Casual Dining Too Pricey to Nibble On
Restaurant Stocks Sizzle
Restaurant stocks continued rocketing back from their November lows, soaring 24% thus far in March and outpacing the Russell 2000 and the S&P 500 indexes, both of which rose nearly 14% this month. Since bottoming in November, the Zacks restaurant index has more than doubled, rising 109%, compared with a gain of 27% for the Russell 2000 and a 23% increase in the S&P 500.
Our restaurant index's rebound has been sharper than the broader market, in part because its fall was greater. All 3 indexes remain 43% off their 52-week highs.
Investors Prefer Casual Dining
Within the restaurant sector, the stocks of casual dining restaurants have rallied the strongest, rebounding 140% from their November lows, with upscale surging 118% and quick service, which has proven more recession-resistant, rising 80%.
Rally Based On Bernanke's Optimism
A chief catalyst in the recent restaurant stock rally ? and that of the broader market ? was a series of comments by Fed Chairman Ben Bernanke anticipating a likely end to the recession in late 2009. Cast in that rosy light, casual dining shares surged as Darden Restaurants' (
DRI) reported better-than-expected earnings report on March 18. The best-of-breed casual dining operator, which owns the Olive Garden and Red Lobster chains, said results improved throughout the quarter ended February 22, and it raised its earnings guidance.
Two Month "Trend" of Decelerating Traffic Declines Does Not a Trend Make
We think it's too early to call improved January and February traffic at a few best-in-class casual dining chains a trend, especially since February's weather was far milder than normal in many typically cold spots of the country. To be sure, many restaurant operators stopped giving earnings guidance because sustained meaningful improvement hinges on an overall economic recovery ? and visibility to that is murky.
More relevant, in our view, are the industry's 4Q08 same-store sales, which fell an average of 6.5% on easing 4Q07 comparisons. Comps would have been worse, but price hikes that averaged 3.5% partially offset a 10% plunge in customer traffic.
Consumer Deleveraging Could Dampen Casual Dining Recovery
Traffic will likely stabilize in 2H09, in our opinion, as the industry laps weaker quarters, but we think the recovery will be slower than after past recessions, as consumers purge themselves from a decade-long binge on debt.
