Casual Dining Recovery On The Right Road, But With Bumps
March 29 2010 - 2:02PM
Dow Jones News
Casual-dining trends continue to improve as customers gradually
return to the restaurants, but the industry's recovery from more
than three years of declining sales will likely run into some
hiccups.
The bumpy road could interrupt a sizzling rally in shares of
casual-dining stocks over the last several months, with some of the
largest chain restaurants like Darden Restaurants Inc. (DRI), up
27%, Brinker International Inc. (EAT), up 30%, and DineEquity Inc.
(DIN), up 64%, so far in 2010. High-end steakhouse operators Ruth's
Hospitality Group Inc. (RUTH) and Morton's Restaurant Group Inc.
(MRT) have both seen their shares more than double this year, as
the premium dining segment has also stabilized.
The S&P 500 Index, meanwhile, is up 5% this year.
Same-store sales, a key measure, still remains negative overall
in casual dining, though investors have bid up valuations hoping
the long-awaited turn to positive territory will soon materialize.
Knapp-Track, a closely watched index that tracks same-store sales
at more than 10,000 restaurants, has declined each year since 2007,
though the index appears to have bottomed last July.
Malcolm Knapp, who administers the survey, says Knapp-Track has
begun to record some positive weeks, and will likely flip positive
for a month sometime in the second-half of the year.
Better sales have mostly been factored into valuations, says
Destin Tompkins, restaurants analyst with Morgan Keegan & Co.,
and shares will likely need even-rosier sales upsides to move
higher. But, he said, "if it slows down and doesn't materialize as
much as is expected, there definitely could be some downside."
The recovery is unfolding unevenly, with one common thread among
the expected outperformers is a unique concept that allowed them to
avoid significant discounts in the past year, analysts say. While
less intense discounting is helping all, chains like Darden and
Cheesecake Factory Inc. (CAKE) are finding their differentiated
menus and experiences can stand out more without the din of
deals.
The dichotomy is playing out among the largest companies. Last
week, Darden, which refused to wade into deep discounting, reported
a positive quarter of same-store sales at Olive Garden, Red Lobster
and LongHorn Steakhouse for the first time in almost two years.
Brinker's Chili's Grill & Bar's same-store sales remain
under pressure, falling up to 5.5% in its latest quarter, as the
chain ended a promotion that offered two appetizers and a shared
appetizer and dessert for $20. Brinker executives said Chili's
sales are still "choppy," comments that underscore concerns about
whether customers will only come in for deals.
"It certainly goes back to whether in the absence of discounts,
how relevant are these concepts?" Stephen Anderson, restaurant
analyst at MKM Partners LLC, said.
Better demand for eating out may eventually translate to upward
pressure on commodities. The formula could set up the next
challenge for the sector as chains try to pass along higher costs
to the consumer. Once again, the differentiated concepts may get
greater leeway from customers to raise prices.
"Ones that have discounted are going to have a tougher time of
it," Anderson said.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com