Outlooks Improving for Quick Service, Chain Restaurants

by: John Gordon
This week’s chain restaurant news will be more driven by casual dining sector matters, as Darden (NYSE:DRI) reports Thursday. RBC Restaurant Analyst Larry Miller’s December Operator/Investor Survey pointed to improving operator sentiment and much more investor interest in the casual dining sector.
Many casual dining operators are located in mall locations or zones, and the retail sales trends reports seem lackluster. In our Seeking Alpha post of October 26, 2009, we noted some smaller operators, like Cheesecake Factory (NASDAQ:CAKE), who were not on TV and discounting, who did trend better. As evidence, last week at the Wedbush Conference, Jack in Box (NASDAQ:JACK) noted the incursions of low priced casual dining offers competing into the QSR marketplace.
It’s interesting that, of the three big national scope casual dining operators -- Darden, Brinker (NYSE:EAT) and DineEquity (NYSE:DIN) -- their forward valuations based on December 14 mid day prices were bunched closely, from 9.89X at DIN to 10.95X at EAT and 11.85X at DRI. Certainly, Darden is the strongest and most removed from the overcrowded grill/bar sub-segment, but we think EAT will get some traffic momentum from its 3 for $20 offer, if for no other reason that the feature is fresher there and DIN continues to work it as a less new theme.
Regarding the QSR sector, we are not surprised by US QSR same store sales weakness. That trend and the unemployment/underemployment drivers have been present and will remain for some time. But we were surprised by the McDonald’s (NYSE:MCD) and Yum (NYSE:YUM) falloff internationally, especially Asia/Pacific/ME/Africa. And there is a growing list of QSR operators pulling out of counties, with the McDonald’s franchisee pulling out of Iceland and the Wendy’s (NYSE:WEN) franchisee pulling out of Japan.
Jack in Box and CKR are both doing a good job structurally, with new menu items, in store reengineering and remodels. For example, JACK can operate its store with fewer workers, with its kitchen remodel and sales terminals. But they will not get same store sales credit for some time, due to their California exposure. Brands with more development in inland California/Nevada/Arizona will lag proportionately behind, due to the sheer population loss due to the housing implosion in those zones.
And we are noticing a real difference in burger quality. The fresh In N Out and Wendy’s burgers taste a lot better than the McDonald’s Angus Burger. If the Angus is pre-cooked and reheated, that is an operational issue that can be fixed.
Disclosure: no stock positions