Analyst Bullish on Restaurants in 2015, Starbucks Payment App Hits Big and More

A Wall Streeter is bullish on restaurants in 2015. The housing market news was good in December. Should YUM spin off Taco Bell? McDonald’s financials remain weak while there is speculation on what Big Mac will trim from their menu. These stories and a whole lot more in This Week in Foodservice.

Joseph Buckley, the restaurant stock analyst for Bank of America Merrill Lynch, looked at 2015 and seemed to like what he saw. Buckley notes that comparable store sales turned positive in the last half of 2014 and he expects the trend to continue this year. He says that historically restaurant sales consume approximately 5 percent of disposable income so an improving job picture and falling gas prices represent positive factors.

He anticipates a rise in food prices this year but feels the increase should be manageable. Labor costs will also rise as more than 20 states have increased minimum wages and higher employment drives more employee turnover. Health insurance costs may rise as a result of the Affordable Care Act but Buckley notes these factors will impact the entire economy, not just the restaurant industry.

It should be pointed out that Buckley’s observations may or may not apply to the entire foodservice industry. Wall Street firms focus on the larger publically held companies and target a small number of chains to follow. In the case of Merrill Lynch, this consists of 20 companies.

Economic News This Week

  • Initial jobless claims fell to 307,000, a decline of 10,000 for the week ending January 17. The 4-week moving average rose to 306,500, an increase of 6,500.
  • Both housing starts and building permits issued increased during December according to the Census Bureau. December housing starts were estimated to be 1,089,000 on an annualized and seasonally adjusted basis, 4.4 percent more than November starts. The estimate for the year of 2014 is 1,005,000, an 8.8 percent increase over 2013. While far below historical highs, this marks the highest number of starts since 2007. The number of Building Permits issued for housing in December was 1,032,00 on an annualized and seasonally adjusted basis, down 1.9 percent from November.
  • Sales of existing homes rose 2.4 percent in December over November to a seasonally adjusted annual rate of 5.04 million homes. December sales were up 3.5 percent over December 2013 but for all of 2014 the National Association of Realtors put existing home sales at 4.93 million which is 3.1 percent less than 2013 sales.
  • The National Association Home Builders/Wells Fargo Builder Sentiment Index for January slipped by one point to 57. The Index continues to show that more homebuilders are optimistic than pessimistic about the market for new homes.
  • A Wall Street Journal/NBC Poll finds consumer economic confidence continues to improve. This month’s poll reports that 45 percent of the participants are “very satisfied” or “somewhat satisfied” with the state of the economy, up from just 28 percent from January 2014.

Foodservice News This Week

  • Should YUM! Spin Off Taco Bell? The restaurant stock analyst at Janney Capital Markets believes a spinoff would unlock more value for stockholders. Mark Kalinowski said that the YUM! Brands have “divergent sales trends.”
  • Menu items on McDonald’s chopping block will include some Happy Meals and some, or maybe all, of the McCafe offerings. A sample of 30 McDonald’s franchisees by Mark Kalinowski of Janney Capital Markets found that wraps and small fries were also on some franchisees hit list while at least one operator wants to drop all the worst sellers that make up the bottom 10 percent of the menu.
  • McDonald’s problems continue. The restaurant giant produced weak financials for the fourth quarter with a 21 percent drop in earnings for the period. Even the one bit of good news — a December increase in U.S. comparable store sales of 0.4 percent —was offset by the company warning of negative same-store sales in January. McDonald’s said fourth quarter profits were $1.1 billion, down from $1.4 billion in the fourth quarter of 2013. McDonald’s CEO stated that as a result of the chain’s situation the burger giant will slow down new store expansion this year.
  • Starbucks’ mobile app payment program is a major success. The chain reports that more than 13 million people in the U.S. use the Starbucks mobile app and they account for 16 percent of all the coffee chain’s transactions.
  • Minimum wage battles continue. A proposal in New York State to raise the minimum wage for tipped employees to $7 an hour from $5 an hour has brought sharp negative reactions from foodservice operators. One believes that patrons will reduce their tips and employees will end up making less money in the long run.
  • Credit card swipe fees will remain at 21 cents since the U.S. Supreme Court has let stand a lower court ruling that that approved the rate. Along with other organizations representing retail operators, the National Restaurant Association expressed disappointment, calling the swipe fees “gouging.”
  • Donato’s Pizza will open a new concept in the Columbus area featuring craft beers and live music.
  • Corporate Stirrings: Meritage Hospitality Group acquired nine Wendy’s units in Tallahassee Fla. The Shake Shack set its initial public stock offering at $14 to $16 a share and hopes to raise $69 million. Frisch’s Restaurants accused a former company executive of embezzling $3.3 million.
  • Food trucks better check their rearview mirrors: is that a food bike approaching? From coffee to beer to tacos, food bikes are sprouting up all over. And while they are a cheaper and more nimble, particularly in busy urban areas, there are some legal restrictions that limit their use.
  • Growth Chains: Blaze Fast Fire’d Pizza signed a franchise agreement for at least 60 stores in Canada. Pizza Rev plans to add at least 10 units in Boston in the next 4 years. Native Grill & Wings plans on opening 8 restaurants this year and on having as many as 100 locations by 2020. McAlister’s Deli signed 12 development agreements for 77 future units. Tijuana Flats opened nine restaurants last year and has one more set to open early this year. Hooters has signed a development agreement for 30 locations in South East Asia over the next 6 years. Fatburger announced a development agreement for three locations in the San Diego area. Coconuts Fish Café plans to open 8 cafes in Texas.
  • Comparable Store Sales Reports: McDonald’s (up 0.4 percent), Pizza Patron (up 17.1 percent), and Starbucks (up 5 percent.)

For details and same-store sales of other chains, please click here for the Green Sheet.

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