Restaurant Chains’ Forecasts: Why Investors Should Be Cautious

The beginning of the year has presented significant challenges for restaurant chains. Many consumers are reducing their spending due to ongoing economic uncertainty, making it increasingly difficult for restaurants to depend on price increases to enhance their revenues. The last quarter of 2024 already displayed signs of weakness, and the situation could worsen in the upcoming months. The eventual impact may hinge on how tariffs influence both customers and businesses across the sector.

Prominent restaurant brands, such as McDonald’s (MCD 0.78%) and Chipotle Mexican Grill (CMG 2.67%), project that they will see stronger performance as the year progresses. However, these predictions are not guaranteed. Here, we will explore the potential pitfalls, emphasizing why investors should approach the acquisition of restaurant stocks with caution during this period.

Understanding Comparable Sales Growth: Key Indicator for Restaurant Stocks

For investors interested in the performance of restaurant stocks, it’s crucial to focus on comparable sales growth, rather than just total sales. This metric provides insight into how well a restaurant is growing on an organic basis, as it excludes the effects of newly opened or closed locations, allowing for a more accurate comparison across the board.

This focus reveals a troubling trend. In the final quarter of 2024, McDonald’s experienced a mere global comparable sales increase of just 0.4%, while in the U.S. market, these sales actually declined by 1.4%. In contrast, Chipotle, while smaller, is recognized as a high-growth stock, reported a comparable sales growth rate of 5.4% during the same period. Although this figure surpasses McDonald’s, it’s important to note that it has decreased from a more robust 8.4% a year earlier.

Despite these concerning statistics, both McDonald’s and Chipotle maintain a hopeful outlook for the future, expecting improvements as the year unfolds. Ian Borden, CFO of McDonald’s, indicated his belief in a “gradual stabilization of the macroeconomic and consumer environment.” Furthermore, Chipotle anticipates an uptick in performance during the latter half of the year, facing easier comparisons to weaker previous year figures. Neither company seems prepared for a significant economic downturn.

The Importance of Caution for Investors in the Restaurant Sector

While no one wishes to forecast negative outcomes, the reality remains that escalating trade tensions and deteriorating economic conditions could significantly impact both sales and profits for restaurants. Although major chains might attempt to attract customers with discounts, many individuals may choose to prepare meals at home instead, which can diminish restaurant traffic.

Costco Wholesale recently shared insights regarding its earnings, highlighting a notable shift in consumer behavior—people are increasingly investing in grocery shopping and spending more on food prepared at home, including prepackaged items and frozen meals. Management has observed that consumers are becoming more judicious with their spending habits.

This trend isn’t surprising, especially given the current concerns surrounding tariffs. However, these shifts are still in the early stages. With President Donald Trump postponing some tariffs until next month, there is potential for prices to surge dramatically for both restaurants and consumers. On one hand, restaurant chains might face increased costs, while on the other, consumers may find their discretionary income shrinking.

The unpredictability regarding the implementation and duration of tariffs makes it a precarious situation for investors who might be banking on an improvement in macroeconomic conditions later this year. The reality is that circumstances could worsen.

Evaluating the Risks: Should You Hold Off on Investing in Restaurant Stocks?

Leading restaurant chains like McDonald’s and Chipotle can represent solid long-term investment opportunities, but it is essential to manage your expectations during this challenging period. The landscape for restaurants could remain tough for the foreseeable future, at least until economic conditions show signs of recovery. In light of this uncertainty, investors should consider purchasing stocks at a discounted valuation, ensuring a margin of safety in case the outcomes are less favorable than anticipated.

For now, the most prudent strategy may be to adopt a wait-and-see approach regarding restaurant stocks. There could be significant potential for price declines this year, particularly if actual results fail to meet the optimistic projections set by these companies.