Restaurant Industry Outlook Improved Slightly in July

The National Restaurant Association said yesterday that the Restaurant Performance Index, a monthly composite index that tracks the health and outlook for the U.S. restaurant industry, improved slightly in July to 98.1, up 0.3% from its June level.

However, the index remained below the 100 level, which signifies contraction, for the 23rd consecutive month:

The index is comprised of the Current Situations Index and the Expectation Index.

The Current Situations Index, which measures trends in same-store sales, traffic, labor, and capital expenditures rose 0.2% in July to 96.8. This was the first improvement in 3 months, but this measure has remained below 100 for 23 consecutive months.

The Expectation Index, which measures restaurant operators’ 6 months outlook on same-store sales, employees, capital expenditures, and business conditions rose 0.5% from June to stand at 99.4. While the index improved in July for the first time in 3 months, the index has posted prints below 100 in 21 of the last 22 months:

Similar to results we have seen in consumer confidence and sentiment in recent months, the outlook from restaurant executives seems to be getting more upbeat. The NRA said:

Although restaurant operators continue to report soft same-store sales and customer traffic levels, they are more optimistic about improving conditions in the months ahead. Restaurant operators reported a positive six-month economic outlook, and the proportion expecting higher sales rose to its highest level in three months.

However, digging down into the details shows that the slight improvement hardly provides for an optmistic outlook:

• 26% of operators reported a same-store sales gain between July 2008 and July 2009, up from a record-low 22% of operators who reported positive sales in June. 58% of operators reported a same-store sales decline in July, down slightly from 61% who reported negative sales in June
• In addition to sales declines, operators reported negative customer traffic levels for the 23rd consecutive month in July. 23% of operators reported an increase in customer traffic between July 2008 and July 2009, up slightly from 19% who reported similarly in June. 59% of operators reported a traffic decline in July, compared to 60% reported lower traffic in June
• 31% of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), up from just 24% who reported similarly last month. In comparison, 33% of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, matching the proportion who reported similarly in the previous two months
• 32% of restaurant operators said they expect economic conditions to improve in six months, up from 24% who reported similarly last month. In comparison, 24 % of operators expect economic conditions to worsen in six months, down from 26% who reported similarly last month

Much like the results and outlook for other retail sectors we have seen, the restaurant industry continues to struggle with weak demand from cash-strapped consumers. Most executives are hopeful things will start to improve, especially as we head into the fall and companies will be dealing with very weak comp store sales from last year.

However, we don’t foresee substantial improvement for the second half of this year, as consumers are unlikely to increase discretionary spending as long as worries about unemployment and income persist.