Restaurants Find Dining Sales Taking Longer To Bounce Back
August 05 2009 - 9:25AM
Dow Jones News
Restaurants are finding tight consumer spending is putting a
sales recovery on hold, with July's results dashing hopes that a
low hurdle could yield improving trends.
As earnings trickle out, chains including P.F. Chang's China
Bistro Inc. (PFCB), Cheesecake Factory Inc. (CAKE) and Texas
Roadhouse Inc. (TXRH) have said same-store sales declined further
in July.
The second-half of 2009 was expected to offer easier year-ago
sales comparisons for restaurants, with July a turning point. Last
year, restaurant sales began to tank in July after benefits from a
government stimulus ran out and consumers grappled with gasoline at
$4 a gallon. From there, television events like the Olympics and
election news coverage kept people at home and out of restaurants,
while the latter financial meltdown kept wallets shut.
The thinking in some circles heading into the earnings season
was that there were so many unique events that restaurants would be
hard-pressed to see same-store sales get much worse.
But they have.
"It hasn't mattered that comparisons are easier, and a lot of
people were hanging their hat on that," Jefferies & Co.
restaurant analyst Jeffrey Farmer said. But, he said, "anyone who
talks about July says its one of the worst months they
reported."
Morgan Stanley (MS) analyst John Glass said that with better
same-store sales failing to materialize in July, September is next
in line for easier comparisons, though the delay comes with more
risk.
"Investors should be aware that for every day shares move up and
for every day sales fail to materialize, the risk to
[casual-dining] stocks grows," Glass wrote in a note on Texas
Roadhouse, whose stock fell 6.5% Tuesday after topping
second-quarter earnings on lower beef prices.
Thursday, Chili's Grill & Bar-operator Brinker International
Inc. (EAT) is the next casual-dining chain to report earnings. UBS
AG (UBS) upgraded Brinker Wednesday to buy from neutral, hoping
that a new promotion offering an appetizer, dessert and two entrees
for $20 will help sales recover from "alarming levels" in June and
July. Brinker shares closed Tuesday at $17.62, up 67% this
year.
Disappointing July sales comes from unprecedented macro
pressures, though some pain may be self-inflicted, analysts say.
With the unemployment rate at 9.5% and projected to rise, consumers
are reluctant to part with their dollars and are stockpiling
savings. Grocery stores are cutting prices, making eating at home a
better deal.
Restaurants also relied in large part on discounts and other
promotions to attract customers earlier this year, though analysts
say most of the bargains failed to pay off. Now that restaurants
have pulled back on deals, diner's aren't coming to the tables.
"The consumer has been trained to respond to deals," Stifel
Nicolaus analyst Steve West said.
While sales slump, restaurants continue to find inefficiencies
to improve on while benefiting from lower food costs, helping
companies surprise to the upside on their earnings reports. That
theme has played out over the last two quarters, helping restaurant
stocks, particularly casual dining chains, rally. But analysts say
investors will only tolerate that for so long before expecting
sales to pick up, which is largely reliant on improving
employment.
The second-quarter "may be the last quarter that investors will
be acceptant of casual-diners beating on less-bad trends," West
said. "They're getting impatient and wanting to see the consumer
come back."
West thinks continuing struggles in casual-dining sales could
set fast-food operators for out-performance in the back half of the
year.
Shares of chains like McDonald's Corp. (MCD) and Burger King
Holdings Inc. (BKC) have slumped in 2009, with investors trying to
get a jumpstart on a recovery in casual dining.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com