Restaurants Hope Tax Refunds Bring Customers
Payroll tax increases and high gasoline prices have pushed consumers to dine out less. But tax refunds, which are rolling in, may bring relief to the limping restaurant industry.
"Payroll tax takes its negative toll. Starting February consumers have less money — low- and middle-income groups," said Darren Tristano, a restaurant industry analyst at Technomic, a market researcher.
The payroll tax was raised in January two percentage points to its previous level from 2010. (Read more: Payroll Tax Hike Will Affect Your Paycheck and Economy)
According to research from the National Retail Federation that was released in February, nearly three-quarters of Americans said they're adjusting spending because of the payroll tax change. Plus, 16 percent of those surveyed said they're eating out less, and 15 percent are using coupons more often, according to the retail group.
Rising fuel prices have hit restaurants even harder. More than 37 percent of those surveyed said they're eating out less because of the gas prices, according to a separate survey from the retail group.
Value is King
Given tighter wallets, it's no surprise consumers are looking for more value, said Tristano of Technomic. Pizza and burger chains will likely grow further during the next few months as they offer more value. Tristano sees a slow growth of 1 percent (adjusted for inflation) for the restaurant industry in 2013.
"Hopefully those tax returns coming in will give us a boost in terms of sales," said Tristano, "Enough to offset, perhaps, the impact of the payroll tax."
With fuel prices forecast to climb further, dining out will be trickier for consumers. But restaurants catering to more wealthy customers won't be hit as hard by payroll tax fluctuations, the analyst said.
Analysts see few attractive stocks in the restaurant industry at the moment, but Starbucks is one of them. Unlike fast-food chains that offer coffee for as little as a buck, Starbucks customers are willing to shell out several dollars for beverages.
"One of our favorite stocks in the industry is Starbucks, which has a luxury of catering to more affluent customer base that probably is not as sensitive to the payroll tax issue," said RJ Hottovy, director of consumer equity research at Morningstar.
(See Related Video: Starbucks Buys the Farm — Literally)
Starbucks also benefits from a variety of high-margin products available at grocery stores. Starbucks sells baked goods. The company acquired juice business Evolution Fresh and tea company Teavana. That diversified business model sets them up for growth, Hottovy said.
As Starbucks builds its growth strategy, consumers seem to be recovering from the payroll tax hike that gained two percentage points.
"When a 2 percent payroll tax went into effect in February of last month, the entire retail and consumer category — in terms of consumer behavior — was modified as a result of that 2 percent," Starbucks CEO Howard Schultz told CNBC's "Closing Bell" this week. "We have since, and I think others have seen it, come back," he said.
Other Restaurants Picks
Sector analysts like other restaurant picks. Hottovy of Morningstar said Yum! is a slightly undervalued stock. Yum! is growing in emerging markets markets such as China, India and South Korea, he said. Yum! brands include KFC, Pizza Hut and Taco Bell.
Some consumers may trade down to lower price restaurants like McDonald's if they continue to feel the impact of the pay roll tax, but the share price of McDonald's reflects it already, he said.
Darden restaurants — including Red Lobster and Olive Garden — on Friday reported its third-quarter earnings of $134.4 million, down 18 percent from the previous year. Revenue of $2.26 billion gained 5 percent from a year ago period. The restaurant group had lowered its profit forecasts for the third quarter back in February, when several restaurants had revised their guidance as well.
(Read More: Darden Meets Earnings Estimates, but Sales Are Soft)
"Not only do they [Darden] face competition among all casual dining restaurants, but also see a shift to fast casual restaurants, like Panera and Chipotle that can generally offer lower price points," Hottovy said.
While Dareden's promotional activity brought in customers, that resulted in thinner margins, Hottovy explained. "Consumers are adjusting, but at the same time it means it is a very aggressive promotional environment for companies," Hottovy said.
-By CNBC's Anna Andrianova; Follow her on Twitter @AndrianovaAnna
Questions? Comments? Email us at firstname.lastname@example.org.