September 26, 2023

Brighton Journal

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McDonald’s and Chipotle are among the restaurants’ profit winners and losers

McDonald’s and Chipotle are among the restaurants’ profit winners and losers
  • While most restaurant companies smashed earnings forecasts, a number fell short of Wall Street estimates for their quarterly revenue.
  • Decreased traffic has hit chains like Wendy’s and Chipotle Mexican Grill.
  • McDonald’s has benefited from the successful promotion of the Grimace birthday meal and its strong sense of value.

McDonald’s restaurant near Times Square, New York on July 29, 2023.

Adam Jeffery | CNBC

Restaurant companies face some of the same challenges in the second quarter They fall into two categories: winners and losers.

Some chains said their high menu prices alienate diners, while others said consumer behavior has not changed even as the cost of their food and beverages has risen. Promotions drove customers to certain restaurants — or waned as diners focused on value. Low-income customers visited some restaurants more frequently, but skipped visits at others.

Broadly, foot traffic to restaurants has decreased. Sales growth slowed as many restaurants grounded for another round of price hikes that led to strong revenue a year ago. Customers are becoming more selective about how they spend their money, including where to eat, sharply dividing the chains’ performance.

While most restaurant companies smashed earnings forecasts, a number fell short of Wall Street estimates for their quarterly revenue. McDonald’s and Wingstop both reported second-quarter earnings, revenue and same-store sales growth that beat analysts’ expectations, a rarity this quarter for restaurant companies.

On the other hand, Papa John’s, Wendy’s, and Chipotle Mexican Grill were among the group of companies that disappointed investors with weaker-than-expected sales. The shares of the three companies have not yet recovered.

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Here are three trends that defined the quarter and identified the winners and losers:

Two metrics shape the company’s same-store sales growth: how much customers spend per order, and how often they visit the restaurant chain.

As restaurants delay price hikes and customers watch their wallets, restaurants have to rely on the second criterion—traffic—to boost same-store sales. Wall Street is watching closely.

“Investors definitely want a lot of traffic as a proof of concept,” TD Coin analyst Andrew Charles told CNBC.

McDonald’s, Chipotle, Texas Roadhouse and Wingstop were among the few chains that reported traffic growth in the US in the most recent quarter.

On the other hand, Restaurant Brands International said U.S. traffic fell for three of its chains: Popeyes, Burger King and Firehouse Subs. Rival Wendy’s reported that its domestic transactions fell 1% in the second quarter.

Looking ahead, traffic may drop further in the second half of the year.

“As we move through the second half of ’23, list prices are likely to decline rapidly as inflation no longer justifies prices and, in the absence of a quick reversal in traffic, they should decline,” Barclays analyst Jeffrey Bernstein wrote in a note to clients in August. Companies visually just as quickly.” 11. “This does not bode well for restaurant stock performance in the coming months, in our view.”

Inflation is falling, and more economists are predicting a “soft landing” than a recession. But consumers are still looking for value.

On a large scale, the fast food sector has benefited from consumers trading from fast food restaurants to cheaper burgers and tacos. But consumer perception of value varies across chains.

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For example, McDonald’s CEO Chris Kempzynski said the chain does well with consumers who make less than $100,000, and with those whose income is less than $45,000. On the other hand, Wendy’s CEO Todd Penegor said the burger chain has seen diners earning less than $75,000 on their purchases decline.

Similarly, Wingstop said its customers’ perception of its value is improving, in conjunction with falling chicken wings prices.

“We’re seeing positive trends in value outcomes with guests, in an environment where many brands are measuring down,” Wingstop CEO Michael Skipworth told analysts.

The fast-casual competitor Chipotle has also benefited from diners realizing the value of burrito bowls. Chief Financial Officer Jack Hartung told analysts that Chipotle has seen more low-income consumers return to its restaurants than they did a year ago.

However, Chipotle’s lower-income customers aren’t visiting it as frequently as they were before inflation started accelerating. The chain has paused price hikes for now, but will decide closer to the fourth quarter whether to hike them again.

One fast-casual convenience store chain has struggled with consumer value perception. Noodles & Company said its traffic saw double-digit digs in the first part of the quarter as customers fell for its higher prices, which were up 13% from the year-ago period. In response, Noodles cut its prices by 3% and directed its marketing to focus on value.

As restaurants and customers focus on value, discounts and combo meals have stolen most of the marketing thunder. The limited-time menu items also helped some restaurants’ sales — but it wasn’t enough to make up for the weakness of others.

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On one end of the spectrum was McDonald’s. The burger chain’s Grimace birthday meal sparked social media buzz and traffic to its restaurants.

“This quarter, the topic was, if I’m being honest, Grimace,” CEO Kempzinski said on the company’s conference call.

The promotion featured limited edition Grimace purple milkshakes and menu staples, such as a choice of 10-piece McNugget or Big Mac. It was based on nostalgia for the mascot.

But not all promotions have helped restaurants achieve their highest levels.

For example, Papa John’s Doritos Cool Ranch released Papadias flavor for $7.99 in May. The limited-time menu item also drove social media buzz and traffic to the restaurants, according to executives. However, the new Papadias couldn’t compete with the pepperoni-stuffed pizza chain it released a year ago for $13.99.

“That increase in traffic wasn’t enough to offset the drop in checks, so you had weaker same-store sales,” said BTIG analyst Peter Saleh.