Starbucks, Chipotle Point to Consumer Concerns as Shutdown Persists
There's reason for concern about the U.S. economy as key data points to storm clouds brewing.
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The federal government shutdown has entered its fifth week with no clear resolution in sight. The impacts of this event are spreading.
Over 40 million individuals are facing the loss of food stamp benefits, roughly one in eight Americans. Roughly the same percentage of consumers are now facing recently reinstated student loan repayments after a near four-year taxpayer hiatus. The air traffic control network is getting increasingly stressed and many areas of the country are now seeing delays in air travel.
Despite this latest example of our dysfunctional government as well as narrow market breadth, equities continue to march to all-time highs. The NASDAQ tacked on another 2.2% to its rally last week and 4.7% in the month of October.
Investors continued belief in the AI revolution remains the main driver of the rally, although more chinks have started to develop in the AI narrative. OpenAI now has something like $1.4 trillion in commitments to purchase future computing power as the vendor-financing circle has reached extreme levels. Meta Platforms (META) had its worst one-day plunge in three years last week after third quarter results showed capital expenditures were running higher than expected.
The top 10% of households by income continues to be doing well, powered in large part by the huge increases in appreciation from equities and real estate since the pandemic. This cohort now powers roughly half of all consumer spending. Most of the rest of the consumer base continues to struggle. According to recent surveys, approximately two-thirds of Americans are living paycheck to paycheck. One key reason is that auto loans to prime debtors remain pristine, while delinquencies to non-prime auto loans are surging along with those on student loans. Auto repossessions are projected to top three million in 2025. The first time this has happened since 2009, in the middle of the Great Financial Crisis.
An investor can see these consumer struggles in many well-known consumer icons. Starbucks (SBUX) has seen same store sales on a year-over-year basis shrink for six straight quarters despite launching initiatives to drive more foot traffic to their stores, including makeovers in many locations. The company also announced some recent layoffs.
Chipotle Mexican Grill, Inc. (CMG) began the year forecasting mid-single digit increases for same store sales in 2025. Unfortunately, comparable store sales only grew .3% in the latest quarter against the same period in 2024. Operating margins shrunk 100 BPS to 15.9% as well in Q3. Management now projects same store sales will fall in the low single digits for FY2025.
The Cheesecake Factory Incorporated (CAKE) also lowered its forecast last week and sees slower demand continuing at least through the end of FY2025 and into the first quarter of 2026. The once promising turnaround effort at Dave & Buster's Entertainment, Inc. (PLAY) has also started to clearly falter in recent months.
This all points to a weakening consumer, outside those households at the top of the income scale. And with consumers driving nearly 70% of U.S. economic activity, it points to some storm clouds ahead despite the boost to economy from surging AI related tech spending.
At the time of publication, Jensen had no positions in any securities mentioned.
