February Chain Restaurant Earnings: Not Much New News

by: John Gordon

With two fast casual (CMG, PNRA) and three casual dining operators (CAKE, BJRI, BWLD) reporting last Thursday and Friday, little new news is really apparent or settled other than expectations are high for high multiple companies and that actual customer spending patterns are lagging behind rising consumer or investor sentiment.

Ourselves, we were generally happy to see the results noted, especially since all five of these companies added and continuing to add new units. If comparable sales are/will be weak, then new units, free cash flow, adequate CAPEX, debt leverage ratios and free cash flow are paramount to moving the business forward.

Rising consumer and investor sentiment doesn’t always translate into comparable sales gains, the leading (but not only) driver to restaurant profits. While Knapp Track reports weekly casual dining sales (for a large group of chains), a quick casual or QSR counterpart that reports quickly, weekly, is not in place. Gallup does a weekly spending survey, and Discover/Rasmussen polls monthly for the next month in discretionary consumer spending. Weekly retail sales reports via ISIC and Redbook also exist as benchmarks. Those results have been generally lackluster since January and sure to get effected even worse soon with the severe February weather.

Buffalo Wild wings (BWLD) did present the weakest appearance, with a notable and quick comp sales slowdown apparent from fall (7-8% trend to around 1%), falling new unit favorability, chicken wing commodity cost increases not covered via pricing, 9 unit closures (even though more will be opened) and lack of a story to explain how 13-15% new unit growth translates into 20% EPS growth.

A few other interesting observations were noted in this batch:

· The designated new CEO at Panera (NASDAQ:PNRA) did note the need to track “operating earnings per share” and “buyback effect on EPS”, a concept we very much favor for better analysis and disclosure. So, even more of those earnings meets or exceeds should be watched. Also, FYI, PNRA reports its catering in its same store sales comps—after all, sales is sales and it has to be reported somewhere. But with a $150 average check, small changes in catering sales mix can have a big effect on normalized comps.

· All five of these companies are not mass market, TV price discounters (DINE, RT, and EAT are, with DRI now into 2 for $29.99 at Red Lobster for selected entrees, its first major price "two for" foray in some time), and all five are not national scale companies with units on every block, all with still a lot of runway to develop.

· Like Cheesecake (NASDAQ:CAKE) practiced this call, perhaps it is not best to talk current, partial month partial quarter sales results. Partial month/quarter results are by definition incomplete.

· As the Wall Street Journal noted Saturday, it is not difficult for CFOs to find a few dollars of expense flux in the P&L or share repurchase authority and beat earnings by a penny. So perhaps in the future, an earnings beat should count as more than $.01/share.

Disclosure: No stock positions