Despite a continued lull in traffic, the restaurant industry put together its best quarter in three years, according to TDn2K’s latest Black Box report. Same-store sales grew 1.2 percent in the third quarter—the best since the Q3 2015. The restaurant industry hadn’t experienced a quarter in which all months had positive sales since Q4 2015. Comps in September grew 1.2 percent, which made it four straight months of positive year-over-year gains.

“Top-line numbers were good for the latest quarter and months,” said Victor Fernandez, vice president of insights and knowledge for TDn2K, in a statement, “but the question is ‘how strong is the restaurant industry really?’ The data suggests restaurants are doing much better, but the industry is still struggling with significant challenges.”

While the rolling three-month comps sales are positive 1.23 percent, comps traffic fell 1.26 percent, year-over-year, after a 1.38 percent drop in September. For the quarter, traffic declined 1.3 percent. That was also the best quarterly performance in the last three years.

The positive sales spread out across the U.S. All regions of the country posted gains during September and Q3. Florida, measured against last year’s hurricane-dampened sales, showed the best year-over-year performance at 5.74 percent comps and 4.31 percent traffic. The Southwest was the weakest with negative 0.02 percent sales and traffic declines of 2.83 percent.

Of the 196 individual designated market areas tracked by Black Box Intelligence, 149 (76 percent) were able to post positive same-store sales growth in September.

Job growth among chain restaurants also continues to rise. The number of restaurant employees lifted 2 percent, year-over-year in August. It was up 1.7 percent in July.

“Although August saw a small drop in turnover rates for restaurant hourly employees and managers, these rates remain at historically high levels and remain a big concern for restaurant operators,” TDn2K said.

Given last year’s Q3 results, which were tied for the weakest sales performance in the last three years, it’s not surprising to see robust growth, which is why Fernandez cautioned against an overly optimistic take. In 2017, Florida and Texas—hit by hurricanes—reported quarterly sales below 3 percent. Yet, there were still results that spoke to a broader recovery.

“It is easy to attribute the current strength to the bad weather that impacted some of the largest economies in the country last year,” Fernandez said. “However, the fact that all regions posted positive sales in the third quarter of 2018 [the first time this has happened in any quarter over the last three years] and six of the 11 regions achieved growth of 1 percent or better suggests that the relative strength goes beyond just the easy comparisons in the hurricane areas. Excluding Texas and Florida, the quarter would have been 1 percent vs. the 1.2 percent reported.”

Another take: Even with positive sales, restaurants are losing guests. They’re counteracting this reality with rising guest checks, which may not have the same kind of staying power. “The fact that this is the best traffic quarter in the last three years highlights the magnitude of the continued market share battle for guest traffic,” TDn2K said.

On a two-year view it’s a less promising picture. In Q3, sales were down 1.2 percent compared with the same quarter two years ago. Traffic declined 5.7 percent over that same two-year span. However, two-year sales performance averaged negative 1 percent over the last two quarters, a slight improvement from the negative 2.5 percent for the previous four-quarter period.

In sum, traffic is a serious concern right now. But there are some signs of improvement.

The national unemployment rate dropped again in September and is currently 3.7 percent. This remains a leading concern for operators competing for talent in a shrinking pool, where underemployment often feels like unemployment. According to TDn2K’s People Report, the number of employees in the restaurant industry grew 2 percent, year-over-year, in August after increasing 1.7 percent the previous month.

Turnover for hourly employees and restaurant managers did decrease in August. And after years of continual climbing, turnover rates in recent months are starting to drop a bit. “This trend, however, is not expected to reduce turnover rates enough for retention to lose its status as a critical issue haunting operators,” TDn2K said.

“… the evidence grows in our analysis of TDn2K White Box Guest Satisfaction data cross-referenced with Black Box Intelligence sales and traffic data,” added Wallace Doolin, chairman of TDn2K. “There is one aspect of the restaurant experience that separates Top Box performing companies from the rest: the guest perception on service. Those are the same companies that we find in the People Report data that are successful at retaining their top talent and effective in staffing every shift.”

There are also warning signs for the economy.

“The economic expansion is the broadest-based in nearly two decades,” said Joel Naroff, president of Naroff Economic Advisors and TDn2K economist, in a statement. “Growth has moved from manufacturing and large corporations into the small business sector. Looking forward, though, there are warning signs.”

Benefits are raising, not wages. Meanwhile, household income continues to crawl.

“That should continue to restrain consumer spending. Rising energy costs are diverting funds into gasoline and utility purchases. A softening in the housing sector, which typically leads the economy, indicates that households are becoming more conservative. And the Fed has signaled that rates will likely rise through next year. Together, these trends imply that the retail battle for share of consumer wallets will only intensify in what is likely to be a more moderate growth environment,” TDn2K said.

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