Thriftier U.S. Consumers May Be Hurting Restaurant Sales

The number of restaurants missing earnings estimates is on the rise, coinciding with weaker reads on consumer confidence.
By Brian Sozzi ,

Are consumers becoming more cautious and spending less at restaurants? The mounting evidence suggests yes. 

On Thursday, Buffalo Wild Wings (BWLD)  reported its second consecutive earnings shortfall, sending shares plunging 17% in midday trading. Same-store sales at company-operated and franchised locations rose 3.9% and 1.2%, respectively, during the quarter.

The sales gains marked a slowdown from the start of the quarter in July, when same-store sales at company-operated restaurants were up 4.8% and higher by 2% at franchise locations. And sales have cooled further into October.  

"I don't know that it's something competitive, we tend to move with the restaurant industry and I think you are hearing that September and October sales were a little bit softer," said Buffalo Wild Wings CEO Sally J. Smith when asked about the slower pace of sales from a chain known for posting strong gains

Encouragingly, Smith said she has not seen consumers trading down to cheaper menu options. Traffic to restaurants is still increasing, too, although not as quickly as it had been.

But Buffalo Wild Wings isn't the only restaurant company seeing weaker results recently. Dunkin' Brands (DNKN) - Get Report  pre-announced slowing sales growth for the third quarter on Oct. 2, in part as consumers balked at recent menu price increases, sending its shares down 12% that day.

The company went onto report Oct. 22 that third quarter U.S. same-restaurant sales at Dunkin' Donuts restaurants increased 1.1%, moderating from a 2.0% gain in the second quarter. Traffic to Dunkin' Donuts U.S. locations fell 0.7%, after rising 0.6% in the second quarter.

"If you look at all of the recent data, some [consumers] are clearly saving some more, some are clearly spending on some big items such as autos," said Dunkin' Brands CEO Nigel Travis in an interview. Overall, though, Travis believes the consumer is "in a good place." 

Even at fast-casual restaurant Chipotle (CMG) - Get Report , which for the past year has logged impressive sales gains in spite of a series of price increases, the third quarter proved less than stellar.

On Oct. 20, the better burrito giant, boasting a reputation for routinely trouncing Wall Street's profit estimates, reported earnings of $4.59 a share, falling short of Wall Street's forecast of $4.62 a share. Same-restaurant sales rose 2.6% for the third quarter, marked a slowdown from a 4.3% gain delivered in the second quarter.

Chipotle execs admitted that sales in October have been "very, very choppy", and cooled in August and September following a burrito giveaway promotion in July. 

Chipotle's shares have shed about 8% in the last month. 

The steady drumbeat of slowing sales and missed profit forecasts from several key players in the restaurant industry coincides with a slowdown in the U.S. labor market and heightened stock volatility that hit markets during the summer. Subsequently, consumer confidence has been dented, which may be leading to the slowing sales at top restaurant chains.

In October, the Conference Board's Consumer Confidence Index fell to 97.6, missing estimates for a reading of 103. September's reading was 102.6.  "Consumers were less positive in their assessment of present-day conditions, in particular the job market, and were moderately less optimistic about the short-term outlook," said Lynn Franco, Director of Economic Indicators at The Conference Board.

Meanwhile, the National Restaurant Association's Restaurant Performance Index (RPI), which tracks traffic and same-store sales trends at the nation's restaurants, declined to its lowest level in 11 months in August, falling about 1.2% from July. "Same-store sales and customer traffic softened from July's strong levels," Hudson Riehle, senior vice president at the association, wrote in a statement.  

Amidst the apparent consumer pullback on spending to eat out, one restaurant may be doing well due to its renewed focus on offering greater value -- long-struggling McDonald's (MCD) - Get Report .

On Oct. 22, the fast-food giant reported third-quarter earnings of $1.40 a share, trouncing forecasts for $1.27 a share. U.S. same-store sales rose for the first time in two years, gaining 0.9% compared to Wall Street's forecasts for a 0.2% decline.

According to the company, it saw solid demand for Egg McMuffins, which could typically be found on its dollar menu and more. 

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