Restaurant Executives Cautious On Consumer, Economy
Despite posting increased sales and profits in the second quarter, many of the restaurant industry's largest companies did not sound optimistic that strong trends would continue and were cautious on the economic and consumer environments for the second half of the year.
Restaurants' gains in sales and profits in the second quarter were all hard-won, executives said, as consumer confidence continues to waver in markets across the globe, spurring brands to take menu price increases, accelerate promotional activity and intensify their efforts to take market share from equally active competitors. Yet, certain restaurant stocks were hard hit as investors read into comments made about the remainder of the year and the unsteady state of spending, sentiment and job growth. Even restaurant chains performing well tempered comments for Wall Street.
Nation's Restaurant News looked at five companies — BJ's Restaurants Inc., Chipotle Mexican Grill Inc., McDonald's Corp., Papa John's International Inc. and Starbucks Corp. — to report the straight talk from second-quarter earnings conference calls with analysts and investors. Papa John's stands alone in its confidence.
BJ's Restaurant & Brewhouse
Officials said BJ's enjoyed another quarter of gains in market share, earnings and sales because of continued unit growth and sales-driving menu strategies. Second-quarter net income rose 10 percent, while revenue increased 18 percent. The chain's 4.4-percent gain in same-store sales included 3.2-percent hikes to menu prices and a 0.8-percent uptick in traffic.
BJ's announced that it will expand its test of its first television marketing campaign.
In a call with analysts, Jerry Deitchle, chief executive for BJ's Restaurant & Brewhouse, said:
"It is not going to be easy; it is a struggle. Even for the larger consumer companies out there — and we see all the earnings releases and sales commentary of other restaurant companies that are much larger and stronger than we are, and some of the softening trends they're seeing — it's a toughening environment. If we could ever get a little bit of tailwind here, it would have a remarkable effect on our business — but we're all fighting the headwinds now."
Chipotle Mexican Grill
Same-store sales growth slowed sequentially from April to June for Chipotle, yet the company still managed an 8-percent same-store sales increase for the quarter. Many on Wall Street thought that was a sales miss, as the fast-casual burrito chain typical record double-digit same-store sales results.
Total revenue rose 21 percent and Chipotle's net income rose 61 percent to $81.7 million. Officials said they expect mid-single-digit same-store sales growth for the rest of 2012. The company's stock fell more than 20 percent in morning trading on July 20, when it released its earnings results.
In a call with analysts, Jack Hartung, Chipotle's chief financial officer, said:
"We're seeing a slowdown. I mean — there's no other way around it. We were humming along nicely in the first quarter. We were humming along nicely in April. And then we saw a slowdown. ... We think it's related to just general consumer spending. We're not seeing anything that's specific to markets. It seems like it's pretty broad based. It's not a significant slowdown, but it is a slowdown....
"I can tell you that the one thing that's interesting, [although] it doesn't explain the slowdown. A significant percentage of our increase is takeout. And so we do have more people coming in and leaving. And I don't know what that means. It does mean that we are selling a few less drinks....
"I'll tell you what we're not going to do: We're not going to do things that traditional QSR might do. So we're not going to do discounting or rush out and come up with the next new menu item."
McDonald's
Slowing economies in Europe, Japan and China were a drag on McDonald's earnings, which foreign-currency translation battered to a 4-percent decrease to $1.35 billion for the quarter. Same-store sales rose 3.6 percent in the United States, 3.8 percent in Europe and 0.9 percent in the Asia-Pacific, Middle East and Africa division.
Across the world, McDonald's plans to intensify its marketing spending and value proposition to coax consumers into incremental visits, officials said. McDonald's also saw its stock slide following its earnings report.
In a call with analysts, Don Thompson, chief executive of McDonald's, said:
"At points [previously], we've seen one or two markets of our top 10 — maybe three or four — that might be experiencing these consumer confidence issues. This is one of the first times when we've seen more of a global piece, so it's a little bit more than a European cold. What it all means for us is that the
things that we've employed historically — we've got to make sure that we're in the best position again to drive additional traffic in the restaurant and be able to trade those customers up....
"We're seeing a hike in competitive activity across the informal-eating-out marketplace, which is interesting because it's not just in QSR. We're seeing it across all of the marketplace from fast casual to convenience stores a
nd grocery stores. Having said that, for us at McDonald's, what matters most is to remain focused on what's within our realm of control."
Papa John's Pizza
After what chief executive John Schnatter called an "outstanding" second quarter, Papa John's raised its full-year, earnings-per-share guidance to between $2.45 and $2.55, from a previous range of $2.40 to $2.50 per share. The company also raised its expectations for same-store sales growth in both its domestic and international systems.
Second-quarter net income increased 22 percent, while revenue rose 8.5 percent, reflecting same-store sales growth of 5.7 percent in North America and 6.1 percent in Papa John's international system. Officials did not credit any new initiatives with driving results, but rather the brands consistent deployment of the "Papa John's Way," built around in-store execution and quality-focused marketing.
In a call with analysts, Andrew Varga, chief marketing officer for Papa John's Pizza, said:
"We've really seen broadly in QSR over the past, let's say, four to five periods, some pretty good strength across all categories. In one sense, the reports we're seeing give us some encouragement, at least in our specific and broader category of QSR from the same-store sales perspective, that things look good.
"We feel very good that we're in a unique position to take some share from larger quick-service chains and from the largest piece of the pizza category, which is the independents. We're not doing anything differently than what we've told you over the last few years. We just keep running our quality positioning and quality story and keep doing it every day."
Starbucks Coffee
The coffeehouse giant lowered its earnings forecast for its fiscal fourth quarter after the July 1-ended third quarter produced results below its expectations. Net income rose 19 percent for Starbucks while revenue grew 13 percent, reflecting a 6-percent global same-store sales increase, including a 7-percent gain in the United States. However, sales began slipping in mid-June and continued their swoon into July.
Like Chipotle, Starbucks endured a steep drop in its share price after reporting disappointing earnings, as the stock fell more than 10 percent.
In a call with analysts, Howard Schultz, Starbucks' chief executive, said:
"We had 7-percent U.S. comp growth and 6-percent global comp growth for the [second] quarter. We would take that any quarter over the 41-year history of the company, and it's a stunning accomplishment, given the backdrop of economic issues.
"We saw a moderate change in June, but the numbers that Starbucks now has are so big that a moderate change in transactions and comps can have a swift and acute change to the economics of the current quarter. ...
"So this is not a Starbucks issue; this is a macro problem. It's not an excuse — we have to correct code on it — but we've got a fracture in consumer confidence, and one of the things that you already know about, but we're confident that we will be able to navigate through it."
Contact Mark Brandau at mark.brandau@penton.com
Follow him on Twitter: @Mark_from_NRN