What Could Derail Restaurant Stocks?

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Over the past five years, restaurant sales have been on an upward climb, rising each year and leading the retail sector. With restaurant sales up 9% over the first half of 2015, on top of already strong numbers in 2014, it begs the question what, if anything could derail the bull market in restaurant stocks. While there is no way to tell for sure, here are a few things that could lead to a restaurant slow down.

Rising Gas Prices

The average gas price has dipped below $2 a gallon, from about $2.90 a year ago, and restaurants have seen the greatest benefit. As gas prices have dipped, restaurant sales have outpaced retail sales and consumer spending in general. That said, there's reason to believe that this party can't go on forever. Gas prices are currently being held artificially low because several nations are over producing oil for a number of geopolitical factors. This can't happen indefinitely and, more importantly, oil is not an unlimited commodity. At some point, the oil supply has to come down and, when it does, gas prices will rise again. 

When gas prices do spike again, it stands to reason that restaurants will feel it more than any other sector. American's are spending additional discretionary cash from low gas prices on eating out; it's only natural that the reverse could happen when gas prices rise again.

 
 

Rising Food Costs vs. The Economy

Over the past few years, many restaurants have battled rising food costs, especially eggs, chicken, and beef. Food costs naturally rise when supply is short, and when inflation rises. Over the past few years, supplies have been short, but inflation has largely been kept in check.

Food costs have risen, but only modestly, and restaurants have been able to pass the additional costs ​onto consumers in the form of price increases. 

However, if we flash back to 2007, we are reminded of a time when food costs skyrocketed from short supply and inflation. High gas prices and high food costs collided with a slowdown in consumer spending in the back half of 2007, which ultimately hurt restaurants (and eventually wiped out restaurant stocks in the recession of 2008). 

Restaurants are always walking the line between consumer spending and the economy vs. rising food costs. If the economy is good and consumers are spending, restaurants can live with higher food costs because they can raise their prices, but prices can only go so high before consumers are hurt. When consumers feel the pinch from rising prices, they start spending less and the restaurant industry can spiral downward. Things are going great for restaurant stocks right now, many are at a multi-year high, but any hiccup in consumer spending, whether it be from rising food costs or not, could send them crashing.

Restaurants Are Resilient

A recent report showed that, for the first time ever, American's are spending more eating out than on groceries.

So sure, lower gas prices help, but consumers spend their money first on restaurants because we are addicted to eating out. In a time of celebrity chefs, cooking reality shows, and foodie bloggers, eating out has become a true entertainment experience. Therefore, it's natural to assume that restaurants will remain resilient and weather any economic storms that may be brewing.

But while most restaurants will survive any downturn, it makes sense that the industry will slow from its recent surge at some point. When that happens, some stocks that are currently at multi-year highs will fall. If you can keep a long-term view, then you have nothing to worry about. Just make sure you are aware that the industry, and many stocks in it, have soared to lofty heights.