Text size
A cheeseburger and french fries at a Shake Shack restaurant .
Scott Olson/Getty Images
Trust your gut. That’s often sound advice, and when it comes to restaurant stocks, it’s doubly true for investors looking for winners in an increasingly tricky environment.
With student-loan repayments once again weighing on many household budgets, gas prices on the rise, and still-high inflation, it’s easy to see why the health of the U.S. consumer remains a hot topic. So far, consumer spending has remained resilient, but given that it drives two-thirds of the nation’s economy, it’s little wonder that investors are nervous about the pressures the average American’s facing.
In fact, consumer stress is climbing, as evidenced by debt delinquency, according to PennMutual Asset Management: “U.S. households are starting to show increasing financial stress as outstanding consumer loan balances continue to rise,” writes investment specialist Jen Ripper on Thursday. “Although American consumers were able to withstand the economic difficulties of the pandemic, missed payments have increased for most types of debt.”
To be sure, aggregate delinquency rates were basically flat in the second quarter, and the overall delinquency rate remains below historical levels, hovering at less than 3.2%; that makes sense given the financial cushion many consumers were able to build up during the pandemic.
However, as Ripper highlights, that cushion is dwindling, and the share debt that turned delinquent—when borrowers stop making repayments—increased last quarter for nearly all debt types.
That trend comes as consumers are taking on more debt of all stripes: By the New York Federal Reserve’s count, total household debt balances jumped by $16 billion in the second quarter, with credit-card debt leading the way with a $45 billion increase. That was the seventh straight quarter that Americans were adding to their credit-card balances, which recently crossed the $1 trillion mark for the first time. Elsewhere, consumers’ mortgages, auto loans, and student loans stand at $12 trillion, $1.58 trillion, and $1.6 trillion, respectively.
Moreover, these increased debts are coming at a time when higher interest rates are making it more expensive to have loans.
“Credit performance on consumer debt is likely to deteriorate as consumers exhaust their savings,” Ripper concludes. “Household leverage has steadily risen from pandemic lows as borrowers draw down excess savings and rely on credit cards to fund the gaps.” That will put “pressure on household finances as borrowers prioritize loan payments.”
Restaurant spending is often one easy place where consumers cut back when they’re feeling squeezed, and as Raymond James analyst Brian Vaccaro notes on Thursday, restaurant sales data for August showed softer year-over-year comparisons in casual dining, even as cheaper quick-service-restaurant data were stable.
In fact, high-end steakhouses, which had been an outperforming category, notched their sixth straight month of comparable sales declines. (That could reflect higher-earning college graduates pulling back ahead of student loan repayments.)
Nonetheless, sales trends remain easily above where they were prepandemic across restaurant categories, and while traffic may have been slower at casual dining eateries that was offset by higher check totals, which pushed up sales.
“Big picture, it seems that underlying casual-dining demand trends have slowed a bit, but not dramatically given relatively stable multiyear stacks, and it remains difficult to get a clean read on the health of the U.S. consumer,” Vaccaro writes.
That’s not surprising given that wages remain fairly strong and data show that plenty of people are still shelling out for experiences—not just dining, but also concerts, travel, and sporting events. Yet on the flip side, he notes that sales trends are a bit concerning, especially as they come at a time of higher prices at the pump and the resumption of student-loan bills.
“In light of the murky macro backdrop, our list of top long ideas has gravitated toward stocks with idiosyncratic dynamics that we believe can drive relative stock outperformance,” he writes.
He has the firm’s highest Strong Buy rating on
Outback Steakhouse
owner Bloomin’ Brands (ticker: BLMN), which he believes will benefit from activist involvement. His Outperform-rated favorites include Chili’s owner
Brinker International
(EAT),
Shake Shack
(SHAK), and
Chipotle Mexican Grill
(CMG), which he believes will be able to buck mixed industry trends.
Ultimately it may not be wise for consumers to finance their burritos with a credit card. Yet logic often takes a back seat when consumers think with their stomachs.
Write to Teresa Rivas at teresa.rivas@barrons.com