Wall Street Week Ahead: Restaurants' uptick offers hope for consumer discretionaries

By Reuters

Nov 14, 2014 07:42 PM EST

An improving U.S. economy has failed to galvanize the consumer discretionary sector so far this year, but a recent rally in restaurant stocks as the holidays approach could herald happier days ahead for other retailers.

The S&P 500 consumer discretionary sector index is up about 3 percent for the year, with only the S&P energy index performing worse.

One recent ray of sunshine, however, has been the performance of restaurant stocks. The Dow Jones U.S. Restaurants & Bars Index index has risen about 4 percent since the beginning of September. The S&P 500 consumer discretionary sector index is up less than 1 percent for the period.

Usually restaurant stocks correlate well with other retailers, but at the moment consumers are showing a preference for dining out over buying apparel, said Oscar Sloterbeck, senior managing director at Evercore ISI.

Shares of Buffalo Wild Wings Inc, Domino's Pizza IncDarden Restaurants Inc and Cracker Barrel Old Country Store Inc have all risen sharply since the beginning of September.

A broadening job recovery and lower gas prices are encouraging middle-income consumers to dine out again.

"The quickest path to the consumer might be through their belly," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston. Other discretionary stocks will also see an effect, but with a lag, he said.

While the better performance at restaurants may have more to do with an increased check size for the average diner, there is a growing belief that consumer discretionary companies will see more spending thanks to lower energy prices.

The average price of a regular gallon of gasoline is $2.914, down from $3.186 a month ago, in the longest sustained decline for prices since 2008, according to AAA.

This is likely to boost consumer discretionaries in the next couple of months, said Charles Sizemore, chief investment officer at Sizemore Capital Management.

Retailers reported strong sales in October in an encouraging sign for the sector, Friday data showed.

Traders in the options market, however, do not seem to be expecting fireworks from the retail sector this holiday season.

The 30-day implied volatility, a gauge of the risk of large moves in a stock, for the SPDR S&P retail fund was at 16 percent on Friday and in the 16th percentile of its 52-week range, Livevol Inc data shows.

"With overall volatility low, if consumer spending through the holiday season turns out to be better-than-forecast that would be a big win for anyone making that bet in the option market," said Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories.

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