U.S. Restaurants Poised for Profit Surge in H2 2023 Amid Favorable Economic Factors

U.S. restaurant chains, including prominent names like McDonald's and Chipotle Mexican Grill, are anticipating a significant surge in profits during the second half of 2023. This expected boost comes as commodity costs show signs of easing, while demand for popular menu items like burgers and tacos remains remarkably resilient.

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The quarterly earnings reports of major restaurant chains are scheduled to kick off this week, with industry giants Starbucks and Yum Brands (parent company of KFC) poised to disclose their financial results in the coming week.

Investors and industry analysts are keenly observing the American fast-food customer's response to ongoing challenges posed by high food prices and overall economic pressures.

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Despite concerns over a potential recession later this year, Jeffrey Bernstein, an analyst at Barclays, remains optimistic, citing encouraging signs in current industry fundamentals.

Furthermore, commodities like chicken and dairy have shown signs of price easing, providing some relief by offsetting higher costs for items like beef and potatoes. Additionally, wage pressures have stabilized, allowing restaurants to operate with a fuller workforce.

The Context:

While footfall has experienced fluctuations, fast-food companies have yet to witness a significant sales slowdown, despite lower-income consumers ordering fewer items or reducing their visits.

As the U.S. economy transitions into disinflation mode and consumer confidence reaches a near 1-1/2-year high in June, analysts predict that restaurants will continue to gain market share from food-at-home channels like grocers and supermarkets.

Data from Placer.ai shows that McDonald's experienced an 8.4% increase in visits during the second quarter, while Starbucks and Chipotle recorded 6.9% and 15.7% rises, respectively.

Jim Sanderson, an analyst at Northcoast Research, expects earnings discussions to revolve around the surprising resilience of consumer demand, which has surpassed expectations. He believes that concerns about macroeconomic headwinds and inflation pressures are less impactful than previously thought.

Price hikes implemented in previous quarters, with minimal resistance from consumers, are anticipated to further bolster profits in the remaining months of the year.

The Fundamentals:

• McDonald's is projected to report an 8.9% rise in global same-store sales for the second quarter, with an expected profit per share of $2.79.

• Chipotle, set to report on Wednesday, is expected to post a 7.5% increase in quarterly comparable sales, with anticipated earnings of $12.31 per share.

Wall Street Sentiment:

• Year-to-date, McDonald's shares have risen by approximately 12%, and Chipotle has surged by 51%. Starbucks and Yum Brands have seen increases of about 4% and 8%, respectively.

• The S&P 500 Restaurants index has advanced 13.5% during the same period.

• McDonald's has an average rating of "buy" with 39 analysts covering the stock, and at least six brokerages have recently raised their price targets on the stock.

• Chipotle's current average rating is "buy" with 34 analysts covering the stock, and the median price target is $2,250, up from $2,175 a month earlier.

As the restaurant industry approaches the second half of 2023 with cautious optimism, it remains to be seen how the economic landscape will evolve and impact the overall performance of these major restaurant chains in the months ahead.

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