John Gordon

Thinking of Investing in Restaurant Stocks? Prepare for Indigestion

Alan's article is very thoughtful. I'd make just a few supplementary comments:

Restaurants can get only so much out of lower commodity costs, and other controllable cost reductions. While cost reductions essentially flow to the bottom line 100%, there is only so far that can go. The controllable operating cost reductions, and that some analysts underestimated the significant commodity cost reductions from the summer 2008 peaks, drove virtually all of the earnings upsides this spring and summer.

Casual sales and traffic dining has been weak for some time, and continues. QSR is now weak, as well. In all the earnings calls last two weeks, I was impressed that CAKE had sales down 3.2% and traffic down only 3.8%. CAKE has rolled out a small plates program that did not destroy the average check (in fact, check up .6%, subcomponent pricing +2.2%). They also aren't discounting. We will visit and take notes.

Keep in mind CAKE is really a niche player, with about 150 units. Broad national/international operators with thousands of units like Darden (DRI), Brinker (EAT), Outback and others have different situations. The geography, price/value perception and franchisee/frachisor base are all different.

The agility of the R&D new product discipline is also critical. I bet Brinker wished it tested its 10 for $7 program further, before rolling it out systemwide (and then yanking it, after poor response).

Near term: store level commodity costs should be lower for most in the near term and some easier sales comparables versus the steep falloff experienced in October-December 2008 should be some positive factors. Traffic looks weak in absolute terms.

John A. Gordon
Chain Restaurant Earnings and Economics Experts
pacificmanagementconsu...

Disclosure: no stock positions