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The second quarter has come to a close, so we will preview the upcoming earnings season for the restaurant industry. We will also take a look at the impact of rising costs that are currently affecting the sector.

June-Quarter Earnings Releases Are Coming

Dow-30 member and restaurant stalwart McDonald’s (MCD - Free McDonald's Stock Report) is set to report results in just a couple of weeks on July 22nd. Value Line, as well as most analysts on Wall Street, are looking for share net to advance about 4%, on a top-line gain of roughly 3%. This would be a solid improvement over the first-quarter figures that were published by the hamburger chain, though harsh winter weather was partly to blame for the weakness experienced in the early stages of 2014. Management said that global same-store sales were modestly positive in both April and May (up 1.2% and .9%, respectively), which largely supports these growth assumptions. On the downside, comparisons in the all-important U.S. market have been negative due to a variety of factors, which is concerning, but we are expecting McDonald’s to right the ship in the not-too-distant future. As a result, we remain very comfortable with our full-year share-earnings growth target of 4%. Investors seem equally confident, as the price of MCD shares continues to inch higher in anticipation of the second-quarter release.

Wall Street darling Chipotle Mexican Grill (CMG) will announce second-quarter results on July 21st. This is another report that investors are anxiously awaiting. The company hit a minor speed bump in the March period, as stronger-than-expected sales did not flow through to the bottom line, owing mainly to higher food costs. Investors punished CMG shares on the news, and they tumbled all the way down to $476. Since, the stock has made an admirable comeback, and the price ($584 as of this writing) is now just about level with the highs experienced earlier in the year. Needless to say, if the burrito chain fails to at least meet analysts’ reduced expectations (share-earnings growth of about 9%), investors could be in for another rocky ride. We think that recent menu price hikes and volume gains will be enough for Chipotle to keep the growth engine at full throttle.

Starbucks (SBUX) is another prominent member of the restaurant industry that will report June-quarter figures in the coming weeks. (Management has not made an official announcement regarding the official date as of this writing, but results have historically been published in late July.) The fundamental picture looks bright for the coffee giant, as same-store sales continue to rise at a healthy rate in the United States and the company makes deeper inroads overseas. Traffic has also remained robust, thanks to customer loyalty programs, mobile payment options, an extended food menu, etc. It looks to us, as well as most analysts on Wall Street, that Starbucks will report double-digit advances on both the top and bottom line in the June quarter and keep the ball rolling in the second half of the calendar year.

Other notable members of the restaurant industry that are set to report second-quarter results are: The Wendy’s Company (WEN) (August 7th); Panera Bread Company (PNRA) (late July); and Potbelly (PBPB) (early August). Those interested in other members of this space can usually find earnings announcement dates on companies’ investor relations websites.

Costs Are Still Rising

As we mentioned in our last roundup, the largest hurdles for restaurant operators are no doubt tied to input expenses. These companies can always raise menu prices in a pinch, as has been in the case in recent months, but this could lead to a decrease in foot traffic, given fierce competition. One of the largest inputs in this space is obviously food, which could mean chicken or beef or limes or coffee beans.  Given the diverse set of menus and different purchasing practices of each member of the industry, restaurants are usually not affected in the same manner or on the same scale. That said, there has been a general trend of rising prices for almost every input, due to drought in Brazil (coffee beans), the PED virus (pork), feed prices (chicken), etc. The elevated food costs are becoming more and more noticeable, and margins are being pressured almost across the board. Managements have been relatively quick to take action and raise menu prices, as was the case for notable industry components Chipotle and Starbucks to name a few. We expect many of the other restaurant operators to follow suit in the coming quarters.

As we also noted in numerous roundups past, the push for marked increases to minimum wage laws from politicians are growing louder, especially ahead of this year’s midterm elections. Ten states and the District of Columbia have enacted increases this year alone. President Barack Obama called for minimum wage hikes in his last two State of the Union addresses, asking to move the figure to $9 an hour back in 2013 and upping the ante to $10.10 earlier this year. (The current federal minimum wage is $7.25.) Twenty-two states and Washington, D.C. already have laws on the books that require a minimum wage above the current federal mandate, but restaurant operators are still concerned about pushing pay higher. More recently, Seattle made national headlines after enacting a minimum wage of $15, surpassing San Francisco’s $10.74 to become the nation’s highest. Chicago’s mayor Rahm Emanuel has jumped on the bandwagon, too, asking to push his state’s minimum wage to $13.00 (from $8.25). By 2018, 12 states are expected to have reached or surpassed the $9 level, and this figure is likely to grow. Given how important managing costs is to the restaurant industry, investors should definitely keep an eye on this trend. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.