Optimism emerges on restaurant stocks amid lighter inflation impact, looser labor market
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Analysts are optimistic on the prospects for restaurants as the space absorbs commodity inflation and looks toward easing staff shortages.
In a hot CPI report printed on Wednesday morning, food away from home was a rare bright spot. While the food at home index rose 12.2% from the prior year, the largest 12-month increase since 1979, food away from home was far less impacted. The latter index rose only 7.7%, with limited service meals rising âonlyâ 7.4% over the same period.
While both figures are the largest increases seen in over 40 years, the significantly lower inflation recorded by restaurants suggests some capacity to absorb increased costs. Additionally, there are signals that the inflation impact on key items like chicken breasts, wheat, and more is peaking in the current quarter, per Cowen research.
Cowen analyst Andrew Charles indicated that checks with CEOs at multiple fast casual chains suggested that food costs are coming down in the third quarter.
âCommodity inflation was acute in 2Q, in particular chicken breast, wheat, packaging & Freight,â he told clients. âEncouragingly, both panelists suggested cautious optimism that commodity costs have peaked, with more meaningful relief expected in the coming months as oil prices have tapered, a leading indicator of soft commodity costs.â
Ahead of a busy earnings season, Charles expects this to be a key point that could portend the trajectory of the companyâs set to report. 
Further, the significantly lower inflation among quick service and fast casual restaurants as compared to 8.9% inflation in full-service is likely to aid in a trade-down impact. Charles indicated this is likely a positive for Chipotle Mexican Grill (NYSE:CMG), Shake Shack (SHAK), and Sweetgreen (NYSE:SG) as well as quick service restaurants like Yum Brands (YUM), McDonaldâs (MCD), and more. The higher level of inflation at casual dining and sit-down service restaurants was pointed to as likely drivers of outperformance at the comparatively cheaper sectors.
In another positive for the overall sector, Cowen indicated that lessening labor shortages are âthe biggest source for optimismâ in their chats with CEOs. While aiding in service, Charles expects the looser labor environment is also likely to aid in normalizing pricing.
Shake Shack [(SHAK), 4.43%], Sweetgreen [(SG), 3.49%], Portilloâs [(PTLO), 3.49%], Dominoâs Pizza [(DPZ), 2.83%], Kura Sushi [(KRUS), 4.32%], Wingstop [(WING), 2.18%], Jack in the Box [(JACK), 2.01%], and Restaurant Brands [(QSR), 1.65%] led gains in the space shortly before Wednesdayâs close.
To be sure, optimism is not apparent in all cases. Alongside caution on casual dining trade down, coffee chains are experiencing a sales slowdown, according to data from placer.ai.
âIn June 2022, coffee visits dropped below QSR levels for the first time all year, as a combination of inflation, high gas prices, and the rise in COVID cases kept some consumers away,â the report reads. âThe fall in foot traffic was evident at both chains in June, with visits falling 7.8% year-over-year at Dunkin,' and 4.1% at Starbucks (SBUX).â
Dutch Bros (BROS) was an outlier in the coffee space, with foot traffic increasing 22.8% in June, per the data.
Read more on recent trends in restaurant stocks.