Obviously, we do not have a crystal ball, but we did not need one to figure out what the numbers would tell us regarding the state of the restaurants space.
The dark days for the restaurant industry have continued, as sales and traffic continue to trend downward. Metrics released by Knapp-Track and Black Box show that deteriorating sales and traffic trends have continued in December, and to an even greater degree. Also working against the restaurant industry are commodity inflation and increasing labor costs, the latter of which appears to be the bigger concern for many operators, as the possible $15 per hour target would be debilitating.
As we have said for quite some time, the majority of the casual dining space is in trouble, and our most recent calls on CAKE, DIN, EAT, and BLMN have reflected this (please see Best Ideas List below, and please do not hesitate to contact us if you would like access to any of those Black Books). At the root of it, these names have not kept up with the changing environment, neglecting to refine their approach in order to combat sales and traffic woes engulfing the space. CAKE rises to the top for us given that 90% of their locations are in or in close proximity to malls. With an increasing number of consumers doing their shopping online, we expect this dynamic will have an outsized impact on CAKE's performance.
KNAPP-TRACK
Knapp-Track figures for the month of December were as follows: comparable restaurant sales of -4.7 % and comparable guest counts of -6.8%. In December, 5 of 5 weeks had negative comparable guest count results, with the spread for the comparable sales between the best week in December 2016 and the worst week being 6.6 percentage points. It is also worth noting that these results coincided with a decline in retail store and mall traffic.
BLACK BOX
To quote TDn2K, “Restaurants have now posted four consecutive quarters of declining year over year sales. The last time the industry experienced a year with all negative quarters was 2009, when the economy was suffering the effects of the great recession.” With unemployment still hovering near historic lows and consumer confidence increasing, it would be assumed that spending on retail would improve, but that has not been the case, as retail and mall traffic have pulled back. Comp sales reported by Black Box were down -4.3% (a 300bps decline sequentially), while traffic was down -6.4% (a 310bps decline sequentially) in December. From a quarterly perspective, comp sales were down -0.9% in 4Q16, while traffic saw a -3.2% decline. California was the best region, once again, with sales down -0.9% and traffic down -3.7%, while the Midwest was the worst region with sales down -6.3% and traffic down -8%.
FAH vs. FAFH
The inflation differential between Food at Home (FAH) and Food Away From Home (FAFH) narrowed by 20bps sequentially from October at -4.7% to November (the latest data) at -4.5%.
EMPLOYMENT
In November, restaurant employment growth across leisure & hospitality and limited service continued to slow. In a slight change in trends, full service employment growth saw a slight growth of 12bps to 2.57%. Growth in limited service employment slowed to 2.06% (down 38bps sequentially). Limited service has also slowed, growing just 2% (down 6bps sequentially) versus a high in the last 12 months of 3.04% (November 2015). This decline is reiterated by industry metrics as TDn2K states: “Job creation slowed down to a crawl in recent months. Turnover for both hourly employees and all levels of management continued the upward trend in November that started at the end of the recession.” Additionally, analysis conducted by TDn2K links higher restaurant turnover to lower sales and traffic growth.
CONSUMER CONFIDENCE
Consumer confidence popped higher in December to 113.7, up 4.3 sequentially and 17.4 YoY. It is also worth noting that Preliminary Michigan Consumer Sentiment sits at 98.1, which is below consensus 98.6.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
