The dining industry and restaurant-related exchange traded fund may enjoy a strong second-quarter earnings season as lower food costs helped bolster diners’ margins.
“Prices were some of the lowest levels in four years,” David Maloni, chief commodity strategist at the American Restaurant Association, told CNBC. “Egg prices are declining… cheese and chicken prices are attractive.”
Over the second quarter, food costs on average were 15% lower year-over-year, the fourth consecutive quarter of double-digit deflation compared to the previous year-ago period.
For example, egg prices dipped 64% in the second quarter year-over-year, dairy fell 20% and cheese decreased 12%. These common food ingredients represent significant savings for family-restaurants, like Denny’s (NasdaqGS: DENN) and DineEquity (NYSE: DIN), which cater toward the breakfast crowd.
“Commodities continue to benefit margins with the breakfast (restaurant) day-part benefiting the most,” Evercore analyst Matt McGinley said in a research note.
[related_stories]Moreover, beef prices were down 15% in the second quarter year-over-year and chicken prices were 11% lower.
Morgan Stanley analyst John Glass pointed out that chicken wing prices were slipping, which is good for the industry as chicken makes up about “10 to 20 percent” of the cost of goods sold for fast-food operators and other chains.
However, Evercore analysts warned that wage growth could temper the benefits of low commodity costs. Wage inflation is hitting restaurants as minimum wages at local and state levels go into effect.
Related: Take a BITE out of a Restaurant ETF
To track the dining industry, investors can look to the Restaurant ETF (NasdaqGM: BITE), a dedicated restaurant-related ETF. The ETF includes exposure to many eateries, with top components including Dave & Busters (NasdaqGS: PLAY) 2.9%, El Pollo Loco (NasdaqGS: LOCO) 2.8%, Arcos Dorados Holdings (NYSE: ARCO) 2.7%, Dominos Pizza (NYSE: DPZ) 2.6% and Papa Johns International (NasdaqGS: PZZA) 2.6%.
Related: 21 Consumer Discretionary ETFs for Economy Growth
Additionally, for more diversified exposure, investors can look at the PowerShares Dynamic Food & Beverage Portfolio (NYSEArca: PBJ), which targets food and beverage companies, and PowerShares Dynamic Leisure and Entertainment Portfolio (NYSEArca: PEJ), which includes restaurant names. Additionally, dining and quick services falls under the broader Consumer Discretionary Select Sector SPDR (NYSEArca: XLY).
Restaurant ETF