Usurprising Downturn: Restaurant Employment Dips in October, Recovery Stalls
Industry sales trends have been signaling this for months
In a shift from recently reported numbers, the restaurant industry experienced a decline in employment in October 2023. Preliminary data from the Bureau of Labor Statistics (BLS) revealed a net loss of 7,500 jobs in eating and drinking establishments on a seasonally adjusted basis. The revised figures for August and September, which were significantly lower than initially reported, have made this downturn worse. Consequently, the sector has not yet rebounded to pre-pandemic employment levels, remaining 14,000 jobs short as of October 2023. This development raises concerns about the full recovery of an industry that was a significant employer before the COVID-19 pandemic.
Detailed Bullet Points:
- October Employment Decline: The restaurant sector saw a net reduction of 7,500 jobs in October, marking a deviation from the growth trend observed in recent months.
- Revised Figures for August and September: Positive job growth figures for August and September were revised downward. August's figures were adjusted from a gain of 14,400 jobs to a loss of 9,300 jobs, and September's figures were corrected from a gain of 60,700 jobs to 48,300 jobs.
- Pandemic Recovery Incomplete: Despite previous gains, the downward revisions and October's job losses indicate that the restaurant industry's employment has not fully returned from the pandemic's impact. As of October 2023, there is still a deficit of 14,000 jobs compared to February 2020.
- Significance for the Industry: Before the pandemic, eating and drinking places were a significant part of the restaurant and foodservice industry, employing more than 12 million of the 15.6 million workforce. The current employment situation underscores the industry's challenges in its recovery efforts.
- Implications for Stakeholders: The unexpected decline in restaurant employment affects business owners, employees, and investors, signaling potential instability and the need for strategic adjustments to navigate the ongoing recovery challenges.
CHUY
Summary Thoughts
At 1.5x NTM sales, the stock is trading at a premium into slowing trends.
New Products: The company's strategic initiatives, spearheaded by the Chief Knowledge Officers (CKOs), are anticipated to counteract the recent decline in customer traffic, with a strong emphasis on achieving operational excellence. Labor costs have been effectively managed through enhanced transparency and a significant reduction in overtime hours, although there appears to be limited scope for further reductions in this area.
New Stores: The performance of new store openings has been encouraging, meeting or exceeding expectations, particularly in regions where average unit volumes (AUVs) surpass the company's average. This expansion strategy will continue over the next 3 to 4 years.
Food Costs: Regarding commodity procurement, contracts currently cover approximately 40%-45% of the total basket. While an increase in beef prices is anticipated, overall commodity inflation is expected to stabilize in 2024.
Guidance: The guidance for Q4 suggests that same-store sales will remain relatively stable, with a slight potential for growth attributed to the recent partnerships with delivery services. G&A expenses for 2024 are projected to remain consistent with 2023 levels, accounting for an additional 5% to accommodate store growth. In 4Q23 and 2024, catering and CKOs are projected to be the primary drivers of comparable sales. Although marketing expenditures will increase in Q4, the budget is expected to stabilize at around 1.5% of sales in subsequent periods.
SBUX
The valuation is reasonable, but upside is limited.
Starbucks (SBUX) shares saw a significant increase (+11.5%) last week following the release of its 4Q23 earnings report. The company outperformed expectations with an EPS of $1.06, surpassing estimates by $0.09, and reported revenue of $9.37 billion, slightly ahead of consensus by 0.9%. The increase in average tickets and U.S. transactions drove global comps. At the same time, China compensated for the decline in average tickets with surprising transaction growth. The stock reacted to the favorable, robust results and the FY24 guidance, which includes $3 billion in cost savings from FY24–26. The company's FY 2024 guidance of 5%-7% global comparable sales growth reflects slowing from FY23, is a healthy target, and leaves no margin for error. In the Americas, operating margins have significantly increased due to various strategic initiatives (labor leverage was very surprising), and the strength in customer traffic was surprising. Investments in staffing and operational improvements have enhanced peak-hour throughput, and a substantial Capex budget is allocated for global store expansion and renovations.
- There is downside risk if the expected $1 billion in savings from incremental cost reductions deviates, and there are potential reinvestment risks given the cap ex budget (small stores in non-core markets).
- I still have concerns about the long-term algorithm and that FY24 EPS growth could be second-half-weighted due to expected EBIT margin expansion.
- Concerns about China and the consumer are abundant, except with SBUX. Confirms no change in China's strategy, dismissing the exploration of strategic alternatives.
- The Friday employment report highlights the vulnerability of traffic growth to unemployment, especially in the morning daypart.
