Restaurants Face a Rough Q1: BofA Warns of Missed Estimates Amid Economic Headwinds

The restaurant industry’s recovery from pandemic-era disruptions is hitting a wall. Bank of America Securities has issued a stark warning: many companies are at risk of missing first-quarter 2025 earnings estimates as economic headwinds and structural challenges mount. Let’s dissect the data behind this caution—and what it means for investors.

The Employment Crisis: A Clear Warning Sign

The Bureau of Labor Statistics (BLS) data tells a grim story. Restaurant employment growth has collapsed since 2022, with net job losses in key months of 2024:
- January 2024: -21,000 jobs
- April 2024: -7,200 jobs
- June 2024: 0 net new jobs

Even in July 2024, when the sector added 19,500 jobs, the quarterly growth rate of 0.35% in Q1 2025 projections remains below the 10-year average of 0.4%. This slowdown suggests a loss of momentum, with full-service restaurants still 4.1% below pre-pandemic levels, while quick-service chains and coffee shops have rebounded unevenly.

BofA’s Downgrade: A Sector-Wide Chill

BofA’s decision to cut Restaurant Brands International (QSR)’s price target from $69 to $56—and maintain an “Underperform” rating—is no isolated move. The bank has recalibrated estimates for over 20 restaurant companies, reflecting a sector-wide skepticism.

Why the pessimism? BofA cites:
1. Economic Uncertainty: A projected 6% unemployment rate by 2026 and delayed interest rate cuts (now expected in late 2025) could crimp consumer spending.
2. Labor Market Strains: Slowing job creation points to either reduced demand for dining or unsustainable labor costs.
3. Valuation Pressures: The bank’s adjustments align with shrinking profit margins as input costs (wages, rent, food) outpace revenue growth.

The Broader Risks: Loans, Rates, and Demand

BofA’s Q1 2025 earnings call hinted at deeper risks:
- Commercial Loan Growth: While BofA reported gains in commercial lending, CFO Alastair Borthwick warned of weakening demand due to policy uncertainty (e.g., tariffs, regulatory shifts). Restaurants, reliant on loans for expansion, face tighter credit conditions.
- Interest Rate Impact: Four anticipated rate cuts in 2025 may not come soon enough. Until then, borrowing costs remain elevated, squeezing margins for debt-heavy chains.
- Consumer Spending: A 4.2% unemployment rate in March 2025 masks sector-specific struggles. Full-service restaurants, for instance, still lag pre-pandemic employment levels, signaling weaker demand for discretionary dining.

Where to Look for Resilience?

Not all segments are equally vulnerable. BLS data shows coffee/snack bars (e.g., Starbucks, Tims) remain 21% above pre-pandemic employment, benefiting from casual, on-the-go demand. Quick-service chains (e.g., McDonald’s) are also outperforming full-service peers, though revised estimates suggest moderation.

Meanwhile, full-service restaurants—already 4.1% below 2020 levels—face a double whammy of labor costs and shifting consumer preferences. Investors should prioritize companies with:
- Strong unit economics (e.g., Cava Group’s modular menus).
- Diversified revenue streams (e.g., delivery partnerships).
- Minimal debt exposure.

Conclusion: The Q1 Miss Is Likely—Investors Must Adapt

BofA’s warnings are backed by cold, hard data. Slowing job growth, elevated wage costs, and macroeconomic clouds suggest a Q1 earnings miss is probable. The BLS’s 50,000-job projection for Q1 2025 is a modest target, especially compared to 2022’s peaks.

Investors should brace for volatility. The sector’s median hourly wage for waitstaff rose to $15.31 in 2023, while productivity gains lagged behind cost increases. Add in BofA’s 6% unemployment assumption and delayed rate cuts, and the path to recovery looks rocky.

Focus on defensive plays:
- Quick-service chains with scalable models.
- Coffee/snack concepts riding the convenience wave.
- Companies with low leverage and flexible cost structures.

Avoid full-service operators and heavily indebted brands unless they’ve demonstrated margin resilience. The restaurant sector’s Q1 2025 results won’t just be a data point—they’ll be a referendum on whether this industry can adapt to a tougher economic reality.

The writing’s on the wall: 2025 isn’t the year to bet on a rebound. It’s the year to pick the survivors.