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Restaurant chains saw traffic weaken in April, but there are some safe havens for investors

Restaurants suffered a slight softening of traffic in April, according to new data, as Americans contended with soaring inflation and talk of a potential recession over the next year. Restaurant meal prices were up 9% in April compared to pre-pandemic levels in 2019, according to a report from the NPD group, which conducts market research to track consumer trends. That contributed to a 4% decline in consumer visits to U.S. restaurants for the month, compared to 2021. “Rising prices put pressures on consumers that contribute to the restaurant industry slowdown. For many consumers, it’s more affordable to eat at home,” David Portalatin, NPD Group food industry advisor, said in the report. “This is when operators need to demonstrate their value to consumers struggling with inflation and be solutions-oriented to help consumers meet needs across life stages.” Rising restaurant prices have affected lower-income homes and families with kids the most, the report says. Consumers in households with annual incomes of under $50,000 saw restaurant visits decline by 11% in April, while those with kids were down 14% from April 2021. While consumers may be tightening their belts, there some analysts are expressing confidence in some restaurant names. Cowen Equity Research recently released its latest Restaurant Conviction List, ranking its top five picks as Yum! Brands , Darden Restaurants, Sweetgreen , Chipotle Mexican Grill and McDonald’s , all with outperform ratings. Yum is a top pick thanks to Taco Bell’s U.S. sales coming during late night or after dinner, as customers see high value in the chain’s offerings, said Cowen’s Andrew Charles, co-author of the report and senior research analyst. Chipotle has continued to demonstrate its pricing power, with a 10% increase compared to this time last year with very little resistance from the consumer, CEO Brian Niccol said recently. Darden, despite being a casual name, has seen its brand Olive Garden “outperform during recessions,” the Cowen report says. “I think it’s a critical thing right now that in a very turbulent backdrop for restaurants, you really want to focus on names that have defensive characteristics,” Charles said in an interview. Cowen surveyed 2,500 consumers on their value perceptions of major brands and for all respondents the top three names were Wendy’s, Taco Bell and McDonald’s, with at or near 50% of respondents saying the value for money at those restaurants were “above average.” Panera, Domino’s, Chipotle and Sweetgreen were also top-ranked. For low-income respondents, Wendy’s, McDonald’s, Domino’s, Taco Bell, Panera and Pizza Hut were also at or above 50% for value perceptions, according to Cowen. Restaurants, even if they offer value pricing, are at risk from taking a hit in the delivery part of their business. In the first quarter, guest sentiment value was much lower for off-premises dining than it was for dining on-site, according to separate data from Blackbox Intelligence, a restaurant analytics firm. This is measured through online restaurant reviews. Expensive delivery fees could be combatted by companies like Chipotle that already have mobile order and pickup systems that work well in place. “They’re definitely pushing more in that digital order for carry out because it has the highest margin as well as the data riches,” Cowen said of Chipotle’s digital ecosystem and loyalty program. “That’s a nice opportunity for them to push towards value that we’ve seen in the past for them.”

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