Casual Dining: Volatile Sector, High Growth

Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Like the fashion industry, casual dining is volatile.  Trendy concepts drive it, and those can go flat fast.  But the good news has been casual dining's high growth.  As part of full service dining, in 2011, it participated in the fastest growth rate in the overall restaurant sector.

According to Packaged Facts “The Foodservice Landscape in the U.S” that was 8.1% versus the industry’s 6.1%.  That was a shock since it trumped fast food casual which was supposedly dealing from a position of strength during the recession.  As many investors know, a leader of the pack in fast food casual has been Panera (NASDAQ: PNRA), a darling of Wall Street. Its stock is at $160.73, with a 52-week range of $96.68 to $165.23.  Panera provides an innovative, even partly healthy menu, cheerful service, with ambiance (including a fireplace in North Haven, Connecticut). No tip is required and the cost of a sandwich and beverage is comparable to fast food McDonald’s. 

Yet, full service, including casual dining, more than held its own. The problem, though, with casual dining is that darkness can fall quickly. Darden’s (NYSE: DRI) was once also a darling of Wall Street.  But there have been negative rumblings.  After all, its Olive Garden and Red Lobster are long in the tooth.  But it’s Longhorn Steakhouse, since steak is in fashion again, has possibilities.  That’s where it’s focusing more of the branding and promotional attention that it had reserved for the other 2 concepts.  The stock reflects that some analysts are giving Darden time to prove out on that promise. The stock is at $50.92, with a range of $40.69 to $53.81. However even if Longhorn succeeds, the others can increasingly drag down the business and therefore the stock.  

The name of the game in this sector, which hammers the American Customer Satisfaction Index, is differentiation from the competition executed in a thematic way.  Motley Fool analyst Seth Jayson is among those with concerns about Darden.  After all, its 2 major concepts don't stand apart from the competition.  As many followers of Motley Fool know, Jayson favors the Cash Conversion Cycle test or how long it takes funds going out to convert to funds coming in.  Jayson calculates, “Considering the numbers on a quarterly basis, the CCC trend at Darden Restaurants looks weak. At 5.7 days, it is 3.4 days worse than the average of the past eight quarters."

Given this dependence on a concept that is and stays hot, no newsflash, casual dining has been packed with casualties. They include Bennigan’s, Chili’s, Houlihan’s, Ruby Tuesday (NYSE: RT) and Applebee’s.  The latter two seem to be again finding some "brand heat," a term David Langston of Evoke Communications uses.

Raymond James upgraded Ruby Tuesday, now at $8.67 with a 52 week range of $6.35 to $13.65, from market perform to overperform.  Analysts like that it has significantly cut costs, improved the décor, and added a healthy menu of organic and natural foods, including a salad bar. That’s a cool trend in some circles.   And there is excitement about Applebee’s new menu, which leads with Blackened Steak Penne. There's even a Bourbon Black & Bleu Burger.

There are 2 other favored players in casual dining, at least for now.  One is  BJ’s Restaurants (NASDAQ: BJRI), experiencing double digit growth.  The stock is at $47.24 with a 52 week range of $37.21 to $56.64.  It caught on with its grill-bar concept, plus the nice extra of signature handcrafted beers.  The huge overhead TV has sports fans coming in several times a week.  Restaurants can't ask for more than that. Another one is Texas Roadhouse (NASDAQ: TXRH), at $16.62, with a 52 week range of $12.21 to $18.40.  Started in 1993, it’s not new.  Its edge is that its décor – Mountain Lodge - and Old West type menu are currently fashionable. It serves both steaks and the retro menu of meatloaf and pot roast.  

The overall restaurant sector, estimates Packaged Facts, is growing this year at 4.2%, which is lower than the 6.1% from last year.  But, just as with last year, full service, which includes casual dining, could beat that.  With debt down for households and confidence in the U.S recovery solid, consumers are spending a little more.  A full service meal has been among the items spent on.  The constraints could be the price of gas, already four bucks in New Haven, Connecticut, and a recovery which stalls.

Motley Fool newsletter services recommend Panera Bread. The Motley Fool owns shares of BJ's Restaurants, Darden Restaurants and Panera Bread. janegenova has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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