Which is a better indicator of future industry performance: consumer-related economic data or the performance of restaurant stocks so far this year? You can decide as we explore a pair of restaurant industry reports from Wall Street analysts.

In a published overview of the foodservice business, Bank of America Merrill Lynch comes across as essentially cautious. Merrill’s analysts state that disposable income has been flat in the last several months and they believe this metric correlates highly to restaurant sales. On the reverse side they believe the national employment picture is improving and commodity prices are “relatively subdued.”

While restaurant hiring and operator sentiment are “bullish” Merrill’s analysts feel consumers are allocating their spending toward other goods and services instead of restaurants. Forty years ago when the economy was experiencing a recession every three or four years, an industry expert theorized that eating out was sort of a lagging indicator. Restaurants meals were one of the last things that people gave up, and, when they became more confident, consumers began buying more big ticket items and driving up their monthly payments. As a result, once consumers looked at their bills they elected to forgo their night out at a nice restaurant. Perhaps that’s what's happening to a certain extent now.

Another Wall Street firm, Deutsche Bank A.G. seems very positive about the potential of restaurant stocks. Their stock pickers report share price for every restaurant chain they cover is positive for the year. In fact, the firm points out that the average restaurant stock picked by Deutsche is up 13 percent while the S&P 500 index is up just 2 percent. Deutsche has strong buy recommendations for McDonald’s, Buffalo Wild Wings, Del Frisco Restaurant Group, Panera Bread and Starbucks.

Economic News This Week:

  • Employment reports were fairly positive this week. Initial jobless claims fell to 343,000, a decline of 5,000 for the week ending June 29. The 4-week average for first-time claims fell to 345,500, a decline of 750. ADP, the major payroll processing firm, estimated that the private sector added 188,000 jobs in June. Small businesses added 84,000 jobs, medium-size concerns added 55,000 and large businesses added 49,000, according to ADP. The Bureau of Labor Statistics research found there were 202,000 new private sector jobs added last month while government jobs, mostly federal, declined by 7,000 for a net gain of 195,000. The BLS also reported the unemployment rate stayed identical to May at 7.8 percent. However if “discouraged workers” (those who have given up trying to find employment) and “involuntary part-time workers” (those with part-time jobs who want full-time positions) are counted, unemployment and underemployment totals 14.3 percent. And while adding 200,000 jobs a month is encouraging, it is not enough to bring down unemployment very quickly.
  • Car and light truck sales increased at the fastest rate in five years in June. Sales volume was up 7.7 percent compared to the first 6 months of 2102 with most manufacturers reporting significant increases. Large pick-up truck sales from Chrysler, Ford and GM were up 26 percent from a year ago. One Ohio dealer said a lot of his truck sales were to companies working the area’s shale oil and gas fields.
  • The Institute for Supply Management’s Manufacturing Index inched back into positive growth mode in June at 50.9 after scoring 49 in May. New orders rose to 51.9 after hitting 48.8 in May but the employment component fell to 48.7 after reaching 49 in May.
  • The Institute for Supply Management’s Services Index fell back to 52.2 in June, down from 53.7 in May. The index tracked fewer new orders but the employment gauge rose.
  • Factory orders measured by the U.S. Department of Commerce rose 2.1 percent in May with shipments increasing 1.0 percent. The DOC also revised April factory orders up to 1.3 percent vs. 1.0 percent previously reported.
  • Construction spending increased 0.5 percent in May. Housing spending led the way with a 6.2 percent rise over May 2012. Spending on new home construction remains one third lower than the average for 2006 and 2007.
  • Home prices in May rose 2.6 percent compared to April and also rose 12.2 percent compared to May of last year. CoreLogic states that this is largest price increase since February 2006.
  • Vacancies of retail properties fell to their lowest level in 4 years in the second quarter this year, according to real estate research firm Reis, Inc. but vacancies remain higher than before the recession. The company also said rental rates increased 6 cents a square foot.

Foodservice News This Week:

  • Foodservice operators added 51,700 new workers in June on a seasonally adjusted basis, according to the U.S. Bureau of Labor Statistics. This means of the 202,000 jobs added to the economy last month, 1 of 4 workers was in foodservice.
  • Listing restaurant chains by sales gives observers an interesting comparison but how do the chains do compared to other retailers? Thanks to the National Retail Federation we know that McDonald’s was the 10th largest retailer in the U.S. last year. YUM! Brands was 24th, Subway was 32nd, Wendy’s 44th, Burger King 47th, Darden 50th, Dunkin’ Brands, 61st, DineEquity 63rd, Chick-fil-A 80th, Brinker 86th, Bloomin’ Brands 90th, and Sonic came in at number 95. This is not a bad showing and probably better than some would have guessed.
  • The use of payroll cards has created a controversy with claims that employees who receive their pay with this system are subject to excessive fees when they use the cards. The N.Y. attorney general has requested information from more than a dozen firms using payroll cards, which include Darden & Wendy’s. New York law requires employers who use the payroll cards to get employees’ acceptance in writing. Darden defended the cards and noted that employees who don’t have bank accounts could potentially incur fees if they were paid by check.
  • A Florida law banning video slot machines and other gambling systems has resulted in police raids on video parlors and so called internet cafes. But the owners of these places are crying about “selective enforcement” and filing suites to have upscale places like Dave & Busters shut down, too.
  • New York City’s city council speaker has announced that if she is elected mayor next year she will require food chains to provide children’s meals meet the same nutritional standards as the federal school lunch program.
  • KFC’s new fast-casual concept in Louisville will offer salads, sandwiches, flatbreads, and rice bowls as well as the chain’s original recipe chicken. The operation may be called KFC Eleven.
  • O’Charley’s CEO, in an interview with The Tennessean revealed that the chain has completed nearly 30 “reimages” in Tennessee so far this year and 26 “exterior only packages” throughout the country. In addition, the company has outfitted all of their locations with a kitchen display system to assure faster service and aligned all of the kitchen platforms to assure consistency.
  • Growth Chains: Huddle House will open 135 restaurants in south east Texas including San Antonio, Waco and Fort Worth in the next 5 years. Tropical Smoothie Café has agreed to multi-unit development to open five locations in Raleigh, N.C. in the next three years. Five Pies Pizza has signed an agreement to open 12 units in Austin, Texas. Noble Roman has 70 take and bake stores open and another 112 in development.

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