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Earnings Preview: Consumer Tastes Change; Casinos on a Roll?

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January 6, 2017
Consumer spending increases among entertainment and restaurant markets.
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Consumer spending and consumer confidence have been edging higher as the economy appears to be revitalizing itself, and many of the nation’s largest eating and entertainment institutions look like they may have enjoyed the fruits of a growing economy. How well they have fared, and what obstacles they may have met along the way, will be evident when behemoths like McDonald’s (MD), Chipotle (CMG), Disney (DIS) and MGM (MGM) begin releasing their quarterly reports in late January and into February.

Though analysts have largely positive forecasts on those companies for the most recent quarter, they may be more interested in what company executives have to say about their outlooks for 2017. Fast-casual restaurants, for example, have been losing foot traffic to other food venues, while the gaming industry is eyeing a new administration in Washington and new rules in Japan that could ease restrictions on U.S.-based gambling establishments.

The Food Front

The swings in consumer tastes and behaviors appear to have had an impact on the restaurant industry, and in particular in the fast-casual segment, according to data reported from TDn2K, an industry research group, through the Restaurant Industry Snapshot. Traffic trends are declining, pulling same-stores sales, a key industry growth metric, down 3% for the year through November. In all of 2015, same-store sales were off only 0.8%.

Meanwhile, market share appears to be moving from larger, more mature restaurant concepts to smaller, younger chains and local eating spots, according to Fitch Ratings’ Outlook Report. Fitch expects about a 4% gain in 2017, coming from higher price points and new-store openings vs. better foot traffic.

“There will be winners and losers,” Carla Norfleet Taylor, a senior director at Fitch Ratings, said in an industry report. “It’s a market-share game. Traffic is just not growing.”

Meanwhile, a recent Bank of America/Merrill Lynch study of credit-card spending habits found that restaurant sales have been sluggish as grocery-store prices have fallen amid lower commodity costs, meaning consumers may be opting to eat at home.

One reason for that may be the widening gap between food-away-from-home prices and food-at-home prices. While tabs for away-from-home meals have climbed 2.4%, those for food-at-home have fallen 2.3%, according to Nation’s Restaurant News.

“That gap has been widely blamed for a slowdown in traffic and same-store sales this year,” the industry magazine said. “Same-store sales have fallen for each of the past nine months…while traffic has fallen 13 of the past 14 months.”

The BAML study analyzed millions of its credit-card and debit-card spends and uncovered an interesting tidbit—restaurant sales weakness does not appear to be an industry-wide issue.

"We find that sales of the big chain restaurants, which make up 18% of the aggregate, have been decidedly slower than the rest of the composite,” Michelle Meyer, a BofA economist, said in a report. “This is indicative of a market shift away from large chain restaurants.”

That may pressure big chains like MCD and CMG as they compete with the boutique-like feels of local, independent restaurants and the uniqueness offered by startup chains like Shake Shack (SHAK).

MCD has seen a management change and with it a new direction for its worldwide stores, into which analysts will be looking for more insight. Ditto at CMG, whose founder Steve Ells took the full reins of the fast-casual enterprise in December amid customer fallout from food-safety issues a year ago.

Analysts reporting to Thomson Reuters are expecting higher sales to be reported at CMG, but a drop in profit. At MCD, the reverse is forecast with sales expected to slip but profit anticipated to be stronger on a year-over-year basis.

And This for Entertainment

Certainly, consumers do more with their free time than go to movies, watch TV and visit casinos. But DIS and MGM are widely held multinational conglomerates, and thus may offer a snapshot for the segment. The short answer? The roads ahead for these two appear to be somewhat brighter.

While analysts this year have sought more insight into DIS’ declining numbers at its ESPN unit, which has historically been seen as a cash cow for the company, its movies continue to post blockbuster results that analysts say may become evident when earnings are announced in early February.

In mid-December, DIS became the first worldwide movie studio to break through the $7-billion mark in ticket sales in one year, fueled by several billion-dollar global winners such as “Finding Dory,” “Captain America: Civil War,” and “Zootopia.” Its most recent hit “Rogue One: A Star Wars Story” opened to grand numbers may have dominated screens through the holiday season.

Analysts are mostly bullish on MGM’s quarterly prospects, according to Trefis. MGM has posted a loss in Q4 for the last four years, but analysts reporting to Thomson Reuters are eyeing a gain when results are announced in mid-February.

What will they be looking for in 2017? One item may be the Japanese market—U.S.-based casino operators have lobbied for more than a decade to get approval to open casino resorts there. They may have passed the first step in mid-December when Japan’s parliament approved a law ordering the government to get plans in place for the nation’s first casino resort, according to published reports. That law doesn’t legalize casinos (there are many other forms of gambling available in Japan) but there is hope that new laws will be enacted for casinos to open in early 2020.

Fitch has noted in a report that some U.S.-based casinos are better prepared for development in Japan than others, and MGM may be one of them. Meanwhile, casino operators have stated publically that they look forward to “one of their own,” meaning Donald Trump, having a bigger say in potentially lifting some gaming regulations when the new administration settles in.

TD Ameritrade clients can get a visual view of the hotel, restaurant and leisure sector of the S&P 500 via a heat map in the thinkorswim® platform. (See figure 1 below.) The size of the square indicates the market cap of that company. With just a click, you can quickly access fundamentals, news, charts and more. 

FIGURE 1: SECTOR HEAT MAP.

To find this Heat Map in the platform, click MarketWatch > Visualize > Indices > S&P 500 > Consumer Discretionary > Hotels, Restaurants & Leisure. Image source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.

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