As we approach the end of the year, the outlook for restaurant traffic remains subdued, with UBS Securities projecting continued challenges throughout the upcoming months. The analysts highlighted several concerning factors, such as the waning strength among middle-income consumers, persistently high pricing levels, and the looming impact of the US presidential election scheduled for November.
Despite these challenges, UBS analysts, including Dennis Geiger, noted potential relief stemming from easing comparisons and strategic marketing campaigns that could bring some much-needed lift to the industry's performance. The first half of the year has exhibited "challenged" traffic trends, and analysts caution that this trajectory may persist.
However, they also pointed out that marketing strategies, limited-time offers, and value deals could play a role in improving the overall traffic trends in the forthcoming months. “Our franchisee discussions continue to highlight modest traffic benefits from value deals and promo offers, while select new menu items and marketing campaigns are driving sales boosts,” the analysts stated. Particularly, the fast-food giant McDonald's ($MCD) has been experiencing "modest" benefits from its $5 meal deal, which has helped maintain high visit levels since its launch in June, according to Placer data cited by UBS.
Similarly, Restaurant Brands International's ($QSR) Burger King has seen a "modest traffic boost" from its own $5 "Your Way Meal," coupled with an uptick in visits due to the launch of their Fiery menu. Moreover, the analysts noted that meal deals at convenience stores remain a crucial factor for traffic in the foodservice channel, benefiting from new deals and varied options in the marketplace. On Thursday, CAVA Group ($CAVA) reported an impressive fiscal second-quarter performance, revealing a 14% increase in same-restaurant sales driven by a notable 9.5% growth in traffic.
This solid performance underscores the ongoing strength exhibited by several emerging fast-casual brands during this earnings season, according to UBS. “Ongoing momentum for select emerging fast-casual brands highlights benefits from on-trend and expanding menus, improved consumer awareness, and a compelling value proposition,” the UBS analysts expressed.
“In terms of value, some fast-casual brands are capturing greater market share, likely due to their increased exposure to a higher-income consumer segment that is less affected by current macroeconomic challenges, while the concept of 'value for the money' resonates strongly with customers.” Investors are currently favoring restaurants that demonstrate momentum in both traffic and same-store sales.
Particularly, brands like Texas Roadhouse ($TXRH) and Wingstop ($WING) are seen as well-positioned to sustain their strength as we move into the latter half of the year. UBS analysts noted, "Preference for quality defensive options has increased somewhat against a challenging macroeconomic backdrop, yet there is still mixed but growing support for select franchised quick-service restaurants that are positioned for resilience." Investor interest has also surged towards certain restaurants that have lagged in performance this year, presenting potential for "solid" returns, as indicated in UBS's note. Within the realm of casual dining, a significant spotlight has turned toward Darden Restaurants’ ($DRI) enticing "Never-Ending Pasta" promotion at Olive Garden, which kicked off on Monday.
The analysts suggest that this marketing strategy will likely benefit sales over the extended week, with investors keenly interested in understanding its potential repercussions on casual dining competitors should Darden ramp up promotional activities. This highlights the competitive and adaptive nature of the restaurant industry, particularly in an environment where consumer preferences and economic conditions are in constant flux. As we navigate through the remaining months of 2023, staying attuned to these trends, promotional strategies, and market shifts will be essential for investors looking to navigate the complexities of the restaurant sector effectively..