Canary, Mouse, or Just Bull? Talk of 'Restaurant Recession' Meets Doubts

Automakers See Slower Growth Too, Yet Fed and Others See Economy Strengthening

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One analyst this week proclaimed the start of a "restaurant recession" amid weaker same-store sales growth for McDonald's as he downgraded 11 big chains. Talk of a "maturing economic cycle" also came from Ford as it announced disappointing profits and lower sales forecasts.

But many aren't buying the recession talk, notably the Federal Reserve and the retail industry. "Near-term risks to the economic outlook have diminished," the Fed said in a statement on Wednesday. Though the Fed remains wary of low inflation and the global economic outlook, stocks have rebounded since the U.K.'s vote to leave the European Union last month. Odds now look higher the Fed will actually raise interest rates to restrain the economy as soon as September.

The National Retail Federation this week actually increased its forecast for 2016 sales growth to 3.4% from 3.1%, based on improving economic indicators. Rather than a canary in the coal mine, McDonald's and other restaurant chains may be confronting a different animal, what Dave Schick, retail analyst and research director for Consumer Edge Research, calls "the mouse that roared."

Consumer income and spending are both growing close to 4%, not adjusted for inflation, and unemployment claims are low, Mr. Schick said. If anyone's confidence it wobbling, it's not that of McDonald's customers. It's that of the wealthy buying at retailers such as Sotheby's or Tiffany's, who are more affected by the global economy and pressure on corporate earnings from a strong dollar and weak overseas economies, he believes.

Instead, Mr. Schick believes restaurant chains may be feeling the same phenomenon that has rattled big retailers, big beer and big beauty brands in recent years -- the rise of smaller, newer, more differentiated players fueled in many cases by digital and social media. He calls it "the Mouse that Roared Economy."

Even so, Stifel analyst Paul Westra said in a note this week that slowing same-store sales growth across the restaurant industry and his own survey reflects "the start of a restaurant recession," which may be a harbinger of a broader U.S. downturn next year. Restaurant sales, he said, tend to be "the canary that lays the recessionary egg."

RBC Capital Markets estimates U.S. fast-food industry same-store sales grew 1% to 1.5% in the second quarter, down sharply from 3% in the first quarter. But those first-quarter numbers did come in comparison to sales hurt by a harsh and late 2015 winter.

Taco Bell Chief Marketing Officer Marisa Thalberg said that while "April was soft for dining and retail," her chain has been "doubling down and firing on all cylinders" and is now seeing more people than last year and "more tailwind than just a few months ago."

Maybe the restaurant industry's woes relate to neither canary nor mouse. Maybe it's about Blackhawks and Bulls. Explaining a 2.1% same-store sales decline on a conference call this week, Buffalo Wild Wings CEO Sally Smith said a closely watched NBA Finals didn't offset the fact that the Chicago Blackhawks and Bulls had 28 fewer playoff games this year than last, and Chicago is a strong market for the chain (It does account for about 1% of BWW locations).

Yet there are also worrisome signs for the auto industry.

Ford Chief Financial Officer Bob Shanks told reporters Thursday that "we're starting to see a maturation of the economic cycle," as the company reduced its full-year outlook. But General Motors raised its outlook earlier in the week.

Kelley Blue Book analyst Tim Fleming said "there's now a better chance that 2016 won't be another record year" based on tough comparisons to a strong 2015 second half. UBS calls for anywhere from a slight decline to a 2% increase in 2016 car sales, but still expects growth the next two years.

Worries are also creeping into the hospitality and airline industries as analysts have asked about recession scenarios on recent conference calls. Jon Bortz, CEO of Pebblebrook Hotel Trust, which operates high-end hotels and resorts, said on a conference call earlier this month: "Fears of an impending recession have substantially dissipated." But he also said business demand remains weakened by earnings pressure.

Contributing: Jessica Wohl, E.J. Schultz, Adrianne Pasquarelli, Automotive News

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