A mediocre jobs report this morning indicated a 217,000 gain in employment in May, greater than the 215,000 that economists expected. Unemployment and the labor force participation rate remained unchanged at 6.3% and 62.8%, respectively.
We received mixed results this morning from BLS pertaining to restaurant industry employment, but we do have a few notable callouts. The 20-24 YOA cohort had its second best month of employment growth since June 2012, which is a bullish data point for quick-service and fast casual operators. The 45-54 YOA cohort continued its employment slump, as May marked the 19th consecutive month of employment deterioration. This continues to be, in our view, a material headwind to casual dining restaurants and, in part, leads us to believe the industry is in secular decline. However, the 55-64 YOA cohort had its second best month of employment growth since August 2013 and is, all told, a bullish data point for the casual dining industry.
In aggregate, the report was fairly mixed for the restaurant industry with perhaps the most telling data point coming in the form of strong employment growth in the 20-24 YOA cohort. We continue to favor select quick-service and fast casual operators, including YUM, CMG, WEN, JACK, PLKI and KKD. BOBE, which is one of our top long ideas, is a special situation play in the casual dining space and we are a strong advocate for change within the company, particularly a separation of the foods and restaurant businesses.
May employment growth data:
- 20-24 YOA +3.79% YoY; +148.7 bps sequentially
- 25-34 YOA +1.34% YoY; -46.1 bps sequentially
- 35-44 YOA +0.48% YoY; -38.3 bps sequentially
- 45-54 YOA -0.24% YoY; -3.1 bps sequentially
- 55-64 YOA +2.72% YoY; +73.3 bps sequentially
Employment growth across full-service restaurants, limited-service restaurants, and leisure & hospitality continues to grow at a fairly healthy clip despite a steady deceleration in two of the categories. We’d note that employment in limited-service restaurants remains the most robust and caution that growth across all three segments remains well below June 2013 levels.
In the chart below, we look at the correlation between TTM Leisure & Hospitality Employment Growth and TTM Knapp Comps. As we’ve pointed out before, Knapp same-store sales have historically tracked well with employment growth in the leisure & hospitality industry, however, this positive correlation began to break down in mid-2012. This trend continues, supporting our case that the casual dining industry is in secular decline. In this type of environment, we continue to believe that only the most nimble and innovative players will thrive.