Higher gasoline prices can hurt casual dining companies in two ways: They take money from their consumers' pockets, and they compress the companies' margins by increasing costs. As a result of this and other factors, the impressive rally in stocks like Darden Restaurants may finally be coming to an end.
Steady inflation, recovering home prices, decreasing unemployment and rising consumer confidence have helped propel consumer discretionary stocks. The 24.5 percent median return among consumer discretionary stocks is the highest of any sector in the S&P so far this year.
Shares of casual dining restaurants—such as Cheesecake Factory (up 35 percent this year), Texas Roadhouse (up 50 percent) and Darden Restaurants, whose biggest brands include Red Lobster and Olive Garden (up 13.5 percent)—have contributed significantly to that exceptional performance.
The news for consumers is not entirely rosy, however, so it may be time to start questioning whether that rally is likely to continue.
While rising asset prices certainly help the balance sheet of many Americans, as the value of their homes and investments rise, their free cash flow has not seen similar growth. The end of the payroll tax holiday is estimated to reduce after-tax pay by about $1,000 per year for the average household. Since June 28, gasoline prices have also risen sharply—gas prices are up about 15 percent in just over two weeks. This coincided with the sharpest rise in interest rates in decades. Sharp increases in rates could slow home and new car sales, and increase interest expense on floating-rate consumer credit.
The precise impact of any one of these factors is hard to estimate, but in the aggregate, reducing the amount of spending money consumers have eventually impacts their discretionary spending. Quite simply, this means that they will dine out less. And some recent sales data confirm that diners may be losing their appetites.