03:49 PM EDT, 06/06/2024 (MT Newswires) -- Restaurant-sector softness is expected to persist through the rest of this year amid consumer spending pressures that will likely elevate emphasis on value, UBS Securities said Thursday.

Industry same-store sales were down 0.5% while traffic dropped 2.5% year-to-date excluding January amid a variety of pressures. Those include pricing, which is up 20% to 30% from 2019 levels due to inflation, and reduced consumer savings, according to UBS analyst Dennis Geiger.

"More cautious restaurant consumer behaviors continue to include fewer items per order, reduced alcohol spend, and menu shift from premium toward value," he said. Pressured spending has been particularly evident among lower income consumers, with people trading down from quick service and into grocery.

The brokerage adopted a "modestly more cautious view" for the second half of the year amid the expectation of ongoing traffic softness that could lead to increased value activity and promotional offers. While the focus on value may benefit traffic, it could risk mix and margins, Geiger said.

"We maintain a still positive, albeit more cautious view on" second-half restaurant sector growth prospects, with low visibility into the sales and earnings outlook given macro pressures, he said.

UBS's top restaurant industry pick is buy-rated Domino's Pizza (DPZ), which was one of the few restaurant brands to improve same-store sales and unit growth and drive traffic, the report showed. The pizza chain at the end of April posted US same-store sales growth of 5.6% for the fiscal first quarter, a year-over-year acceleration from 3.6%. Further upside exists amid "a compelling catalyst path" with potential 2025 earnings beats, Geiger wrote.

Chipotle Mexican Grill ( CMG ) and Texas Roadhouse ( TXRH ) are among the brokerage's other top picks and are also rated buy. Chipotle maintains high-quality growth with leading traffic momentum, while Texas Roadhouse ( TXRH ) is positioned to maintain leading same-store sales and traffic momentum while expanding margins, the report showed.

Industry wide, wage inflation is expected to rise in the mid-single-digit range this year given minimum wage increases and a still relatively tight labor market, while food cost inflation is expected to be "largely benign," according to Geiger.

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