Chain Restaurants Q2 Earnings: What's Going On?

Chain Restaurants, Q2 2009: What is Happening?

Most of the chain restaurant earnings for the quarter are now in, but it will be interesting to watch Burger King (BKC) on August 25. This quarter, virtually all companies beat analysts estimates based on commodity and other cost structure reductions, all of which essentially fall 100% through to the bottom line.

So beating projections on cost decreases is good but should be no surprise in this sector right now.

Sales and traffic gains were much more elusive, with only really McDonald’s (MCD), Chipolte (CMG), Steak N Shake (SNS) and Buffalo Wild Wings (BWLD), posting full quarter gains. Of these, we know SNS’s and CMGs sales components (traffic, average check, sub components mix and price), with Chipolte with a 6.5% (biggest anywhere) price increase effect and 3.5% negative traffic, while Steak N Shake experienced a 8.4% negative mix effect but increased traffic a whopping 13.4%, for a same store sales gain of 5%. WEN gets an honorable mention, with July Wendy’s sales up if you back out breakfast.

The Steak N Shake moves were the most dramatic in the publicly traded chain restaurant universe. I grew up in Indianapolis, and know them well. Many of their midwestern markets were long waiting for a nostalgia/founding year based, low priced promotions. Their Q1/Q2 promotional themes were $.15/$.79 steak burgers, 4 meals under $4, steak burger/fries/drink for $2.89).

SNS' menu and operations look more focused based on my May 2009 swing through that area, and SNS did deliver a $3.8M profit for the quarter, versus a year ago loss, or about a $.07/share gain over the consensus estimate. When the 10Q is filed, more examination will be possible. The announced August 13 Western SNS/Western Sizzling merger (no proxy yet) does not seem to be an operational play, but a G&A cost reduction play. But, again, lets see the numbers.

A group of chains isn’t discounting or not as much, as a core strategy: CKR (Carl’s Jr), Cheesecake Factory (CAKE), Panera (PNRA), Chipolte (CMG), and now, Red Robin (RRGB). Like retailer Abercrombie and Fitch (ANE) until they threw in the towel Friday, these companies are concerned about maintaining long-term brand integrity by not discounting. This group will bear watching. However, the importance of absolute price level is easily seen in the chain restaurant results, with all of the high-end operators such as Ruth Chris (RUTH) Morton’s (MRT), and McCormick and Schmick’s (MSSR) comp sales down about 20%.

But the non-discounters aren’t as badly off as Abercrombie, with 30% same store sales declines two quarters straight, and operating margin down to 3.9%

Two very recently released future oriented restaurant operations industry operators and other industry professional’s surveys essentially are wiggling slightly negative:

• The well written and designed RBC Operator and Investor Survey, by Restaurant Analyst Larry Miller, points to 50% of operators noting sales will not improve in August, versus 46% stable, versus 4% noting an absolute improvement expected. More downward pressure on the average check and mix shifts are expected, and fast fooders a bit more pessimistic.
• The National Restaurant Association’s Expectations Index (surveys 6 months out) is at 99.0, down 70 bpts. from May, and the second consecutive monthly decline. After falling dramatically for months, the index had wiggled up earlier this year.

Disclosure: No stock positions