Restaurant performance index soft, negative for sales

Market Realist

Restaurant performance index falls in July

The RPI (Restaurant Performance Index) stood at 100.7 in July, down 0.6 percent from June’s level of 101.3. The index is published at the end of every month by the National Restaurant Association and reflects the health of and outlook for the U.S. restaurant industry in a month before. Investors can interpret the decline in the index for the month of July as somewhat a negative for companies like Mcdonald’s Corp. (MCD), Yum! Brands Inc. (YUM), Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA).

(Read more: Why fast food business owners can’t offer $15 per hour)

Construction and interpretation of index

The RPI is constructed so that the performance of the restaurant industry is measured relative to a steady state. Values over 100 indicate that the restaurant industry is expanding, while those below suggest the industry is possibly in contraction.[1. Some topics that are surveyed include same store sales, traffic, labor and capital expenditures.] As such, when United States went into recession from 2008 to 2009, the RPI index fell below 100, and reached as low as 96.5 at the end of 2008 before bouncing back up along with share prices of several restaurant stocks.

(Read more: Fast food companies pay near minimum wage, yet high wage expense)

Reason for July’s soft data

July’s soft data appears to be driven by customers allocating a larger portion of their money towards big purchases like cars, houses and furniture, which has been a trend since May. With car sales strong in August, investors should be surprised if restaurant performance index falls again when August data is released at the end of September.

(Read more: Why mega fast food companies depend on macro trends)

Effect on share prices

Since stock prices move based on current earnings and expected earnings, when the RPI (the outlook) is rising, it bodes positive for stocks like MCD, YUM, CMG and PNRA. When the RPI is falling, you can expect share prices to fall. But As long as outlook holds above or around the steady state of 100, investors can expect the overall restaurant industry’s earnings to grow.

Thus, the declines we’ve seen in July can be interpreted as a short-term negative in a long-term positive for companies mentioned, which may suggest a sideways trend for shares mentioned above. But since the data is released with quite a bit of lag, investors may want to use it as more of a confirmation indicator rather than a leading one. August data for food retail sales and service PMI, which can give some clue to investors regarding the prospects of current and future restaurant sales, are already out.

Effect consumer ETF

This is also applicable to the Dow Jones Consumer Service ETF (IYC). Keep in mind, however, the ETF also invests in other parts of the retail tha could be performing well.  investor should keep in mind that other parts of the retail sector could be performing well.

 

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