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This morning, Restaurant Brands (QSR) released their earnings for the third quarter of the year, completing the trifecta of big fast-food reports after Yum! Brands (YUM) on Wednesday and McDonalds (MCD) last week. The story from all three was pretty much the same; better than expected earnings and revenue and relatively strong outlooks all around. That is good news for those companies’ shareholders, but what do the combined reports say more generally about the U.S. consumer?
The conventional wisdom here is that the success of fast-food places, or “quick service restaurants” as they prefer to be called these days, is bad news. It is said to be a sign of consumers trading down, eschewing higher-priced full-service restaurants in favor of cheaper alternatives, something they will do if they are suffering economically. Indeed, McDonalds said they had observed just that in the comments that accompanied their report, but the numbers suggest that isn’t the lesson to be drawn. Their sales increased by 6.1%, but that was during a period in which they increased prices by around 10%. That indicates not so much a switch to cheaper food, but rather consumers beginning to react negatively to price hikes.
That impression was reinforced by QSR’s numbers this morning, where Burger King reported U.S. sales growth of 4% after a year in which, according to this Nation’s Restaurant News report, prices increased by 21%, and by YUM, where U.S. sales rose in general. Again, those sales look less impressive, but in general terms less worrying, when price increases are considered. Consumers are spending more, but actually buying less to do so. So, the story here is not really about consumer preferences shifting to cheaper options, it is about consumer resilience, or the lack of it, in the face of price increases.
That matters because price resistance is usually temporary, whereas a full behavioral shift has more of a lasting impact. Most people, when they first notice that something is more expensive than it was the last time they bought it, will be put off for a while. But at some point, the new price becomes the norm. However, if they change their habits and trade down, those lower-priced options become the norm for them, and they have to feel significantly wealthier to move back up to more expensive choices.
While the earnings reports from QSR. YUM, and MCD may, on the surface, appear to send a worrying message about shifts in U.S. consumer behavior, they may not actually be as bad a sign as that. Even though they do show resistance to higher prices, sales haven’t fallen off a cliff, and the numbers don’t necessarily point to a lasting shift in consumer behavior. When considered alongside some good results and reasonable forecasts from consumer-facing companies like GM (GM) and Coca-Cola (KO), which I wrote about here, the overall picture of consumer health is not too bad.
I said yesterday that a negative reaction to the Fed announcement would present a buying opportunity for investors, and the results of the big three fast-food companies speak to the reason for my optimism. Other than in things directly related to interest rates like the housing market, the rate hikes so far have taken place with a backdrop of resilience by consumers, which is a good sign. It gives more time for the impact of an improving supply situation to moderate inflation, without the Fed needing to actually force a recession. That is the outcome the market is pricing in right now, so if it begins to look as if a recession can be avoided, Powell will change his outlook yet again before too long, and a rally over the next few months is on the cards.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Image and article originally from www.nasdaq.com. Read the original article here.