Consumers Skip Dining for Cars as Sales Slow: EcoPulse

Restaurant sales contracted in June and July, even as spending on other discretionary categories such as automobiles and homes grew, a sign some Americans remain budget conscious.

Results at casual-dining establishments fell 3.5 percent last month, following a 2 percent drop in June, according to the Knapp-Track Index. This marked the first two consecutive declines in the monthly index of restaurant sales after the industry was rocked by its worst streak in almost three years between December and February.

Preliminary data suggest that August sales still are weak, though “better than July,” said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970. The summer slowdown is a symptom of a “reallocation nation,” in which people choose between different discretionary items to purchase each month, he said.

Brinker International Inc., Cheesecake Factory Inc., Texas Roadhouse Inc. and Bloomin’ Brands Inc. were among casual-dining restaurant chains that cited slower sales in their most-recent quarters, as several companies cut earnings guidance.

“Consumers’ priorities change every month based on what they can afford,” Knapp said. Many Americans don’t eat out as often as they would like, and they’ve had to cut back “very begrudgingly” on meals away from home to help subsidize other purchases.

Best Year

Americans bought 5.39 million existing homes in July, up

17.2 percent from a year ago and the strongest month of demand since November 2009, according to data from the National Association of Realtors. Cars and light-duty trucks sold at a 15.7 million seasonally adjusted annualized rate, keeping the U.S. on track for its best year since 2007, when 16.1 million vehicles were sold.

With “only so much income coming in,” many consumers had put off auto purchases for several years, said Rob Morgan, who oversees $1 billion as chief investment strategist in Exton, Pennsylvania, at Fulcrum Securities LLC. Now, a “forced replacement cycle” for cars on the road more than a decade is helping boost sales, he said.

Douglas Benn, chief financial officer of Cheesecake Factory, cited auto and home sales during a July 24 conference call as a reason why “consumers, at least temporarily, are cautious about spending their discretionary dollars” at restaurants.

Missed Estimate

The Calabasas Hills, California-based chain reported net income of 54 cents a share in the three months ended July 2, missing the 57-cent average of analyst estimates compiled by Bloomberg. Cheesecake Factory now forecasts earnings of $2.10 to $2.15 a share for its fiscal year, compared with an earlier projected range of about $2.12 to $2.18.

Bloomin’ Brands, owner of Outback Steakhouse and Carrabba’s Italian Grill, also attributes weaker industry sales in part to “pressure on discretionary income” among diners, Chief Executive Officer Liz Smith said on an Aug. 1 conference call. The Tampa, Florida-based company reported second-quarter revenue on July 31 of about $1 billion, missing the consensus analyst estimate by 1.5 percent. It expects 2013 adjusted earnings of at least $1.10 a share, which was below the $1.13 consensus.

“This has been a choppy environment for us and for everybody,” Smith said.

Lagging Behind

The Bloomberg U.S. Full-Service Restaurant Index -- made up of 21 companies including Cheesecake Factory, Brinker, Bloomin’ Brands and Darden Restaurants Inc. -- has lagged behind the Standard & Poor’s 500 Index by 4.5 percentage points since July

9. That followed about five months when these stocks led the broader market by about 20 percentage points.

Weaker demand at restaurants “speaks to the bifurcated nature of this recovery,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC. Many low- to middle-income consumers have been “squeezed out” of spending on meals away from home as they save for back-to-school shopping, he said.

Education-related expenses -- estimated to be about $600 per household -- historically have taken a bite out of casual dining, though this year’s summertime weakness has been more pronounced, said Andy Barish, a San Francisco-based analyst at Jefferies & Co. That has added volatility to a sales environment that already was “very choppy,” he said, echoing Smith’s assessment.

Could Suffer

While restaurants try to rebound from this slowdown, some chains could suffer until consumer confidence improves, said Barish, who maintains a buy recommendation on Red Robin Gourmet Burgers Inc. and a hold on Cheesecake Factory. Sentiment, as measured by the Bloomberg Consumer Comfort Index, fell to minus

28.8 in the week ended Aug. 18, the lowest in two months.

Higher payroll taxes and gas prices, along with sequestration -- automatic, across-the-board federal spending cuts, also continue to constrain many diners’ budgets, Knapp said.

U.S. paychecks shrank this year after Congress and President Barack Obama let the tax that funds Social Security benefits revert to 6.2 percent from 4.2 percent. Meanwhile, the average price of a gallon of regular unleaded gasoline rose as high as $3.67 in mid-July, the most since March, based on data from Heathrow, Florida-based AAA, the largest U.S. motoring organization.

Even with the sluggishness, the industry’s performance doesn’t necessarily suggest a broader economic slowdown is imminent, Luschini said. Rather, weak casual-dining sales show that some households continue to struggle, living paycheck-to-paycheck, and must “decide where to allocate what discretionary capital they may have.”

Curbed Appetites

Morgan also hasn’t become more cautious just because Americans have curbed their appetites for dining out. He’ll continue to monitor sales of homes and cars, looking for a slowdown in these purchases before becoming concerned, he said.

He maintains an equal-weight recommendation on consumer-discretionary stocks in part because “the job market seems to be picking up steam,” he said. “I wouldn’t go underweight on all consumer-discretionary sectors just because restaurant sales are declining.”

U.S. employers added 162,000 workers in July, capping 13 consecutive months above 100,000, the longest such streak since the 33 months ended in May 2000, based on figures from the Labor Department.

The “crowding-out” that happened in July even could point to some positive signs ahead for casual dining, Brinker Chief Financial Officer Guy Constant said on an Aug. 2 conference call. That’s because improvements in big-ticket purchases may be a sign that restaurant sales also will improve. The Dallas-based company operates the Chili’s Grill & Bar and Maggiano’s Little Italy chains.

“Broadly speaking, this is the start of what we hope is a turnaround in macro numbers that we’ve been waiting for for a long time,” he said.

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