The U.S. consumer may be under some stress right now, and to gauge that look no further than what they are (or aren't) putting in their mouths.
Over the past month we have received a flurry of negatives from major restaurant players. Remember, this was a sector that up until the summer was doing pretty well -- consumers were responding to promotions, price increases were being passed through, and repeat visits during the week were happening due to low gas prices. However, as the stock market took a hit in the summer, it seems that consumers sat down in September and reassessed what they were spending. In other words, they made a decision to save that money being saved from a stop at the gas station.
This is a big difference from earlier in the year, and a big shift in the investment thesis on the restaurant industry and the consumer discretionary sector.
Here is the information we have so far:
Dunkin' Brands (DNKN): DNKN warned a couple of weeks ago that consumers were showing some resistance to menu price increases. I will be talking with the CEO today post-earnings for TheStreet at 9:30 a.m., so pay attention to my Twitter feed (@BrianSozzi) for updates. I am curious to learn if traffic has improved since the recent warning in light of the stock market's bounce.
Brinker International (EAT): A pretty weak quarter, and some tough talk from the CEO about there being a sense of urgency to improve performance. I believe it's a red flag on the consumer that they visited Chili's less as the company pulled back on promotional support and instead invested in getting the word out on a new loyalty program.
Chipotle (CMG): I can't recall when the better burrito chain hinted that sales were running only OK. That is what went down earlier this week, with the company saying sales in October were "choppy." Another red flag on the consumer seeing as Chipotle has recently pushed through new price increases at a majority of its locations.
I believe you will be able to broaden out the reads on the restaurant industry to major retailers. After all, Wal-Mart (WMT) told us last week low-income households continue to shop with a cautious mindset while middle-income families are not shopping as often as execs at the retailer would prefer.
Here is what to be looking for in these restaurant results to make some broader consumer discretionary calls:
1. Traffic: For Chipotle, traffic to its restaurants seemed to cool after July -- continuing right on into the current quarter. If this is being seen elsewhere in the sector, it may mean weak results from specialty retailers (notably Gap (GPS), which has already been struggling) as fast casual restaurants are positioned in, and around, shopping centers.
2. Wage inflation: Restaurants were hammered in the third quarter by higher wages and so was Wal-Mart for that matter. To see people not spending those higher wages (perhaps at the places where they work) is a red flag leading up to the holiday season.
3. China: Restaurants have largely been afforded premium valuations because of their growth opportunities in China. But the recent news from Yum! Brands (YUM) has sent shockwaves through the fast-food industry. I would be on the lookout for weak results from McDonald's (MCD) in the region, which in turn could be broadened out to include Starbucks (SBUX) and even luxury apparel makers such as Coach (COH). Starbucks isn't going to post disastrous results from China, but even the slightest hint of slower growth will upset the market.
Speaking of Coach, I would be concerned on the quarter and outlook and over the next 12-months. Other than slowing China growth, I think the market is underestimating how other companies are going after the men's accessible luxury goods market. For Coach, this market has been pitched to investors as a key growth driver.
I spent Wednesday afternoon with the head designer for Tumi (TUMI) and left very impressed by how the company is broadening out its men's business into a more lifestyle collection. Tumi has reengineered products to make them more intuitive (and remove some costs I think), and has gained more distribution in Nordstrom (JWN) for 2016. Not to mention the company is starting to have its products sold on the first floors of department stores (where Coach calls home), instead of simply the luggage section.