Casual Dining's Fragile Recovery
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During 2011, reports Restaurant Management, casual dining broke out of a 2-year slump. Sales increased 8.7%. But, research firm Technomic is among those which forecast no real growth this year, with 2.5% nominal growth. A mild winter might have propped up sales in ways that won’t be sustained. The bears include Sara Senatore of Bernstein Research who has responded by raising estimates for fast casual or Quick Service Restaurants (QSR) such as Yum Brands, Starbucks, and Chipotle Mexican Grill.
The most obvious reason for pessimism is the overall economy. GDP growth been projected to be between 2 and 3%. Unemployment stands at 8.2%. The tip remains a deal-breaker. There’s also the uncertainty of a presidential election year. No one knows what’s ahead, ranging in policies from stimulus packages to taxes. However, those are temporary conditions.
The factor which should be more alarming is what seems to be a fundamental shift in how America eats out. One might call it Food On The Run, with the traditional balanced 3 squares a day an anachronism and with smartphones undercutting the sacred space of the sit-down dining experience. GE Capital found that sales of full service versus QSR are now about even. Last year they were $195.7 billion versus $195.1 billion. Back in 1975, full service was at about 60%.
QSR has gotten and is enhancing its edge because the sector improved every aspect of eating outside the home. Panera (NASDAQ: PNRA), whose price earnings ratio is 33, is the classic example. Its ambiance of a European-like café has made into one of those “third places” urban sociologist Ray Oldenburg says society needs to congregate in addition to the home and work or school. Its menu has both healthy egg white sandwiches and indulgent desserts such as walnut carrot cake with cream cheese topping. Yet prices often match McDonald’s. Consumers trading down during the recession liked what they found. Also, QSRs cater easily to non-traditional eating patterns and more meals out, at a low cost. Technomic found that soup or salads, as stand-alones, are becoming popular. Panera specializes in both. According to the USDA, Food and Agricultural Organization, only 59% eat breakfast at home and 21% of the other 41% eat it at fast food outlets. Who goes to a full-service restaurant for breakfast unless it's attached to business?
In the casual dining sector currently there are no big surprises. Darden (NYSE: DRI), the leading brand in the sector, remains predictable. Though its Red Lobster, Olive Garden, and LongHorn Steakhouse are mature concepts, for 3Q 2012, it reported total sales up 9.3% for a total of $2.16 billion. The EPS of $1.25 beat Thomas Reuters estimate of $1.23 EPS. Jefferies Group raised its price target to about 60 and Citigroup to $59.
BJ’s Restaurants (NASDAQ: BJRI) continues to be a growth leader with a 48.39% earnings per share increase. Well run, it has a negative cash conversion cycle, computes Motley Fool analyst Seth Jayson, that is, its funds come in faster than what’s going out.
Given that steak is back in and the western theme is hot, it was expected that Texas Roadhouse (NASDAQ: TXRH) would have earnings growth. For 4Q, that totaled 22%.
For 3Q 2012 Bob Evans (NASDAQ: BOBE) had a 31% growth in net income, with 5 analysts predicting growth at 9%. But this is a sector dependent on the concept theme and its Mimi’s Café, with 145 outlets in 24 states, never caught fire. It had a 3.4% drop in sales.
Newer brand Hurricane Grill & Wings, which now operates 47 outlets, had a 47% growth in revenue since 2009 but predicts 2012 will be flat.
The good news for investors is that casual is a sector in which there are more knowns than unknowns. So, it’s clear that what they have to watch among established players and new entries includes:
The Concept
A promising sign is a fresh theme. A red flag is a mature or overcrowded one. But consumers do tend to opt for the familiar so predictable dining experiences such as at those at Red Lobster have to be factored in.
Location
With mall space expensive and the popularity waning, margins and growth could be greater for restaurants in outdoor shopping centers. Those are where Darden tends to place its restaurants. Another proven setting is the college campus. According to the National Center for Educational Statistics, students have annual discretionary spending of $37.7 billion. That’s where Darden is building a dual concept, that is both Olive Garden and Red Lobster under one roof, in outlets. Globally, people are moving back to cities so urban trumps the suburbs and rural.
Social Couponing
Research shows that most of the negative thinking about Groupon kind of discounting is wrong. In the study “Restaurant Daily Deals: Customers’ Responses to Social Couponing,” academics Sheryl Kimes and Utpal Dholakia found:
* No brand erosion. Users said they would return and pay regular prices and recommend it to their friends
* User profile tends to be tipped toward younger, married, higher income people
* Trial attracts new customers who do become regulars
* Universal perception of restaurant as providing good value, even without discount.
With the exception of the top tier, restaurants not participating in couponing likely put a constraint on growth. Its cost has come to be considered just another media expense like advertising on radio.
Labor Costs
During the recession, the lid was kept on rising labor costs. However, for 2012, this has become a wild card. As of January, 8 states had raised minimum wage rates. Health care reforms could significantly raise expenses. Employers would then have to hire more part timers which could reduce reliability and loyalty. In states like California workers’ compensation rates have doubled. Lots more could change with a new administration and shifts in legislative bodies, federal and state.
Commodity Prices
Last April commodity prices began to rise and some categories such as beef are being hit harder than others. The issue is how restaurant handle this. If they absorb too much margins erode. If they pass them on to customers sales and market share could go down.
Gasoline prices
Reaching almost $4.20 a gallon in states likeConnecticut, this could cut discretionary spending. So far, it hadn’t.
If the economy doesn’t shrink and unemployment go up, the strong members of this category could hold onto the gains made in 2011. But the weaker ones could continue to lose share to QSRs or not attract new customers. Significant growth is not anticipated.
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.
