The last thing restaurants want is a food fight. The one emanating from Washington may be an exception, though.
The response to President Trump’s imposition of tariffs on China, Mexico and other countries has hit American agriculture hard. Casual dining chains, which typically spend between 20% and 40% of revenue on food, have been pegged as beneficiaries.
Analysts’ consensus earnings-per-share forecasts for 10 fast-casual or quick-serve chains have surged by 12% on average since December for this fiscal year, according to FactSet. Of that group, only one— The Cheesecake Factory Inc. CAKE 0.36% —has seen forecasts drop. Dine Brands Global Inc., DIN -0.63% owner of Applebee’s and IHOP, has seen the biggest boost.
Food costs probably don’t explain the gain, though. While the prices of certain foods such as meat and dairy have seen some sharp drops—cheese prices hit multiyear lows, for example—David Maloni of restaurant-supply chain specialist ArrowStream says most chains have locked in most prices. Moreover, higher transport costs probably outweigh any gains from unhedged food purchases.
Next year, though, tariffs on crops like soybeans combined with unexpectedly bounteous harvests will ripple through the prices of most foods—including meat—that these firms buy. Restaurants rarely cut menu prices so the savings may fatten bottom lines. Analysts have boosted their expectations already.
The explanation for this year’s higher earnings expectations comes from the demand side, not costs. Government data through June show that sales at food-service establishments have risen by nearly 10% compared to a year earlier. ArrowStream estimates that about 6.8 percentage points of that is a result of higher foot traffic, either eat-in or via delivery and takeout. Tuesday’s Conference Board Inc. consumer-confidence data—the reading was the highest since October 2000—reflects Americans’ proclivity to splurge on meals away from home.
But tariffs are hurting businesses one step removed from the customer. A basket of 10 food companies with exposure to commodity prices have seen analyst earnings forecasts drop by an average of 24% so far this year for fiscal 2018. Among the worst were Sanderson Farms Inc. and Conagra Brands Inc. The only company that saw forecasts rise was Hormel Foods Corp.
As long as trade tussles don’t ding the broader economy and dissuade Americans from eating out in 2019, restaurants have a good year coming. Right now they are just busy enjoying the appetizer.
Write to Spencer Jakab at [email protected]