CHICAGO – The heady growth that has characterized fast-food sales in the past year may be headed back to earth, leveled by tough comparisons and consumer belt-tightening, analysts said Thursday.
McDonald's Corp. (MCD), the largest restaurant company and a bellwether for fast-food stocks, saw May sales growth at comparable U.S. stores slow to 7.9 percent from increases in recent months that often reached the double-digits.
The company is now a victim of its own strong numbers a year ago when its turnaround began in earnest.
McDonald's and others in the sector, including No. 3 hamburger chain Wendy's International Inc. (WEN) and CKE Restaurants Inc. (CKR), parent of the Carl's Jr. (search) chain, have been broadening their appeal with entree-sized salads, low-carbohydrate meals and other offerings aimed at women, the health set and young adults.
On average, overall restaurant industry sales growth has decelerated to 3.3 percent growth in May from 4.0 percent in April and 4.8 percent in March, according to a Thursday report from Banc of America Securities Inc. Analysts expect a continued slowdown.
"With the easiest of the 2003 comparisons behind us, restaurants will continue to face tougher comps as the year progresses," particularly fast-food restaurants, wrote Banc of America's restaurant analyst Andrew Barish.
"We expect a continuation of the deceleration that we have recently witnessed...," he said, noting that stock multiples will likely compress.
In addition to tough year-on-year comparisons, Wall Street also worries that the positive effect of an improving economy on consumer spending such as tax cuts and lower mortgage and refinancing rates have already been taken advantage of.
Offsetting those spending catalysts are the ongoing pressures of higher fuel prices and rising interest rates that may crimp budgets, especially those of lower-income buyers who may trim discretionary spending on fast food.
Added in the mix is an apparent comeback from No. 2 hamburger chain Burger King Corp. (search) , which is posing an increased competitive threat in the industry.
The Miami-based chain posted its biggest same-store gain in 4-1/2 years in May, with U.S. franchised restaurants up 7.2 percent. The company attributed its growth in part to new menu items such as TenderCrisp fried chicken sandwiches, Fire-Grilled salads and a quirky advertising campaign.
"Clearly Burger King has been the odd man out for the last few years," said JMP Securities restaurant analyst Dean Haskell. "Now they're working on reviewing their product quality and offerings."
Even in the more competitive marketplace, Haskell expects fast-food makers to post same-store sales gains of 3 percent to 5 percent in the near-term, impressive growth for a highly saturated industry.
"Successful operators will focus on new products, while not losing track of core customers," he said.