While it was somewhat new to see Chipotle (CMG) shares get whacked in response to earnings, and Yum! Brands (YUM) shares rise, the collective reports served up worthwhile clues on the health of the U.S. consumer.
And no doubt, the health of the U.S. consumer has been in doubt of late in spite of ebullient consumer confidence readings and a resilient stock market. Retail sales over the last several months have been a colossal disappointment from two perspectives: outright consensus misses and weak absolute core numbers.
Meanwhile, reports surfaced throughout the first quarter that traffic to restaurants, in spite of cheaper fuel costs, fell as inclement weather wreaked havoc on traveling plans. This was something Chipotle confirmed Tuesday evening, and Brinker International (EAT) earlier in the day with its traffic declines at both its Chili's and Maggiano's. If the consumer were truly living in a state of amazement, say one consistent with prior economic expansions over the past 10 years, I suspect the cars would have been packed up for a family run to eat out, even in torrential rains and the freezing cold.
But, now, we are beginning to get more concise reads into the consumer and economy beyond anecdotal evidence. Here are three things that have caught my attention from restaurant earnings.
No Rebutting Price Increases, Which Is a Good Thing
Chipotle's same-store sales in the quarter benefited from a 6.1% menu price increase, largely taken back in the second quarter of last year. Consumers mostly did not trade down -- demand during peak lunch and dinner hours stayed strong, and Chipotle pumped them through the line even faster. Chipotle will be raising prices on its beef products by 4% to 6% in the third quarter, which theoretically shouldn't harm sales based on the non-resistance on the part of consumers in 2014.
On the other hand, sit-down eatery Brinker's International also passed along price increases in the first quarter, though more moderately than Chipotle. Same-store sales at both of its chains increased instead of slipping from disapproving customers.
Some will say this is the first round of evidence of Fed-driven inflation. I would counter that it's good to see companies finally have pricing power amid headlines of meager hourly wage growth on the part of Americans -- it makes equity valuations easier to digest.
More People Are Eating Breakfast -- on the Run to Work
Taco Bell has been on the attack vs. McDonald's in breakfast with new high-profile TV ads and a host of new products and promotions. Taco Bell's parent company, Yum! Brands, tells me more innovations are on the way this year, so look out McDonald's. Importantly, Taco Bell's innovations are driving profitable sales, which only happens if people are stopping at the chain on their way to work.
The sales gains for Taco Bell during breakfast hours suggests to me the Bureau of Labor Statistics' employment report may be understating the health of the job market (not sure it counts those cash-paying off-the-books gigs). And if that's the case, consumers may be poised to open up their wallets during key spending periods like Memorial Day, July 4 and Black Friday.
What, you didn't think sales of breakfast burritos were economic indicators?
Restaurants Are Offering New Services
Chipotle confirmed that it would be unveiling a delivery service with courier network Postmates in 64 cities and 24 major markets, a development TheStreet reported in March. The burrito giant is also investing to launch Apple Pay later this year (it needs updates to point-of-sales hardware and terminal software to support). For its part, Yum! is looking at delivery in the U.S., and continues to improve its mobile apps. All these tech-driven investments, similar to leader Starbucks, are byproducts of execs being pleased with the sales and profit responses during test phases. Positive responses to delivery and ordering of fast food on apps only happens if the consumer wants to spend -- they very easily could make a can of soup in the office microwave or reheat leftovers at home for dinner.