Domino’s and Other Restaurant Stocks Did Well Last Year. 2024 Might Be Different.

Still, the restaurant industry has been surprisingly resilient. As people cut their discretionary spendings from furniture to clothing, they continue to enjoy a good meal with families and friends at restaurants.

Federal data show that sales at food and drinking places are 11% higher than a year ago, while grocery sales are roughly flat. The share of consumers’ food spending on restaurants has been steadily climbing, reaching 56% as of late, even higher than before the pandemic.

Of course, much of the growth was driven by higher price tags. Restaurant traffic is 1.5% down from a year ago and 10% below the prepandemic level. Still, the resilient sales number suggests that although people might be eating out less, they spend more every time they do.

Regardless of the economic environment, consumers seem to continue to prefer dining out over cooking at home, wrote Barclays analyst Jeffrey Bernstein in a Wednesday note: “The restaurant industry reminded us that eating out is no longer a luxury.”

Menu prices will likely stabilize in 2024. Prices in food commodities peaked in 2022 and are now about 20% lower from a year ago, although the decline is uneven: While fresh produce and grains have seen their costs drop a lot, beef and chicken prices remain higher.

With staffing shortages easing, labor pressures are also less onerous. The average wage across the restaurant industry has increased to $20.01 from $15.50 at the end of 2019. But the labor inflation has eased to 5.3% on a year-over-year basis, down from the peak of 15% in 2022.

Fast-food chains with large exposure to California would face more headwinds, though. A new legislation passed last September would boost fast-food workers’ minimum wage in the state and allow a council to adjust the baseline each year based on inflation.

Slowing inflation and a more dovish tone from the Federal Reserve has given consumers a renewed confidence boost. After declining for a few months, consumer sentiment rebounded in December to the highest reading in two years.

This is reflected in the restaurant business as well. Following a slight slowdown in August and September, sales reaccelerated again in the fall. Still, analysts are worried that the lagging effects of interest-rate hikes could finally push consumers to tighten their belt for restaurant spending. 

“While we are encouraged by the improvement in sentiment and acknowledge the consumer has been resilient, we still expect more headwinds than tailwinds in the year ahead for the consumer,” wrote Morgan Stanley analyst Brian Harbour in a Tuesday report.

That doesn’t necessarily mean people won’t eat out, they are just more likely to choose the cheaper options. 

There are already signs of the shift: In November, same-store sales at quick-service restaurants was 3.8% higher than a year ago, with traffic nearly at the same level, according to Black Box Intelligence. Casual dining, on the other hand, only saw 0.4% growth in sales and traffic was down 3% from a year ago.

The larger quick-service restaurant chains are well positioned for traffic share gains as they have more resources to compete for customers with advertising and promotion campaigns. 

Barclays’ Bernstein upgraded
Yum! Brands
to Overweight from Equal Weight on Wednesday, while raising the target price to $146 from $126. The stock now trades at $129. Bernstein expects the restaurant giant to grow its store number by an average of 6% annually and same-store sales by 3% annually over the next three years.

UBS analyst Dennis Geiger’s top pick is
Domino’s Pizza,
which has been accelerating growth through partnership with
Uber Eat,
enhanced loyalty program, and new product launches. For the next five years, Geiger expects the company to grow same-store sales by 3% annually and add more than 1000 new stores. His target price for the stock, which currently trades at $402, is $480.

Write to Evie Liu at [email protected]