KNAPP-TRACK
The political process strikes again per Knapp-Track, as the continued fascination with the election process has seen TV viewership up 60-90% in July; restaurant sales continue to struggle as a result. While Knapp cites people staying home as the reason for this month’s decline, it does not explain the continued softening in sales since the peak in January 2015. We believe there are a number of reasons for the restaurant malaise currently being played out across the industry. The most important of which can be gleaned by the excess inflation in the core services inflation (i.e. housing, healthcare, education, transportation). The Hedgeye Macro team makes a very strong case that the government continues to underreport these measures.
Knapp reported that sales in July were -0.2%. This suggests that sales improved 210bps sequentially, after being down 210bps sequentially in June. The two-year average improved 50bps in July, which represents the third month of 2016 with improvement in the sequential two-year average change. In 2Q16 it was more than just casual diners that were affected by a slowing in the restaurant industry. We have heard from nearly all the restaurant companies at this point and virtually all of them mentioned a slowing in consumer spending on restaurants. This is now a widespread slowing in the restaurant industry, and coupled with the slowing in restaurant employment as shown below, leads us to believe we will be in for prolonged slowdown in spending. The restaurant industry has always been a game of market share, but now that will become an even greater focus for operators as there are fewer consumer dollars to go around.
For just the second time this year, the two-year average comparable guest count number improved sequentially. In July, Knapp-Track traffic was down -3.4%, which represents a 140bps improvement sequentially, and 60bps improvement on the two-year average sequentially.
RESTAURANT EMPLOYMENT
Two of the top drivers of restaurant industry success in our opinion are income and jobs. The May data we saw in June showed a continued flattening out of growth which started to shift towards a slowdown. Now, coming out of July as we got a look at the June data, we saw an accelerating slowdown in the growth of limited service restaurants. Growth in limited service restaurant employment slowed 36bps sequentially to 2.72%, down from 3.08% in May. Since hitting a peak in summer of 2013, limited service restaurant employment, and broader restaurant industry employment has slowed and is beginning to roll-over.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
