Some Chain Restaurants Gaining Traction

Thus far in Q3 2009 earnings season, most of the chain restaurants have delivered “good” earnings results: generally negative sales comp results, favorable commodity and other cost reductions and as a result meeting EPS expectations.

Food commodity market conditions have been favorable, with price decreases tracking to weak demand. So long as the companies aren’t too far out in their contracting, and playing the generally favorable spot market conditions (one notable exception was Brinker (EAT) that noted on October 20^th that a chicken contact was above market and that they wouldn't see deflation until the back half of the year). Also, most have reported significant G&A cost reductions, including Darden (DRI), YUM and others, 100% of which flows to the bottom line.

The downside of so much information and the news cycle is that the analysts and press are very critical: good results are not good enough if any kind of hint of negative outlook is delivered. A prime example is Chipotle (CMG). CMG, one of the margin and comp sales stars still growing, fell about $10 from its early October trend. It noted on October 22 that next year sales would be flat and it was working to develop a smaller prototype unit (with supposedly lower sales, no resolution of the proforma ROI however).

In looking at the sales results closely, it seems the national/international operators, with a lot of market penetration and heavy television strategies, are struggling the most. Good examples are DRI, YUM (Pizza Hut –13%, Taco Bell/KFC –2%) and DINE (Applebee’s, with results announced Tuesday, with same store sales deteriorating to –6.6%). Even McDonald’s (MCD) noted on October 22 that October US sales might be flat to –1%. Its Quarterly US same store sales were positive 2.5%.

A few smaller operators with more limited footprints and non-TV, smaller ad budgets did deliver some encouraging sales news, along with Domino's (DPZ). A recap follows:

· BJ’s (BJRI): -1.6% comps for the quarter, and a -4% traffic trend, but noted sales were even by 3^rd week of October. Ad budget: 1% of sales.

· Cheesecake Factory (CAKE): -2.8% comps, with positive check, 2% price and traffic some negative value. Ad budget: 1% of sales.

· The Pei Wei component of PF Chang’s (PFCB), with –. 7% same store sales in the quarter but positive 2.5% sales in September. No TV, but limited radio, print, online and direct mail marketing strategies.

Domino's had total comp sales system flat domestically (company was –2.0% and franchisees were -.3%) Ad budget: appx. 5% of sales. Domino's of course has enhanced the lunch daypart and pushing $4.99 sandwiches.

The burger wars in the QSR sector, 2 for $20 (DIN) and 3 for $20 (EAT), and Unlimited Pasta Bowl for $8.99 (DRI) are filling the US airwaves and diffusing messages. Perhaps some smaller, growing concepts not playing there have a chance to crawl up the ledge.

Disclosure: no stock positions

Comments

[Alan Brochs...:]

Hey, John. I listened to the BJRI call, as that is the restaurant chain about which I am most optimistic. While I continue to view that story very favorably, the stock seems to more than anticipate the future. The near-term remains very challenging for all restaurants in terms of demand. I don't see a lot of opportunity for investment currently in the sector.

Oct 28 08:21 AM

[Ricard:]

Already set DCA pricing points of 70 and 50 to double down on CMG.

Oct 28 09:33 AM