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Dining out: US restaurant sales continue summer simmer in July

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Dining out: US restaurant sales continue summer simmer in July

Sales gains at U.S. bars and restaurants continued to outpace overall retail sales growth in July, though the gap between the two narrowed from a year ago, according to an analysis by S&P Global Market Intelligence.

Additionally, the number of workers at bars and restaurants grew faster than broader job gains and the cost of going out to eat climbed during the month, based on U.S. government data. The majority of U.S. restaurant stocks made gains in July, however, a number of companies saw their stocks take a hit.

Sales growth continues to slow

Food services and drinking places sales rose 3.8% year over year in July to a seasonally adjusted $65.17 billion, according to U.S. Census Bureau advance monthly sales estimates released Aug. 15. The figure includes bars, restaurants, caterers and other types of food service vendors.

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July's growth in bar and restaurant sales marked a slight increase from the 3.7% growth posted in June, according to Census Bureau preliminary estimates. In July 2018, restaurant sales reported growth of 9.2%. Broader retail sales rose by 3.4% in July, up from the 3.3% gain posted in June.

Sales growth at restaurants and bars could continue to slow, according to SunTrust Robinson Humphrey Analyst Jake Bartlett. Growth could trough to 2.5% for the third quarter if current sales trends continue, Bartlett said in an Aug. 15 note.

Measures of personal consumption and expenditures are often used to gauge the health of the economy. Despite the continued, albeit slowing, rise of retail sales, some investors are feeling pessimistic over the inverted yield curve and global trade disputes.

Growing pace of hiring

Food services and drinking places added 15,400 workers in July for a seasonally adjusted total of 12.2 million workers, according to the Bureau of Labor Statistics, or BLS.

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July's gain marks a 2.1% gain over the previous year and a slight dip from the 2.2% growth seen in June, according to BLS data.

The pace of hiring in the hospitality sector has grown as job openings have decreased, the National Restaurant Association noted in an Aug. 8 report.

"During the last few months, the number of job openings dropped back below the number of monthly hires, which potentially suggests that the industry's labor challenges are starting to ease somewhat," the trade group said.

Total nonfarm jobs growth stayed flat with 1.5% gains in both July and June.

Rising prices

July prices declined 0.1% from the previous month for the "food at home" subcategory of the Consumer Price Index, or CPI, while they rose 0.2% for the "food away from home" subcategory during the same time, according to seasonally adjusted data from the Bureau of Labor Statistics. Food at home refers to spending at grocery stores, and food away from home covers meals from eateries.

The increase for food away from home comes after a 0.3% increase in June from the month prior. CPI for full-service meals and for limited-service meals — subcategories of food away from home — both rose 0.2% over the previous month.

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During the past year, the index for food away from home rose by 3.2%, according to unadjusted BLS data. In that time, full-service meals and limited-service meals both grew by 3.2%.

Inflation grew 1.8% in the year through July, according to the BLS.

Good burger

Most of the top publicly traded U.S. restaurants saw stock gains in the month ended Aug. 14, however at least six saw their stocks lose ground, according to Market Intelligence.

While many publicly traded restaurant companies beat top-line expectations in the most recent quarter, "flow-through has been more challenging against higher commodity, packaging, labor and delivery costs, and [currency exchange] headwinds," Credit Suisse Analyst Lauren Silberman said in an Aug. 9 report on second quarter earnings.

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Shake Shack Inc. led the pack with an 18.5% gain for the month. Shake Shack's pace of introducing new menu items has slowed in 2019 as it focuses on digital sales, though limited-time-only options will be a sales driver in 2020, SunTrust's Bartlett said in an Aug. 14 note.

Jack in the Box Inc., Chipotle Mexican Grill Inc., Starbucks Corp. and YUM! Brands Inc. are among other companies that beat the S&P Composite 1500 Restaurants subindex gain of 1.9%.

At least six restaurant stocks dropped in the month ending Aug. 14.

Domino's Pizza Inc. stock posted the biggest loss at 16.3%. The company missed revenue expectations for the first two quarters of 2019, according to Market Intelligence.

Domino's faces higher competition from third-party delivery companies that are hurting its same-store sales, Goldman Sachs Analyst Katherine Fogertey said in a July 29 report on the restaurant sector.

Still, with restaurants offering global growth opportunities, recently strong top-line and limited exposure to macroeconomic and e-commerce challenges elsewhere in consumer, sentiment in the restaurant sector feels mostly positive, Silberman of Credit Suisse noted.

"The top question among investors is what to pay for these restaurant stocks, as many are already trading at peak valuations. We continue to favor large chains investing in digital ecosystems," Silberman said.