. Thank you mom and dad for the genes (and thanks Ulta’s COO for the skin cream recommendation).

Two, Overstock.com purchased Bed Bath & Beyond’s website and will change its name to Bed Bath & Beyond. I personally would never want to be associated with failure and bad vibes — yet here is Overstock going all in on both.

I wish the team there well in trying to walk around in a zombie’s skin.

morning brief image

morning brief image

And lastly, I — along with investors I have chatted up — have been surprised by the performance of most restaurant stocks. That’s across the board from fast food plays such as McDonald’s to sit-down eateries in the mold of Olive Garden owner Darden.

Everything but the kitchen sink has been tossed at restaurant companies and their stocks this year.

Slowing GDP growth has taken hold, which usually doesn’t translate to strong financial results from restaurants. Rising menu prices have consumers thinking twice about a family dinner out on the town.

Higher average hourly earnings for waiters, waitresses, and back-of-house staff are weighing on profits. Inflation has hit everybody.

And of course, much higher interest rates make putting 10 orders of pizza from Papa John’s after a kid’s sports game on a credit card adds another expensive wrinkle.

Even the infatuation with AI stocks serving to suck investment dollars from other sectors in the market could be viewed as a headwind.

Yet here we stand, with most restaurant stocks doing quite well for the year. Restaurant sales as sourced by the Census Bureau have trended higher in recent months. As you can see in our nifty infographic, same-store sales for most major chain restaurants strengthened in the first quarter from the fourth quarter of 2022.

McDonald’s, for example, saw higher sales in the first quarter on the back of higher menu prices and guest counts.

Winning recipe.

Veteran restaurant analyst Danilo Gargiulo at Bernstein tells me there are at least three reasons behind the moves in the stocks and the financial resilience:

  • Restaurants are an affordable luxury: even if consumers’ wallets are more squeezed, the typical spending reduction occurs among durable goods and large ticket items first; reduction in spending at restaurants is the last resort.

  • Unemployment rate is still low. The biggest negative impact on restaurant demand comes from reducing disposable income and increasing unemployment rate. Consumer sentiment and future outlook matter, but only marginally. Today we are still enjoying healthy employment rates in the United States, favoring restaurants’ demand.

  • Restaurant prices have grown less than grocery prices. The relative inflation of food at home (i.e. grocery) vs food away from home (restaurants) has once more favored restaurants’ demand, given that the pricing actions taken by restaurants have been significantly more moderate vs the price increases at the average grocery.”

Another ingredient (and one Fed chief Jay Powell could eat up) at play is inflation that is finally cooling.

“There’s a line of sight to lower inflation/less margin pressure,” Bank of America restaurant analyst Sara Senatore tells me of the appetite to own restaurant stocks in 2023

So can these stocks continue to cook up the surprising gains?

Maybe, but the second half headwinds will be almost as formidable as the first half, pros say. Chief among them is potentially a next leg down in economic growth and two more interest rate hikes from the Fed.

“The group is heading into any potential slowdown in much better shape than perhaps any prior US recessions,” one long-time restaurant analyst remarked to me.

Somewhat reassuring.

The pros think it’s best to remain with best-in-breed names rather than bet on turnaround stories.

“We believe that Yum! Brands and Wendy’s will continue to have positive momentum in the second half of the year, but we expect Chipotle and Darden to provide the greatest returns, as they directly operate their stores and can capture the upside from more moderate commodity inflation,” Bernstein’s Gargiulo says.

Chew on that.

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email [email protected]

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