Three Areas of Optimism for Foodservice

At least two restaurant analysts see a glimmer of hope in the economic outlook for the foodservice industry.

With a consumer sentiment survey showing optimism and retail gasoline prices down from highs earlier, investment firm Morgan Keegan & Co. Inc. of Nashville, Tenn., issued a note this week that was subtitled “Resilient operating fundamentals provide a reason for hope.”

“We believe recent macro economic data appears to point toward gradual improvement including consumer sentiment hitting a five-month high last week,” said restaurant analysts Destin Tompkins and Bob Derrington, who added that it raised “hopes that an improving holiday season could provide a lift for the economy.”

“In addition, many chains could see a modest [same-store sales] benefit in December through February, as last year’s harsh winter weather will usher in somewhat easier [same-store sales] comparisons to end 2011 and begin the New Year,” the analysts wrote.

Tompkins and Derrington said the restaurant industry had made it through the third quarter “reasonably well.” Of 33 restaurant companies reporting quarterly earnings in restaurant weeks, 23 beat expectations, three met them and seven missed, the note said.

“While we are optimistic operating fundamentals for the industry will gradually improve through Q4 and into 2012,” the analysts said, “we acknowledge a number of challenges facing the industry, including a still fragile consumer spending environment —distinctly bifurcating the ‘haves’ and ‘have nots’ — and a continued difficult commodity environment contrasting the need for additional menu pricing at a time when a strong value message is demanded.”

The Morgan Keegan note cited three areas of optimism:

Consumer sentiment improves: Reaching a five-month high, the Thomson Reuters/University of Michigan Consumer Sentiment Index increased from 60.9 in October to 64.2 in the preliminary November reading, above consensus expectations for a smaller increase to 61.5. The headline figure was driven by increases in the Expectations sub-index from 51.8 to 56.2 and the Current Conditions sub-index from 75.1 to 76.6.

Gas prices dip: While gasoline prices remain elevated, they have slipped below the 25-percent year-over-year level, which Tompkins and Derrington said was “a psychological barrier which historically has caused a meaningful negative impact on consumer spending and restaurant sales.” The national average retail gasoline price was $3.42 per gallon last week, up 19.5 percent over the same time last year and up 12.2 percent year to date. The average price was down 13.6 percent from the 2011 high of $3.96, logged in early May.

Jobs grow slowly: The analysts called payroll growth “tepid.” On Nov. 4, the U.S. Labor Department released data showing that non-farm payrolls increased 80,000 in October, falling short of consensus expectations for an increase of 95,000. However, the unemployment rate declined 10 basis points to 9 percent, aided by revised payroll figures for August and September that showed that payrolls increased by 102,000 more than previously estimated. Separately, initial jobless claims reported for the week ended Nov. 5 declined 10,000 to a seasonally adjusted 390,000, below the consensus estimate of 400,000. New jobless claims, the analysts said, are “now at the lowest point since early April.”