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US restaurants set for second-half profit boost as costs ease, demand stays firm

2023-07-24 23:17
By Deborah Mary Sophia Restaurant chains including McDonald's and Chipotle Mexican Grill are expected to report strong profits
US restaurants set for second-half profit boost as costs ease, demand stays firm

By Deborah Mary Sophia

Restaurant chains including McDonald's and Chipotle Mexican Grill are expected to report strong profits in the second half of 2023 as commodity costs finally ease at a time when demand for items including burgers and tacos has remained fairly resilient.

U.S. restaurant chains kick off their quarterly earnings this week, with some top names such as Starbucks and KFC-parent Yum Brands set to report results next week.

Investors will be keen to see how the American fast-food customer is faring amid still-high food prices and a pressured overall spending environment.

"When looking at current industry fundamentals, it is hard not to be encouraged" despite the looming risk of a recession at some point in 2023, Barclays analyst Jeffrey Bernstein said.

Meanwhile, prices of commodities such as chicken and dairy have eased, offsetting higher costs of some items like beef and potatoes, while wage pressures have also stabilized, with restaurants now back to operating a fuller workforce.

THE CONTEXT

Even as footfall has remained choppy with lower-income consumers ordering fewer items or visiting outlets less often, Wall Street analysts have said fast-food companies are yet to see a notable sales slowdown.

With the U.S. economy now moving into disinflation mode, consumer confidence touching a near 1-1/2-year high in June, and spending in April also increasing more than expected, analysts have said restaurants would continue to take back market share from food-at-home channels such as grocers and supermarkets.

Visits to McDonald's rose 8.4% in the second quarter, Starbucks saw a 6.9% jump and Chipotle a 15.7% increase, data from Placer.ai showed.

"I'm expecting (earnings) discussion to focus around how consumer demand has been probably more resilient than anyone had forecast when we had our last earnings cycle," Northcoast Research analyst Jim Sanderson said.

"The concern about macroeconomic headwinds and pressure from inflation ... is not as impactful as it has been in the past."

With little resistance from consumers, the price hikes undertaken in previous quarters are expected to further boost profits for the rest of the year.

THE FUNDAMENTALS

** McDonald's is expected to show an 8.9% rise in global same-store sales when it reports second-quarter results on Thursday, while profit per share is expected to come in at $2.79

** Analysts expect Chipotle, scheduled to report on Wednesday, to post a 7.5% increase in quarterly comparable sales and earnings of $12.31 per share

WALL STREET SENTIMENT

** McDonald's shares have gained roughly 12% year-to-date, with Chipotle surging 51%. Starbucks and Yum Brands have risen about 4% and 8%, respectively

** The S&P 500 Restaurants index has advanced 13.5% in the same period

** McDonald's has an average rating of "buy", with 39 analysts covering the stock, according to Refinitiv data; at least six brokerages have raised their price targets on the stock over the past two weeks

** Chipotle has a current average rating of "buy", with 34 analysts covering the stock, and a median price target of $2,250, up from $2,175 a month earlier

(Reporting by Deborah Sophia in Bengaluru; Editing by Shounak Dasgupta)