Steak House Conundrum: Sales Are Up and So Is the Cost of Beef

by: John Gordon

We are impressed that same store sales trends of many steak-centric related restaurant concepts have outperformed other restaurant chain concept same store sales trends lately. But beef costs have also risen from 2009/2010 levels. This is reverse of the position in 2009 when sales were plunging and protein costs also fell from the then historic 2007/2008 highs. However, after declines in 2007 through the first half of 2010, few chains are at pre-recession average annual volume (AUV) levels.

Steakhouse chain restaurant same store sales are up throughout the restaurant space, not just at the upper end fine dining segment (driven by improved business travel) but also improved, albeit less so, in more mainstream casual dining steakhouses, as the table below demonstrates.
Darden’s (NYSE:DRI) recent Q4 earnings reinforced this notion: its steak centric chains (Longhorn, Cap Grille) were positive 500 bpts or more. The steak centric Capital Grille outperformed its sister and fellow “upper end” Season’s 52 brand by 570 bpts, for example.
In the chart below, we jumped off of a 2009 base to represent the low point of the Great Recession, to quantify SSS magnitude trend movement. To be sure, the brands most affected by improved business travel/expense account volume fell further and are now up more basis points versus the 2009 low. The budget/ buffet steakhouse operator Golden Coral was up the least.
“Upper End “brands:
Q1 2011 SSS, %
FY-09 SSS, %
Bpts improvement
+2790 bpts
Morton’s (NYSE:MRT-OLD)
+2560 bpts
Ruth Chris (NASDAQ:RUTH)
+2470 bpts
Capital Grill (DRI)
+2400 bpts
Casual Dining Brands:
Q1 2011 SSS, %
FY-09 SSS, %
Bpts improvement
Longhorn (DRI)
+1060 bpts
+1310 bpts
Texas Roadhouse (NASDAQ:TXRH)
+750 bpts
Golden Corral (NYSEMKT:FRS)
+100 bpts
Memo: Total Knapp Track
+700 bpts
Seafood flat, some Italian concepts improved: the seafood centric casual dining brands—McCormick and Schmick’s (NASDAQ:MSSR), Red Lobster (in DRI Q3) and the Cameron Mitchell Group (RUTH)—are still reporting nominally negative sales or essentially unchanged from earlier performance. Among the Italian centric group, Maggiano’s (NYSE:EAT) and Bravo Brio (NASDAQ:BBRG) concepts same store sales trends are improved but Olive Garden is flat the last two quarters.
Beef Costs: over the last several years weekly steer prices seem to be in a 2 year cycle, peaking in early 2006, late 2007 and again in May 2011. Unfortunately, the peaks are growing higher over time. Prime beef, which is the bulk of the fine dining menu, is generally difficult to be contracted or hedged, particularly in a rising market. And choice beef quality in a difficult market can be marginal as we just found in Boston, via a field trip to a leading chain store operator.
Beef currently has come off the highs but is still above a 2008-2010 index. We guess that steak operators have limited new flexibility to rework menus if that hasn’t already occurred, when upper average check operators did everything possible to lower prices in the last two years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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