Spotlight On: Restaurants
The restaurant industry is experiencing significant damage from the contraction of the economy as consumers continue to cut back on discretionary spending. At the beginning of 2009, the food service industry consulting firm Technomic forecast industry nominal growth of -2.2 percent. That estimate is probably too conservative. In June, the National Restaurant Association confirmed that challenges persisted for this industry and that same store sales and traffic continued to soften. We can expect to see an increase in bankruptcy filings as over-leveraged chains begin to violate loan covenants. The restaurant industry is composed of several segments: quick service restaurants (QSR) and the casual ding segment. Some would say the QSR segment is better positioned to weather the storm because of consumer perceptions of vale, lower priced menu items and the poaching of customers from full-service restaurants. In this segment, Burger King (BKC), McDonald's (MCD), and YUM Brands (YUM) appear to be the healthiest with significant liquidity and do not have near term maturities. Our outlook for the casual dining segment is negative as costs continue to escalate and consumers are either trading down to the QSR segment or just staying home. Several companies have engaged in large debt-financed acquisitions or share repurchases and are now feeling the pinch. Examples include Darden Restaurants (DRI) and Brinker International (EAT). These companies may experience credit downgrades as they struggle with their debt.  Market capitalizations of most major restaurant operators have declined drastically on the past 12-18 months. However, because of lack of access to low cost debt and free cash flow pressure, we do not expect much in the way of share repurchases or restaurant acquisitions. An increase in the number of bankruptcy-related closures will reduce industry capacity. Buffet's, Vicorp, and Metromedia Restaurant Group all filed for bankruptcy this year and are closing hundreds of restaurants. In this challenging environment, we find one company, Rick's Cabaret International (RICK) as an interesting prospect. Rick's is an operator of "adult" nightclubs and bars. From Reuter's:

"Rick's Cabaret International, Inc.