For nearly two years now, the restaurant industry has been posting declining quarterly comparable sales. The so-called “restaurant recession” can be primarily chalked up to over-expansion as growth in dining out hasn’t kept up with new restaurant openings. Some much-needed good news was released in October, though, that could indicate a recovery is underway.
The last two years in review
According to industry research group TDn2K, average comparable sales at restaurants have been negative every quarter since early 2016. The metric, which accounts for both foot traffic and ticket size, has been hit hard as the notoriously competitive industry quickly expanded to keep up with increasing demand for places to eat out.
In recent years, the rate of new openings has far outpaced demand growth. While diner ticket size and menu prices have continued to go up, foot traffic declines have more than offset those as the restaurant count has started to poach customers and thin out dining rooms.
However, after nearly two years of quarterly declines, TDn2K just reported that average same-store sales were positive in October. That’s the first monthly increase since May 2016. At only a 0.9% advance, it was hardly worth getting too excited over, but good news is good news, and the industry has needed some for a long time now.
Why the numbers may not matter
It is too early to call this the bottom, however. Foot traffic was down 1.5% in October, implying that the positive comps came from larger customer orders and menu price increases once again.
It is worth noting, though, that the 1.5% drop in traffic was the best figure reported by TDn2K since February 2016 when the issue first began to rear its ugly head. While that is encouraging, major headwinds remain. Chains continue to expand at an aggressive rate, especially in the fast-casual segment — a dining experience that lies somewhere between fast food and traditional table service.
Added to mix is the disruption coming into play from the likes of GrubHub (NYSE: GRUB), Amazon (NASDAQ: AMZN), and Blue Apron (NYSE: APRN). Those companies are offering even more choice for diners and making new eat-at-home, delivery, and take-out services available. It all adds up to a fast-changing industry in which some brands are struggling to hold on to their patrons.
What investors should do
It may sound like a scary time to be invested in restaurants, but hardship creates opportunity. In spite of industry woes, some restaurant chains are still finding ways to not only expand locations, but also grow traffic and comparable sales. Here are some top-performing examples.
|Company||YTD Revenue Increase (Decrease)||YTD Earnings per Share Increase||Comparable Sales Increase|
|Texas Roadhouse(NASDAQ:TXRH)||11.2%||7.6%||4% company-owned; 2.9% franchised YTD|
|Dave & Buster’s(NASDAQ:PLAY)||15.5%||38.5%||1.1% during last quarter|
Texas Roadhouse and McDonald’s are both finding success in their respective segments by offering value to customers. Roadhouse is especially known for its big portions in a fun-loving atmosphere, a combination that is working wonders in suburbia, where most of its stores are found. McDonald’s, which has been revamping its image and menu, refranchising locations, and integrating technology into its operations, is being rewarded with resurgent traffic at its thousands of restaurants.
Dave & Buster’s has taken a different approach, going for experience instead. The chain has created a social gathering and gaming hub for friends and families, carving out a niche for itself in an otherwise crowded casual-dining segment. Casual dining has been hit especially hard over the last two years, according to TDn2K, but Dave & Buster’s results have been impressive.
It is far too soon to call the “restaurant recession” over, but the October comparable sales figures were nonetheless encouraging. Whether traffic declines continue or not, though, I think the situation creates a buying opportunity, especially for brands that are growing in a healthy way despite industry hardship.