McDonald’s, Chipotle among restaurant profit gainers and losers

Restaurant companies are navigating some of the same challenges in the second quarter divided into two categories: winners and losers.

Some chains said high menu prices were driving diners away, while others said consumer behavior had not changed despite food and drink prices rising. Promotions drove customers to certain restaurants or dropped off as diners focused on value. And low-income customers visited some restaurants more often, but not others.

In general, foot traffic to restaurants has decreased. Sales growth slowed as many restaurants halted another round of price hikes that drove strong profits a year ago. Customers have become more selective about how they spend their money, including where they eat, leading to a stark difference in the chains’ performance.

While most restaurant companies beat earnings expectations, many missed Wall Street’s quarterly revenue estimates. McDonald’s and Wingstop both reported second-quarter earnings, revenue and same-store sales growth that beat analysts’ expectations, a rarity for restaurant companies in the quarter.

On the other hand, Papa John’s, Wendy’sand Chipotle Mexican Grill was among the companies that disappointed investors with weaker-than-expected sales. Shares of all three companies have yet to recover.

Here are three trends that defined the quarter and determined its winners and losers:

Two metrics shape a company’s same-store sales growth: how much customers spend per order and how often they visit the restaurant chain.

As eateries delay more price increases and customers watch their wallets, restaurants must rely on a second metric—traffic—to increase same-store sales. And Wall Street is watching closely.

“Investors certainly want a lot of traffic as a sign of health for concepts,” TD Cowen analyst Andrew Charles told CNBC.

McDonald’s, Chipotle, Texas Roadhouse and Wingstop were among several chains that reported traffic growth in the U.S. last quarter.

On the other hand, Restaurant Brands International It said U.S. traffic is slipping for three chains: Popeyes, Burger King and Firehouse Subs. Rival Wendy’s reported a 1% decline in domestic operations in the second quarter.

Looking ahead, traffic may decrease further in the second half of the year.

“And as we move into 2H23, menu prices are likely to decline rapidly as inflation no longer justifies prices, and comps, which prevent rapid traffic turnover, will optically decline just as quickly,” Barclays analyst Jeffrey Bernstein wrote in an Aug. 23 note to clients. must fall”. 11. “In our view, this does not bode well for restaurant stock performance in the coming months.”

Inflation is cooling and more economists are predicting a “softer recession” than a recession. But consumers are still looking for value.

Broadly, the fast-food sector has benefited from consumers trading in cheaper burgers and tacos from fast-casual restaurants. But consumers’ perception of value differs across chains.

For example, McDonald’s CEO Chris Kempczinski said his chain performed well with consumers making less than $100,000 and those making less than $45,000. On the other hand, Wendy’s CEO Todd Penegor said he has seen the burger chain pull back from acquisitions of restaurants that make less than $75,000.

Likewise, Wingstop said customers’ perception of its value has improved, coinciding with falling chicken wing prices.

“We are seeing positive trends in value scores with guests in an environment where many brands are measuring decline,” Wingstop CEO Michael Skipworth told analysts.

Fast-casual competitor Chipotle has also benefited from diners’ acceptance of the value of burrito bowls. CFO Jack Hartung told analysts that Chipotle has seen more low-income consumers return to its restaurants than a year ago.

However, Chipotle’s lower-income customers don’t visit as often as they did before inflation began to accelerate. The chain has suspended price increases for now, but will decide whether to raise them again closer to the fourth quarter.

A fast-casual chain struggles with consumers’ perception of value. Noodles & Company It said traffic reached double digits in the first part of the quarter as customers pushed back against higher prices, which were up 13% from the previous period. In response, Noodles lowered its prices by 3% and refocused its marketing on value.

Discounts and combo meals have stolen much of the marketing thunder as restaurants and customers focus on value. Limited-time menu items also helped sales at some restaurants, but weren’t enough to offset the weakness for others.

At one end of the spectrum was McDonald’s. The burger chain’s Grimace Birthday Meal created buzz on social media and drove traffic to its restaurants.

“The theme this quarter was, frankly, Grimace,” CEO Kempczinski said on the company’s conference call.

The promotion featured key menu items like a purple Grimace milkshake and a choice of a 10-piece McNugget or Big Mac for a limited time. Leaned on nostalgia for the mascot.

But not all promotions have been top-notch for restaurants.

For example, Papa John’s In May, Doritos released Cool Ranch flavored Papadias for $7.99. The limited-time menu created buzz on social media and drove traffic to the restaurants, executives said. However, the new Papadias couldn’t compete with the chain’s pepperoni crust pizza, which it launched a year ago for $13.99.

“That traffic increase wasn’t enough to offset the check decline, and so you had weaker same-store sales,” BTIG analyst Peter Saleh said.