Will tax reform help restaurant sales?

History proves that lower taxes help the industry

Restaurant owners looking for something that will help sales next year might have received an early Christmas gift from Congress.

The Senate over the weekend passed a sweeping tax reform package that reduces taxes for individuals and corporations while eliminating some popular deductions and giving most of the cuts a 2025 expiration date. (RB's Peter Romeo has a summary of the bill here.)

The final package must still be hammered out in a conference committee. But there’s little question that restaurants and investors are paying close attention.

Cutting taxes is an easy way to increase restaurant spending. While much of the bill’s impact is among top earners, who are unlikely to spend their tax savings at restaurants, lower income consumers do frequently spend their savings. That’s good news for casual-dining chains that rely on consumers feeling particularly bullish.

Indeed, Baird analyst David Tarantino said that analysis following the 2003 tax reduction and 2011 payroll tax holiday showed increased sales for the subsequent 12 months.

Perhaps a better and more recent example came in 2014, when gas prices suddenly plunged by about $1 a gallon. Restaurant sales spiked. In January of 2015, same-store sales increased 6.1%, according to the monthly Black Box Intelligence index.

While that wasn’t a tax break, per se, it did put money into people’s pockets. And consumers proved they would go out and spend.

To be sure, that spending also eased after a while after consumers adjusted their budgets and spent on other things.

The bigger impact from the bill, therefore, could be in the form of higher profits, as the reform measure reduces the corporate tax rate from 35% to 20%.

Wall Street has been cheering tax reform, and investors in particular have been cheering the news.

Restaurant stocks are up more than 2% since Friday, according to the S&P 500 Restaurants Index. But several companies have seen their valuations surge.

Applebee’s owner DineEquity Inc., for instance, rose more than 10% on Monday. Brinker International Inc., owner of Applebee’s rival Chili’s, rose more than 7%, as did Steak ‘n Shake owner Biglari Holdings Inc. And both Chuy’s Holdings Inc. and Potbelly Corp. rose more than 6%.

Investors, it seems, are on board with tax reform.

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