Earnings Season & Changes to the position Monitor
- DPZ and DOM-LON are NEW BEST Idea LONG.
- Moving PZZA up to best Idea SHORT.
- Covering SYY & CHEF from the best Idea SHORT
- Removing WEN, PTLO, JACK and HLFFF from the SHORT BIAS list
- Moving KRUS and WING to the TOP of the SHORT Bias List
The 2Q23 earnings season will likely tell a story about the struggles of middle-income consumers, contrasting with the free-spending of wealthier consumers with the revenge travel bug. The question for restaurant stocks is whether spending support from higher-income consumers can outweigh the malaise of middle America, and judging by the performance in 2023 market participants are living the dream. Restaurant stocks have spoken that the spending will continue with the Restaurant ETF EATZ up 21.6% YTD and the median of the stocks we follow up 30%. The best performing segment is Fast Casual up 47.6% (SHAK +87%, BROS +78% and SG +51%), followed bay casual Dining up 28.1% (RRGB 168% KRUS +99% and CHUY +41%) For us the the jury is still out.
The focus on the restaurant sector heats up this week as the 2Q23 earnings season begins, with McDonald's (MCD) Chipotle (CMG) and Domino's Pizza (DPZ) due to report earnings this week. MCD is on the BEST Idea long list has been showing strong traffic trends at quarter. DPZ has been struggling, and posted a mixed quarter today. DPZ 2Q22 GAAP EPS of $3.08 beats by $0.01. Revenue of $1.02B (-3.8% Y/Y) misses by $50M primarily due to lower supply chain revenues attributable to a decrease in the Company's market basket pricing to stores, as well as lower order volumes. Global retail sales growth (excluding foreign currency impact) of 5.8%. US SSS +0.1% vs FS +0.2%; Company +5.5% vs FS +2.4%; Franchise (0.1%) vs FS +0.2%; International +3.6% vs FS +2.5%. G&A 9.5% vs FA 9.3% and Operating margin 19.1% vs FS 17.2%
Last week Domino's made headlines from its new partnership with Uber Eats in the US, UK, and Canada. Domino's will keep all customer data and fulfill all deliveries with hopes of generating an incremental $1bn in sales for 70% of its global footprint. Last year, the chain inked a deal with Just Eat to enable marketplace orders from 1,200 stores in the UK and Ireland. Uber Eats will only claim exclusivity in the US until 2024. As of 1Q23, takeout accounts for half of Domino's orders. We like this deal and on a soft 2Q23 we are adding to the BEST IDEA list along with Domino's Pizza Group LTD (DOM-LON). "We will also benefit globally from the deal we recently announced with Uber. Over two-thirds of our stores around the world will have the ability to take orders from Uber Eats. We are excited to strategically enter the multi-billion dollar aggregator marketplace as the number one pizza brand in the world." We like this change for DPZ and will likely lead to an acceleration is sales trends.
Restaurant Traffic Slowed in July
Restaurant traffic slowed significantly in 2Q23, but just saw sequentially better trends in the last month of the quarter. That said things have begun to slow again in July especially for Casual Dining.
- For the fist two weeks of July Casual Dining Traffic is down (-2.6%) versus June (-0.7%)
- For the fist two weeks of July QSR is up 2.6% versus June 2.1%
Eating and drinking places registered total sales of $88.9 billion on a seasonally adjusted basis in June, that was essentially unchanged from May’s sales volume, according to the BLS. The plateauing of restaurant sales mirrored the broader retail landscape in June, as consumer spending in non-restaurant retail sectors rose just 0.2%. YoY consumer spending in restaurants increased 8.4% in June 2023, while total spending in non-restaurant retail sectors edged up 0.5%. The component of the monthly retail sales report that includes restaurant spending showed just a 0.1% month-over-month increase in June after rising 1.2% in May and 0.5% in April. Consistent with the slowing traffic from Placer.AI, the primary driver for increased sales YoY was higher menu prices. In inflation-adjusted terms, eating and drinking place sales rose just 0.7% YoY in June 2023.
