In the second quarter, restaurant companies faced similar challenges but can be divided into two categories: winners and losers.

Some chains found that higher menu prices drove away diners, while others observed that consumer behavior remained unchanged even as food and drinks became more expensive. Certain promotions successfully attracted customers to specific restaurants, while others failed as diners sought better value. Low-income customers frequented some restaurants more often, but avoided others.

Overall, foot traffic to restaurants has declined, and sales growth has slowed as many establishments refrained from implementing further price hikes that had driven revenue in the past. Customers have become more selective about where they spend their money, creating a clear divide in performance among restaurant chains.

While most restaurant companies exceeded earnings expectations, some fell short of Wall Street’s estimates for quarterly revenue. McDonald’s and Wingstop were among the rare few that reported Q2 earnings, revenue, and same-store sales growth that exceeded analysts’ expectations. On the other hand, Papa John’s, Wendy’s, and Chipotle Mexican Grill were among the companies that disappointed investors with weaker-than-expected sales. As a result, their stocks have not recovered yet.

Trends that Defined the Quarter

1. Restaurant Traffic

Two key metrics determine a company’s same-store sales growth: the average amount customers spend per order and the frequency of their visits. With restaurants delaying price hikes and customers becoming more conscious of their spending, establishments must rely on the latter metric, traffic, to boost their same-store sales. This aspect is closely monitored by Wall Street.

McDonald’s, Chipotle, Texas Roadhouse, and Wingstop were among the few chains that reported growth in U.S. traffic in the latest quarter. On the other hand, Restaurant Brands International revealed a decline in traffic among three of its chains: Popeyes, Burger King, and Firehouse Subs. Wendy’s reported a 1% decrease in domestic transactions in Q2. Looking ahead, traffic may further decline in the second half of the year, potentially impacting restaurant stock performance.

2. Value Perception

Despite inflation cooling down, consumers still prioritize value. The fast-food sector has benefited from consumers trading down from fast-casual restaurants to more affordable options. However, value perception varies across different chains.

For example, McDonald’s performs well with consumers in the under $100,000 and under $45,000 income brackets. In contrast, Wendy’s experienced a pullback in purchases from diners earning less than $75,000. Wingstop witnessed improved value perception among customers as chicken wing prices dropped, while Chipotle has seen a return of low-income consumers to its restaurants. However, these customers are not visiting as frequently as they did before inflation escalated. One chain struggling with value perception is Noodles & Company, which experienced a significant decrease in traffic due to higher prices. The chain responded by lowering prices and refocusing its marketing efforts on value.

3. Promotions

As restaurants and customers emphasize value, discounts, combo meals, and limited-time menu items have become the primary focus of marketing efforts. While some promotions successfully boosted sales and generated buzz on social media, others were not enough to offset weaknesses.

McDonald’s Grimace Birthday Meal, with its limited-time purple Grimace milkshake and core menu items, attracted social media attention and increased restaurant traffic. However, Papa John’s release of Doritos Cool Ranch-flavored Papadias for $7.99 failed to outperform its previous pepperoni-stuffed crust pizza released at a higher price. As a result, weaker same-store sales were recorded.