Will the Revival of the Restaurant Industry Continue in 2015?

The U.S. restaurant industry remained under the weather at the beginning of last year, primarily due to the prolonged and severe winter that swept the country. Also, increasing food costs, weak consumer spending environment and a few political and general issues added to industry’s woes. But the industry started improving in the second half of the year on the back of better job prospects, stepped-up economic activities, improved business and renewed optimism as a result of the housing recovery.

Rising wages and cheaper fuel were the other positives. In fact, the economy recorded back-to-back quarters of strong growth in over a decade and is now well on track for the best annual job growth rate since late 1999.

Not surprisingly, consumer sentiment jumped to 93.6 in December from 88.8 in November, as per Thomson Reuters/University of Michigan. The final reading represents the highest level in nearly eight years. Consequently, according to TDn2K’s Black Box Intelligence, Dec 2014 recorded best same-store sales in the past three years while fourth quarter same store restaurant sales were the best in six years. Same store sales were up 0.8% year over year in 2014 as against a 0.1% decline recorded in 2013.

Same store traffic for the month of December grew 0.6%, the highest since Feb 2012. This reflects a real improvement in sales and not just the impact of rising prices. No doubt, the restaurant industry has been one of the stronger performing industries within the broader retail sector, with many industry players like Chipotle Mexican Grill (CMG -Analyst Report), Darden (DRI - Analyst Report) and Starbucks (SBUX - Analyst Report) performing really well.

Buoyed by positive sales and traffic and an optimistic outlook among restaurant operators, the Restaurant Performance Index (RPI), which tracks the health of and outlook for the U.S. restaurant industry was at 102.1 in November -- the 21st consecutive month in which the RPI scored above 100. This signifies expansion of key industry indicators.

The Current Situation Index remained above 100 in November -- the ninth consecutive month in which the index came above 100. Meanwhile, the Expectations Index stood at 102.8 in November, above 100 for the 25th consecutive month.

Given the recent trends, Black Box Intelligence expects industry performance in first quarter 2015 to be positive. However, inclement weather that took a toll on first quarter 2014 performance remains a concern.

Meanwhile, on a slightly pessimistic note, Orange County Register also expects the industry to remain in a post-recession state in 2015 as people are expected to dine out less frequently amid rising menu prices.

Zacks Industry Rank – Positive Outlook
Within the Zacks Industry classification, the restaurant industry is grouped within the broader Retail sector. We rank all 260+ industries in the 16 Zacks sectors based on earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd or Zacks Industry Rank of #177 and higher is 'Negative.'

The Zacks Industry Rank for the restaurant industry is currently #44. This implies that it is in the top 1/3rd of all industries ranked, highlighting the group’s near-term positive outlook. We believe that the positive outlook reflects improving consumer sentiment, same-store sales and traffic trends.

Earnings Trends
The restaurant industry falls under the broader Retail-Wholesale sector, which has an earnings and revenue beat ratio of 62.5% each.

Earnings grew 2.9% in the third quarter while on the revenue front the sector recorded an increase of 5.6% in the third quarter. The upside on both fronts reflects initiatives taken by the companies to boost traffic trends.

The 2014 fourth quarter earnings season is underway. Earnings are expected to increase 0.4% and 8.4% in fourth quarter and 2014, respectively. Meanwhile, revenues are expected to grow a respective 5.4% and 7.1% in the fourth quarter and full year 2014. The upside reflects improving consumer sentiment.

>> Continue to Restaurant Stock Outlook - Part 2

>> Continue to Restaurant Stock Outlook - Part 3