Capital expenditure expectations
In the previous part of this series, we looked at the current situation of capital expenditure for the US restaurant industry. The National Restaurant Association (or NRA) also reports restaurant operators’ outlook for capital expenditure over the next six months.
Restaurant operators are expecting to increase their capital expenditures for the following projects:
- opening new stores, which is critical for restaurants such as Shake Shack (SHAK)
- purchasing new equipment as discussed in the Brinker International series (EAT)
- remodeling or re-imaging existing restaurants, as Domino’s (DPZ) and McDonald’s (MCD) are doing
The expected capital expenditure index increased by 1% to 101.7 in April from 100.7 in March. This index is a forward-looking measure. According to the NRA, 59% of operators plan to increase capital expenditure compared to 53% as reported in the previous month. Increased capital expenditure is also positive for the consumer and retail sector (XLY) (XRT). XLY has a 37% weight in retail stocks, and holds a few of the restaurants mentioned below.
Companies are expanding
The fast casual restaurant segment is on an uptrend, and this translates into capital expenditure. For example, Chipotle (CMG), which only operates company-owned stores, has been growing its units at a rate of 12% each year. A restaurant’s requirement for capital increases for company-owned stores as opposed to franchising, where the financing comes from the franchise owner.
Increased units lead to a requirement for labor as well. In the next part of this series, we’ll look at the current situation for labor in the restaurant industry and see whether restaurant operators are anticipating an increase in hiring in the coming months.