Why auto sales dug into restaurant sales despite more spending

Market Realist

Why restaurant sales are important

Food services and drinking place sales are an indicator that’s published monthly by the US Census Bureau. Analysts often follow this data to get a sense of where the overall restaurant industry’s sales are headed. When the industry does well, it tends to help companies within the industry. On the other hand, poor industry performance often spreads to companies.

(Read more: Why do most workers at McDonald’s work part-time?)

August sales follow July’s increase

In August, eating and drinking place sales totaled $45.9 billion on a seasonally adjusted basis—up 0.34% from the $45.72 billion in July. While August’s data was an improvement from July’s, it still remains roughly $200 million below the record of $46.1 billion we saw in April. Compared to the monthly growth rate of 0.53% in July, August’s increase was moderate. It was likely negatively affected by car sales—a trend we’ve been seeing since April that has benefited car companies like Ford and General Motors.

On a position note, year-over-year growth turned higher in August, rising from 3.69% in July to 3.81%. The three-month moving average, though, remains in a downtrend. Analysts often use year-over-year growth to get a sense of how fast sales are expected to grow annually, which they then use to estimate earnings growth. The National Restaurant Association currently estimates 4.0% annual growth in 2013 if monthly employment is in the 180,000-to-200,000 range.

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

Restaurant Stock Performance 2013-09-05

The impact of year-over-year growth on share prices

Since peaking at ~9.0% in 2011, year-over-year sales growth has declined. Because share prices often move on the growth rate, lower growth has negatively affected the stock performances of companies like McDonald’s (MCD), Panera Bread Co. (PNRA), Chipotle Mexican Grill Inc. (CMG), and Darden Restaurants Inc. (DRI). While some companies managed to produce strong gains, they were outliers.

(Read more: Must-know: Majority of fast food workers “not” above 25 years old)

Consumers focusing on other goods

In the short to medium term, restaurant companies as a whole may underperform other retail stocks as people decide to spend more on discretionary goods. With 47% of people saying they’re not eating at restaurants as much as they like, according to National Restaurant Association’s September statistics, there’s still room for restaurant companies to increase sales.

Investors can rotate in and out of stocks and industries if they see emerging changes to consumers’ spending behavior. However, that can take up quite a bit of time. Investors can use ETFs such as the Consumer Discretionary Select Sector ETF (XLY) and iShares Dow Jones Consumer Services ETF (IYC) to gain exposure to other consumer industries like autos while still investing in restaurants.

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