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Restaurant Investing: Indigestion Ahead
By: Alan Brochstein   Sunday, August 09, 2009 9:34 PM

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A year ago, I highlighted the fast casual restaurant segment favorably, suggesting these chains would benefit from falling input costs and a slowdown in expansion.  Most of the stocks mentioned are higher today despite the overall market being down.  I followed that article up a few days later with a explanation of why I bought BJ's Restaurants ( ), which turned out to be a real winner. 

While most of the stocks mentioned are up, the path wasn't so straight, as all of these stocks were hammered in the October massacre.  I had alluded to the too-high debt levels of many of these companies, and those were the ones that fared the worst.  Several, in fact, suffered losses over the ensuing months of 80-90%.

I certainly have been impressed with the resurgence in these stocks.  In addition to the headwinds of rising input costs for the restaurants and gasoline and other expenses for their consumers abating and reversing, several other factors have helped the sector to do relatively well despite the overall weaker economy.  First, the expansions have pretty much halted.  I had mentioned in the article a year ago that P.F. Chang's ( ) had already strategically decided to focus on its existing portfolio rather than opening more restaurants.  I will give an example below of how the math works, but these companies have cut expenses by slowing or halting expansion.  A second reason for stabilization is likely share gains.  I don't have hard data, but the credit crunch buried some weak players like Bennigan's and countless other smaller competitors.  Finally, the "comps" were pretty easy, as the industry has been struggling for a while.


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