The idea behind fast-food restaurants is pretty simple: You don't wait long, you don't make it yourself, and you don't pay that much.
However, expense has become an issue with several of the largest chains.
Roughly a quarter of low-income consumers, defined as those making less than $50,000 a year, said they were eating less fast food and about half said they were making fewer trips to fast-casual and full-service dining establishments, Reuters reported, citing polling by the consulting firm Revenue Management Solutions.
Chains may be less likely to chase customers than they were in the past because even as traffic drops, sales have remained consistent, supported by higher prices.
Fast food companies aren't "in a hurry to take traffic over profit the way they were a decade ago,” Mike Lukianoff, chief executive of SignalFlare.ai and a fast-food-industry consultant, told Reuters.
Executives at some of these companies have acknowledged that they're having trouble attracting lower-income customers.
“Eating at home has become more affordable,” McDonald’s CEO Chris Kempczinski told analysts in February. “The battleground is certainly with that low-income consumer.”
Ricardo Cardenas, president and CEO of Darden Restaurants (DRI) , which owns Olive Garden, LongHorn Steakhouse, and other brands, told analysts during the company's earnings call that "the lower-income consumer does appear to be pulling back, and the mix of guests based on income is now in line with pre-covid."
Chipotle 'doing well' with lower-income group
About one-third of Black American households and 21% of white American households earned less than $35,000 in 2022, according to the latest available U.S. census data.
Chipotle (CMG) appears to be one of the fast-casual restaurants that is bucking this trend.
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Stifel analyst Chris O’Cull addressed the lower-income issue in an investor note, in which he raised the investment firm's price target on Chipotle shares to $3,270 from $2,700 and affirmed a buy rating.
The firm evaluated year-over-year visitation performance for several restaurant chains and found mixed results among them, O’Cull said.
The firm's analysis confirmed comments recently made by McDonald's and Olive Garden management and estimates that Starbucks (SBUX) also saw some challenges with lower-income customers. However, he also said that several restaurants, from Chipotle to Chili's (EAT) , appear to be performing well among this income group.
Chipotle is scheduled to report first-quarter earnings on April 24. The FactSet consensus estimate is that Chipotle earned $11.60 a share on $2.68 billion in revenue.
In February, Chipotle reported fourth-quarter earnings of $10.36 a share, compared with $8.29 a year earlier. The latest figure surpassed the FactSet consensus of $9.71 a share. Revenue totaled $2.52 billion, up from $2.2 billion a year earlier and ahead of FactSet's call for $2.49 billion.
The revenue increase was driven by an 8.4% increase in comparable restaurant sales. That comparable number reflected transactions up 7.4% and average checks 1% higher, the company said.
A month later, on March 19, Chipotle's board announced a 50-for-1 stock split, which the company said was one of the biggest such splits in the history of the New York Stock Exchange.
Chief Financial Officer Jack Hartung said this was the first stock split in Chipotle’s 30 years in business, and it came at a time when “our stock is experiencing an all-time high driven by record revenues, profits, and growth.”
The stock split is subject to shareholders' approval, expected in June.
At the time, Deutsche Bank analysts reiterated their buy rating. They said Chipotle was among the best-performing restaurant stocks and they had "high conviction in CMG's near-term and long-term growth outlook."
Analyst cites 'robust balance sheet'
Analysts have been assessing their price targets ahead of the Newport Beach, Calif., company's earnings report.
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Stephens resumed coverage of Chipotle with an equal weight rating and a $3,010 price target.
Chipotle separates itself from its fast-casual-dining peers through best-in-class execution. It offers impressive unit economics in its company-owned stores coupled with expanding digital offerings, the firm said.
A robust balance sheet also supports continual funding of increased units and returns of cash to holders through stock buybacks, the firm added.
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Stephens noted, however, that the stock trades at an enterprise value multiple of 35 times the expected next 12 months of earnings before interest, taxes, depreciation, and amortization. Its 10-year average multiple on that basis is 23.5 times.
UBS analyst Dennis Geiger raised Chipotle's price target to $3,400 from $2,900 and reiterated a buy rating on the shares.
Geiger said he used a recent UBS Evidence Lab quick-service-restaurant survey of about 2,000 consumers to help assess traffic drivers and the sustainability of traffic momentum.
He said that the firm saw Chipotle as positioned for continued traffic and sales momentum, supported by near- to longer-term growth catalysts including growing visit intent, solid food quality, and value attributes.
TD Cowen analyst Andrew Charles raised the firm's price target on Chipotle to $3,400 from $2,900 and maintained a buy rating on the shares.
The analyst said he expected a “clean” first-quarter report from Chipotle and raised his same-store-sales estimate to 4.5% from 3.5%, inline with Wall Street's consensus.
In a research note, the analyst tells investors that a panel of casual-dining executives suggests a favorable first quarter for fast-casual sales and the margin environment, which increases TD's conviction in the subsector.
At current valuation levels, the firm sees greater importance in raising 2024 adjusted EBITDA guidance to sustain the recent runs. TD is most confident this will be done at Shake Shack SHAK, Sweetgreen SG, and Cava Group (CAVA) .
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