Eight Restaurants with the Right Recipe for Lean Times

It might not be good for America's waistline, but froufrou dining off petite plates is out. The recession has made us hungry for family-size piles of comfort food, skyscraping burgers, and all-you-can-eat fries.

Like other segments of the retail economy, the restaurant industry has struggled over the past two years as unemployment has soared and consumers have curtailed spending. The National Restaurant Association's performance index shows that the industry has been shrinking for 23 months in a row. High-end bistros have fared the worst, with sales at fancy restaurants like Ruth's Chris (RUTH) and Morton's Steakhouse (MRT) off by 20 percent or more, as corporate customers pare expenses and other diners trade down. Casual- and family-dining places have suffered too, as people eat out less, order more takeout, or cook at home. Even fast-food chains like McDonald's (MCD) and Burger King (BKC) have lost business, despite dollar meals and other deals meant to keep the fryers sizzling.

Still, as in other whipsawed industries, a few survivors stand to benefit from the widespread pain. To figure out who they are, I analyzed data provided by financial research firm Capital IQ, a unit of Standard & Poor's, to see which publicly owned restaurant companies with at least $250 million in annual sales have gained revenue and market share since the recession began near the end of 2007. Then I researched earnings reports and other sources to separate firms with strong inherent growth from those benefiting from mergers, accounting anomalies, or one-time events.

Of 41 firms on Capital IQ's initial list, only eight made the final cut. All emphasize value, whether it's huge portions or quality for less. And all of these companies are financially healthy, with reasonable debt and the wherewithal to keep expanding despite a credit crunch. Here are the restaurants with the right recipe for lean times:

Buffalo Wild Wings (BWLD). Hot wings, zesty drinks, low prices, and a funky sports-themed atmosphere seem to draw crowds no matter how the economy's doing. This Minneapolis-based chain with outlets in 41 states has grown rapidly over the past two years, thanks to its plan to open about 60 new restaurants per year. Same-store sales have risen slightly, with expansion juicing overall revenue by about 31 percent so far this year. Profits are up by 34 percent. And the company says the grand openings will continue.

BJ's Restaurants (BJRI). Management might be tempted to belly up and drown their sorrows, since the majority of this chain's 89 restaurants are in deep-recession states like California, Arizona, and Florida. But the company's homemade ales, Chicago-style pizza, and deep-dish cookies seem to offer some comfort from the gloom, and nine new restaurant openings in 2009 have helped drive net income up 41 percent so far this year. The company hopes to open nearly a dozen new stores next year and ramp up expansion even more once the economy improves.

Chipotle Mexican Grill (CMG). The fast food at these casual eateries feels slow, thanks to organic ingredients, custom combos, and an emphasis on freshness. Traffic is down at many locations, but the company has been able to compensate by raising prices, a recession rarity that signals how popular Chipotle's burritos and spicy salads are. The company has also been able to continue a breakneck expansion plan, with new store openings for 2009 and 2010 likely to total about 250. Prices increases and expansion have boosted profits by 55 percent so far this year.

Olive Garden. More food for less money hits the sweet spot these days, which makes the family-style portions at this casual Italian chain a hit with diners. Olive Garden is a division of Darden Restaurants (DRI), which also operates Red Lobster, Longhorn Steakhouse, and a few smaller chains. Olive Garden has been the best performer of the bunch, with same-store sales down slightly but overall sales up, thanks to about 35 new outlets that have opened over the past year. That helped boost overall earnings for the company by 15 percent in the most recent quarter.

Panera Bread Co (PNRA). This bakery-cafe chain has viewed the recession as an opportunity to impress customers with its tasty, inexpensive meals—and to steal business from competitors. It's working. An emphasis on artisanal breads, organic chicken, seasonal specialties, and other delicacies hard to find in the suburbs—where most of Panera's nearly 1,400 stores are located—has helped propel earnings 35 percent higher so far this year. The stock has been even more impressive, nearly doubling since the beginning of 2008. The company plans to continue expanding, opening about 20 new stores each quarter for the foreseeable future.

Peet's Coffee & Tea (PEET). Instead of the deep price cuts that some premium retailers have used to prime sales, Peet's has doubled down on service at its nearly 200 stores and introduced upscale new offerings such as Godiva-flavored coffees. It has also reached well beyond its base in the western United States and begun selling coffee through grocery stores in New England and other regions. Earnings are up 25 percent so far this year, and Peet's remains ambitious, aiming to offer the highest-quality coffee in every market it serves.

P.F. Chang's (PFCB). This chain of snazzy Chinese joints disappointed investors recently, with third-quarter earnings that came in below expectations. But overall the firm has performed well, considering that many of its outlets are in malls—ground zero for the retail recession—and one third of them are in hard-hit California, Arizona, and Florida. Despite that, profits are up 35 percent in 2009, thanks to aggressive cost-cutting. The company plans to open nearly 20 new restaurants over the next year and to start selling a line of frozen food. And despite the recent disappointments, the stock is still up more than 40 percent since the start of 2008.

Texas Roadhouse (TXRH). Free peanuts and the down-market folksiness of this burger-and-steak chain with the Willie Nelson memorabilia have kept the crowds from fleeing to cheaper joints. To combat the recession, the company added lower-priced items it could still make a profit on, instead of slashing prices on existing menu items. That has helped sustain profits even though same-store sales have dipped slightly. And about 10 restaurant openings this year have helped bring in new revenue. Overall earnings are up 21 percent so far in 2009, a bigger jump than analysts expected, with 15 new restaurants planned for 2010. Best of all, the peanuts will remain free.

Disclosure: no positions

Comments

[Steve in TN:]

PF Chang's has also introduced a new line of lower cost Asian style restaurants called Pei Wei. I went to one that just opened in our city - same food as PF Chang with smaller menu, much faster service, but not lower cost.

Nov 04 12:05 PM

[cuznjames:]

Check out the historical price volatility on PNRA, Has this translated in option strategy opportunities?

Nov 04 01:07 PM

[mbkelly75:]

Nice list that gives "food" for thought. I have always been a fan of large portions and all-you-can-eat buffet lunches. I am a long-term holder of MCD and have done very well with it over the decades, but I like your viewpoint on these choices. Thank you for your work on this.

Nov 04 03:08 PM

[TCK:]

Just wondering how the bottom line of any restaurant will fare if/when the companies are forced to provide health insurance for all or pay another 8% or more additional payroll tax ?

Other cost increases could show up in higher energy cost due to "Cap and Trade".

Combine these considerations with a difficulty to raise prices in a slow economy ?

Something to think about ?

Nov 05 09:52 AM

[a. palmer jr.:]

You didn't mention the Golden Corral restaurants...they seem to be pretty busy in the cities around me.

Nov 05 10:12 AM

[spald_fr:]

On Nov 05 09:52 AM TCK wrote:
> Something to think about ?

Sure is. Just think, every credit card purchase at any restaurant and supermarket could segregate "bad" foods and up the insurance charges (or reduce the "public option"). Yikes.

Nov 05 12:14 PM

[Windsun33:]

Not mentioned, but I have been buying some Jack in the Box (JACK) over the past few months, much lower PE than many of those mentioned. Though of course sales growth is still a question until the next report comes out.

Nov 05 12:25 PM

[mbkelly75:]

Golden Corral is a very fine place to eat, but seems to be privately owned. I would NOT buy JACK right now as their MAs formed a Death Cross last 17 August and they have been trending down since and they have no dividend at all. They might be a trade stock when the Moving Averages form a Golden Cross and start trending up again.

Nov 05 01:59 PM

[a. palmer jr.:]

I assumed Golden Corral was publicly held since there have lots of restaurants. My oversight.

Nov 05 03:06 PM

[HAPA:]

PF CHANGS...R U KIDDING. U PAY FOR HI-END AMBIANCE N FAIR SERVICE W/ "OVER-PRICED FAKE-CHINESE CRAP" AS THEY TRY 2 PASS-OFF AS GOURMET CHINESE/ASIAN CUISINE...NOT! ALL THE DISHES N MOST SAUCES CAN SOMETIMES TASTE THE SAME AS EXPERIENCED IN HONOLULU N WALNUT CREEK, CA (SONS BIRTHDAY) WE WERE SO DISAPPOINTED AND THEY BROUGHT OUT THEIR TOP- YOUNG "FILIPINO" (R NOT CHINESE/ASIAN) TO APOLOGIZE..MAYBE THEY SHOULD OPEN A NEW CHAIN CALLED PFILIPINO NOT (CHANGS A SLANG 4 CHEAP)!? WE'LL NEVER GO BACK TO PFC AGAIN...LIKE KFC BETTER, ESP IF COOKS/CHEFS R NOT OF THE ETHNIC/CUISINE BEING SERVED!?

Nov 12 09:57 PM

[Danny Furman:]

If anything, Panera is a short candidtate as I doubt it will exist in 5 years. Otherwise most choices look good, but Denny's and Famous Dave's would have made my list.

Nov 13 08:38 AM

[GourmetGrrl:]

Have you been to your local KFC lately and looked at the cooks behind the counter?! Your Kentucky Fried is most likely being fried by someone of Asian or Hispanic decent. We as Americans think we are "too good" to work as a fast food or quick serve cook. The bottom line is that if there were no Filipinos or Hispanics to work in PF Changs kitchen, there would likely be NO PF Changs. Open your eyes! Just because someone does not LOOK the way you think they should look (in this case the cook in your local PFC) doesn't mean that they aren't skilled at what they do. I am a chef and the ethnic cuisines that come out of my kitchen are amazing, but one would not necessarily think so judging by the fact that I am a plain ole American girl.


On Nov 12 09:57 PM HAPA wrote:

> PF CHANGS...R U KIDDING. U PAY FOR HI-END AMBIANCE N FAIR SERVICE
> W/ "OVER-PRICED FAKE-CHINESE CRAP" AS THEY TRY 2 PASS-OFF AS GOURMET
> CHINESE/ASIAN CUISINE...NOT! ALL THE DISHES N MOST SAUCES CAN SOMETIMES
> TASTE THE SAME AS EXPERIENCED IN HONOLULU N WALNUT CREEK, CA (SONS
> BIRTHDAY) WE WERE SO DISAPPOINTED AND THEY BROUGHT OUT THEIR TOP-
> YOUNG "FILIPINO" (R NOT CHINESE/ASIAN) TO APOLOGIZE..MAYBE THEY SHOULD
> OPEN A NEW CHAIN CALLED PFILIPINO NOT (CHANGS A SLANG 4 CHEAP)!?
> WE'LL NEVER GO BACK TO PFC AGAIN...LIKE KFC BETTER, ESP IF COOKS/CHEFS
> R NOT OF THE ETHNIC/CUISINE BEING SERVED!?

Nov 13 09:22 AM

[mikeymike420:]

The problem is this there are highly paid people in fast food the 15 16 17 year old thats willing to work for minimum wage cant get jobs.if you were a manager making 15 dollars an hour on 50 hours of salary a week you wouldn't leave.Its a easy job any moron could do i did my managers job when i was 15.These fast food places are losing a balance thats why there stoping all raises in these places.so when they fire some one the person that takes over starts and stays at minimum. this technique is some what effective but,the people they need to get out is the 35 year old fast food manager that makes 750 a week.For a job a half retarded monkey could do.

Nov 13 10:23 AM

[david76116:]

Until someone does something like reporting the illegal use of foreign undocumented workers in americas kitchens,you'll always have inferior cooking standards.I know many kitchens that employ foreign workers so that they can continue to reap vast profits while keeping skilled culinary trained or trained chefs under formally trained chefs,to work elsewhere.You'll always have low paid kitchen workers til something is done.One way to fight it is to constantly report your favorite eateries to health departments and food critics and state beverage commissions.

Nov 13 11:28 AM

[GourmetGrrl:]

As a former "half retarded monkey" (as you put it), the problem with hiring the 15, 16 and 17 y/o(s) is that they are not dependable employees. They are not brought up with a proper work ethic because most (not all) of the time 'mom and dad' make them feel like they are entitled and better than everyone else. To them, a job at their age (unfortunately...but not in all cases) is social time and a way to make a little extra cash (over and above what the folks already give them for making their beds). In my restaurant, I gave many a teenager the opportunity to grow and learn responsibility to be able to advance...they did not take advantage of such opportunity. It is sad, but true.

Nov 13 11:28 AM

[Marcus Aure...:]

Of the joints in the list above -- I have been to the Texas Roadhouse (not the symbol but I will henceforth use the acronym TR) once and when on the road for business (and can expense at least a portion of my dinners) I frequent The Olive Garden (not the symbol but I will henceforth use the acronym OG). I ordered ribs at the TR and found them dry and not very appealing (especially in comparison to DAVE) and have not been back -- though others tell me their steaks are great.

OG's menu is a bit limited -- they used to have one of my favorite Italian staples and shortly after I started frequenting the place it came off of the menu. However, the portabella stuffed ravioli is a great dish and usually what I order. Where I used to visit regularly they were usually pretty busy at dinner time, but the bar was usually open so I would sit at the bar order a couple of ginnentonics and have two three glasses of wine.

Famous Daves is a place my wife and I visit on a regular (but infrequent) basis -- mostly when the weather is warm. I've seen analysts complain the menu is static but I say, SO? I don't go there to explore new foods I go there for RIBS (which is the only thing I've ordered from all of my visits).

I have played DAVE in the past I bought at $4 and sold about two - three months later at $6. I played with it in a sandbox once -- shorting it and made out well on that (except for the fact it was a sandbox play).

Of late, $6.00 on DAVE seems to be the base and far deviations from $6.00/share need to be cause for further investigation.

Nov 13 11:39 AM

[bobbybutte:]

asa person who has becoem financially independent solely from investing and writes a national newsletter i appreciate the author diligence

However personally the restaurant sector has 2 stocks that are not among of the 8 that I would choose instead

I appreciate different opinions but the time to buy restuarants like buffalo wild wings IMO has already passed

Nov 13 02:31 PM

[bottoms-up:]

Rick,

Just wondering... Does your parent company-owner (you know that real estate company in Boston) have any commercial interest in ANY of the restaurant chains you are pumping here?

Just curious, as I know you are a journalist, but the magazine is owned by a real estate company with large commercial real estate holdings.

I just wanted to know if you have come clean with any positions your employer may have here.

Just asking Rick... You know you can´t be too careful these days as all sorts of people are pumping all sorts of things under and above the table.

Nov 13 04:26 PM

[bottoms-up:]

Rick,

I'm sorry, but when you report "No Position," but U.S. News is owned by Mortimer B. Zuckerman, Boston Properties, Inc. (BXP) and you work for Zuckerman, I think you should disclose thiis to the Seeking Alpha readers.

If I'm not mistaken, some of the restaurants you list have corporate offices in some of the BXP buildings. Am I incorrect Rick?

Nov 14 09:29 AM

[bobbybutte:]

bottoms up makes some excellent points.

as a person who allocates capital for aliving and has achieved financial independence by doing just that

I can tell you these restaurant stocks recommended are not in my opinion among the best out there

Nov 14 10:29 AM

[somecatchyp...:]

Investing in any company that falls into the consumer discretionary category is probably the worst move a person could make under the present circumstances.

(OK, 30 year Treasury bonds might be worse.)

Nov 14 08:10 PM