As restaurant chains grapple with slowing traffic and wage pressures tied to inflation, BTIG Managing Director Peter Saleh and Morningstar Senior Equity Analyst Sean Dunlop join Yahoo Finance Live to discuss consumer spending pullbacks.
Saleh notes that while the US consumer has shown resilience, "not all consumers are created equal." Chains catering to lower-income customers will feel pressure first. However, brands like Chipotle (CMG) and Texas Roadhouse (TXRH) that appeal beyond just lower income groups had "really healthy numbers."
Dunlop says two key factors are "consumer health" and brands being "different operationally." Value-oriented names like Domino's (DPZ) and Papa John's (PZZA) can withstand consumer cutbacks. Meanwhile, Dunlop expects outperformance from Starbucks (SBUX), McDonald's (MCD), and other chains boasting "massive loyalty programs" that offer "personalized value" to retain customers amid traffic declines.
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Editor's note: This article was written by Angel Smith
Video Transcript
AKIKO FUJITA: While sluggish store traffic combined with wage pressures are weighing on fast food restaurants. The latest earnings pointing to consumers pulling back on spending, opting for more value with tighter budgets. We've got a panel lined up to discuss which companies are best positioned in this environment.
Sean Dunlap is Morningstar senior equity analyst and Peter Saleh, BTIG managing director restaurant analyst. Good to talk to both of you today. Peter, I'm going to start with you because it feels like restaurants are getting squeezed on both ends right now. You've got the wage pressures, you've got the cost of food.
Yes, coming down but still pretty elevated and then you've got consumers who are saying, well, we want better value right now. Who do you think is best positioned in the landscape?
PETER SALEH: Yeah, so thanks for having me on. Look, I think all those are true but the US consumer is actually doing quite well. But not all consumers are created equal. So if you cater to that lower income consumer you are feeling some pressure and that's the traditional QSRs that you see out there. The hamburger QSRs with the drive-thru. They are feeling some pressure with that lower income consumer.
But in general, the consumer is pretty good. I mean, you look at the numbers from Chipotle mid to high single digit traffic gains in the last quarter. Look at the numbers from Texas Roadhouse, mid single digit traffic as well. Shake Shack, so Wingstop. So you're seeing some really healthy numbers out there. Overall, I think the consumer is healthy.
But again, the lower income consumer is still pulling back and those discounts are designed to bring them back in. But it has not worked quite yet.
AKIKO FUJITA: Sean, you know Peter just mentioning that all consumers are not the same. We had a guest on yesterday who said, look, when you talk about consumer facing brands, it's not necessarily the blame on the consumer, so much as it is about companies not being able to execute in a certain environment. So when you look across the landscape here, who do you think is executing the most.
I mean, how do you think investors need to differentiate some of these names even though the overarching narrative is out there?
SEAN DUNLOP: It's a great question. I think as we look across the restaurant landscape, there are two sets of factors right now. One of them is exogenous that ties to consumer health that ties to the value driven decisions that some of them are making. The other point as you rightly make is that these brands are different operationally in a number of ways.
We like in the current environment brands that are positioned to cater to consumers desire for value, you think about pizza chains like Domino's or Papa John's. You think about historically McDonald's being able to compete on the value end of the menu, barbell pricing is obviously very popular right now. But we also like brands that have strong digital touchpoints.
You think about a Chipotle that does 30% to 35% of its sales through digital channels. You think about Yum Brands doing 45% of system wide sales through digital channels. And you think about brands like Starbucks and McDonald's that have massive loyalty programs and are able to meet consumers with personalized value messages that cater to them propping up traffic without relying on costly national discounting.
And those are the brands that we expect to continue to outperform in the current environment. We do like Starbucks, we do like McDonald's, we think the current environment favors the biggest best run restaurants and we think that's a dynamic that's likely to continue to play out over the mid-term.
