By Waylon Cunningham
May 4 (Reuters) – Several U.S. restaurant chains including Wingstop and Domino’s reported weaker-than-expected sales growth in the latest quarter, saying that soaring gasoline prices caused by the U.S.-Israeli war on Iran have forced their customers to cut back on other spending.
Many don’t expect consumers to feel relief anytime soon. Analysts expect other restaurant chains also will show declining sales growth in upcoming earnings including Shake Shack and Jack in the Box, according to LSEG averages.
The U.S.-Israeli war on Iran, which began in February, has brought the worst-ever disruption to global oil supplies, driving up average U.S. gasoline prices to $4.43, a nearly 40% increase since this time last year, according to GasBuddy.com.
Gasoline prices have broken $6 in California, which regularly ranks as the largest state for restaurants.
Wingstop, a chicken-wing chain that pitches itself on affordability, said higher pump prices contributed to an 8.7% plunge in quarterly same-store sales. While CEO Michael Skipworth said it was “extremely difficult for anyone to predict this macro environment”, he told investors Wednesday to expect shrinking sales over the year in part because of expectations that pump prices will remain high.
Even chains that did well in the latest quarter are staying cautious. Chipotle, which posted better-than-expected same-store sales growth of 0.5%, maintained an outlook of flat growth over the year, which Chief Financial Officer Adam Rymer attributed in part to uncertainty over the war and gasoline prices.
Wall Street forecasts reflect the darker mood. In April, nearly twice as many restaurant analysts cut profit forecasts for next quarter as raised them, according to LSEG data.
Flagging investor confidence in the sector is also evident in the 5% drop in the LSEG U.S. restaurant index since the start of the war, erasing more than $40 billion in market value, according to LSEG data.
The $4 mark at the pump is a tipping point, according to Sebastien Fernandez, chief analyst at U.S.-based restaurant consulting firm Revenue Management Solutions. Shortly after the war began, the firm analyzed 14.6 billion restaurant transactions over the last four years and found that as pump prices rise, restaurant visits gradually tick down — until the $4 mark, at which point the impact doubles.
The firm estimated that $4.20 average gasoline prices mean approximately 1.5% fewer visits, and if pump prices reach $5.10 or more, fast-food restaurants could see a 3% drop in traffic.
The firm estimated that for a restaurant drive-through with 300 daily transactions, a $1 spike in gasoline prices loses the restaurant about six customers a day, piling up to $22,000 in lost annual sales.
Even before the latest spike in fuel costs, customers had been cutting back on restaurant spending, prompting costly discounts to win customers back. On Wednesday, Yum Brands’ Taco Bell, which launched a value meal starting at $3 in January, reported 8% quarterly same-store sales growth in its U.S. restaurants.
“We’re seeing a record level of value menus right now,” said Mark Wasilefsky, head of restaurant finance at TD Bank.
Domino’s CEO Russell Weiner told investors on Tuesday that his chain’s competitors ran promotions “out of our playbook”, partly contributing to the chain’s weaker-than-expected 0.9% U.S. same-store sales growth. Although Weiner said his chain was better positioned to sustain these discounts, the company still cut sales forecasts for the year.
Starbucks, which reported 7.1% quarterly same-store sales growth in North America on Tuesday, may have actually benefited from the gloomy consumer outlook. CEO Brian Niccol told investors the company had gained among lower-income consumers who saw the chain’s beverages as “a little bit of indulgence.”
Demand for affordable indulgences, such as sweet beverages instead of vacations, has fueled growth at some restaurant chains.
The next major indicator will come from McDonald’s, which reports results on May 7 and last quarter posted stronger-than-expected sales amid a drive to push value meals.
(Reporting by Waylon Cunningham; Editing by David Gregorio)
Comments