It’s tough to celebrate negative numbers, but third quarter and early fourth quarter trends may hold a sliver of optimism that at least the ugly trends are slowing down.
According to accounting firm BDO, the third quarter ended with a blended segment same-store sales decline of .4%, with only pizza (3.2%) and QSR (.8%) in the black. Fast casual performed the worst due to Hurricanes Harvey, Irma and Maria. Fast casual restaurants sank 2.1% in the third quarter even as the giant Chipotle rebounded 8.3%. Pollo Tropical was especially hard hit, sinking 8.5% in the quarter following widespread closures.
According to TDn2K, things have gotten modestly better early in the fourth quarter. According to the research firm, same-store sales were negative .04% in November, down from .9% in October, but up from the three-month rolling average of negative 0.5%. But the firm noted that it might not be time for champagne as traffic is still a major issue. Traffic sank 2.5%, less than the three-month average, but yet another bad month. According to the firm’s data, traffic hasn’t been positive since Q4 of 2014 and Q1 of 2015 when it hit .3% and .4% respectively.
"Our concern is that these improved trends come despite the fact that the industry has not cracked the code on declining guest visits," said Victor Fernandez, executive director of insights and knowledge for TDn2K. "Brands have come to rely on rising checks to overcome the steady loss of traffic."
According to Knapp Track, casual dining is enjoying some slightly better comps. Same-store sales were up .6% in November, down from the 1.4% in October, but still positive—which is great news for casual dining. But still, traffic is down yet again; it sank 1.8% in November, slowing slightly from 1.6% in October.
Brian Vaccaro, an analyst at Raymond James, said this holiday season was critical to keep restaurant stocks outperforming.
"Restaurant stocks outperformed the broader indices in November for the first time in several months (RJ Restaurant Index +5.8% vs. 2.8% gain in both the S&P 500 and Russell 2000 – Exhibit V), which we attribute primarily to increased M&A activity and tax reform optimism," wrote Vaccaro. "That said, if industry sales can remain stable during the critical holiday December sales period, we believe the group could continue to outperform."
He said given the macro trends, QSR is poised to continue in positive territory, but full-service will likely not see a big rebound.
"We continue to believe that the relatively low quality of job growth since the 2008/2009 recession has: 1) constrained aggregate wage growth, and 2) benefited quick-service restaurant sales while negatively impacting full-service restaurants," wrote Vaccaro, who noted one full-service bright spot: steak. "High End Steakhouse segment comps were particularly strong in November (second straight month) with comps +4.3% and traffic +2.7% (note: comps in the last three weeks of November were +5.2%) which reflects the highest reported comp in the segment since January of 2015."
Vaccaro pointed to Red Robin (NASDAQ: RRGB), Chuy’s (NASDAQ: CHUY), Del Frisco’s (NASDAQ: DFRG), Dave and Buster’s (NASDAQ: PLAY) and Carrol’s Restaurant Group (NASDAQ: TAST) as good bets for "tactical exposure" to the improving trends.
While many brands state they would be very cautious about price increases given the trends, the Bureau of Labor Statistics reported that restaurant prices rose 2.4% year to date. While it’s brand to brand, there are many restaurants reporting positive comps based only on price increases and that simply won’t work in the long term.
Comps do get easier for everyone in November and December, but any negative numbers would be really bad news and more evidence of some deep, structural issues like oversupply, a changing consumer and a growing number of existential threats.
But if comps (and hopefully traffic) get better, it could mean things are finally turning around. Some positive traction is necessary given the ongoing wage growth in the restaurant industry. The cost of labor rose .7% in the third quarter, according to BDO. And with unemployment at 4.1% (a number not seen even in the days leading up to the Great Recession), restaurateurs need some better trends.