Death and taxes are the only two constants. Perhaps we should add to this list Americans’ love of pizza and burgers.
This is what emerges from the latest research by Jeff Farmer, an analyst at Gordon Haskett. It looked at the restaurant industry to determine what would happen if the ‘increasingly inevitable US recession materialized’ and found that two decades of quarterly data paint ‘a clear picture’ in favor of these food staples. fast food remaining more resilient than casual dining in a downturn.
The market already takes this reality into account to some extent. Worries about an economic slowdown have hit the restaurant sector, which has fallen an average of 28% since the start of the quarter, before the S&P 500 fell 18%, but shares of hamburger and pizza companies have fallen by about 15%.
The farmer notes that
(YUM) are the top performers of the group, down mid-single digits so far in the second quarter. This is likely due to the fact that they tend to have greater resilience in a recessionary environment, but also benefit from greater cash flow stability, thanks to their franchise models.
“The Consumer Discretionary sector offers very few ports for what increasingly looks like a recessionary storm,” he writes. ” In this context
remains a first choice, and [we] see an increasingly attractive risk/return profile for Domino’s.
Indeed, the data shows that same-store sales at McDonald’s, Domino’s and
Papa John’s International
(PZZA) had the lowest correlation with gross domestic product over the past 20 years, from 2000 to 2019.
McDonald’s posted the strongest same-store sales in the four quarters of GDP decline between 2008 and 2009, at nearly 4%, followed by
Chipotle Mexican Grill
(CMG) at 2.5%. They were the only two restaurants to offer positive comps during this period, while Papa John’s and Domino’s fell the least.
In contrast, occasional diners were more likely to rise and fall with the economy.
Texas Truck Stop
(TXRH) had the strongest correlation with GDP in farmer coverage, closely followed by
“Casual dining occasions are discretionary and curtailed by economic uncertainty, while quick-service occasions often serve as a meal replacement at home and are much less discretionary,” notes Farmer.
Other analysts have also argued that some of the biggest names in the industry, including Domino’s and McDonald’s, look set to outperform, given that they are doing well with consumers in terms of value and have the ability to better withstand a difficult economic environment.
Food services have held up relatively well lately retail sales data, released Wednesday, which showed a surprise drop of 0.3% overall in May. Restaurant sales were up 0.7% from the previous month and 17.5% year over year. This echoes April’s continued strength, but is a sequential deceleration from the prior month.
Restaurants fall squarely into the “revenge” spending category, as Americans race to catch up on experiences, like dining out, that have been put on hold during the pandemic. Yet with inflation at record highs, particularly for food prices, investors have largely looked beyond recent strength, fearing demand will not be sustainable as consumers are forced to cut back on discretionary spending. to buy essentials.
Write to Teresa Rivas at firstname.lastname@example.org