Zacks Industry Outlook Highlights: McDonald's, Yum! Brands, Krispy Kreme Doughnut, Dunkin' Brands Group and Darden Restaurants

   Zacks Industry Outlook Highlights: McDonald's, Yum! Brands, Krispy Kreme
            Doughnut, Dunkin' Brands Group and Darden Restaurants

PR Newswire

CHICAGO, Oct. 2, 2013

CHICAGO, Oct. 2, 2013 /PRNewswire/ --Today, Zacks Equity Research discusses
the U.S. Restaurant, including McDonald's (NYSE:MCD-Free Report), Yum! Brands
(NYSE:YUM-Free Report), Krispy Kreme Doughnut Inc. (NYSE:KKD-Free Report),
Dunkin' Brands Group Inc. (Nasdaq:DNKN-Free Report) and Darden Restaurants
Inc. (NYSE:DRI-Free Report).


Industry: Restaurant


Not all companies performed equally well in the quarter. While some were
laggards, others posted solid results mostly on their individual strength.
While 31% of operators missed the Zacks Consensus earnings estimates this
season, 60% surpassed theirs and about 9% met. Some operators blamed a softer
economic trend for the insignificant growth in revenues.

Industry behemothMcDonald's (NYSE:MCD-Free Report) delivered
weaker-than-expected earnings in the second quarter and in-line revenues hurt
by comps deceleration, while another renowned operator, Yum! Brands
(NYSE:YUM-Free Report), topped its earnings estimate but fell shy of revenue
expectations mainly due to issues in China. However, we believe that both the
companies will rebound in the long run, once the global issues subside.

Earnings Trend

The restaurant industry falls under the broader Retail-Wholesale sector, which
portrays a stable earnings trend in recent times. The second quarter 2013
results for the sector were impressive in terms of both beat ratios
(percentage of companies coming out with positive surprises) and growth.

The earnings "beat ratio" was 51.2%, while the revenue "beat ratio" was 32.6%.
Total earnings for this sector went up 7.2% in the second quarter from 5.6%
growth in the first quarter of 2013. The improvement came from the upside in
revenues. On the revenue front, the sector has seen an increase of 4.2% in the
second quarter on the top of a 2.8% increase in the prior quarter.

Looking at the Consensus earnings expectations for the rest of the year, we
are positive since earnings are expected to grow a modest 3.9% in the third
quarter of 2013 and 7.1% in the fourth quarter thereby registering full-year
growth of 7.6%. For the next year, the sector is poised to expand around 16.5%
with 10.9% growth in the first quarter itself. 

While revenue surprises started off on the weak side, the sector is
anticipated to gain momentum from the fourth quarter of this year. For more
details about earnings for this sector and others, please read our 'Earnings
Trends' report.


Cooling Commodity Inflation in the US

The food cost inflation seems to have eased as the nation emerged out of
severe drought in the Midwest growing region last year. Food costs account for
about one-third of restaurant sales, thus making the industry vulnerable to
food cost inflation.

As suggested by the U.S. Department of Agriculture (USDA) report, price
inflation for all food is expected at 1.5-2.5% in 2013 down from 2.5-3.5%
estimated previously. Commodities like fish and seafood, dairy products, fats
and oils, sugar sweets, non-alcoholic beverages, cereals and bakery products
and other foods will likely witness a decline in prices.

Although USDA expects poultry costs to increase in 2013, feed prices will
likely cool off with a favorable weather in the new harvest season, leading to
lower poultry prices in 2014.

Domestic and International Unit Expansion

Emerging from a lackluster economy from more than three years back, most of
the companies have accelerated their pace of restaurant openings. A relative
recovery in consumer confidence has also encouraged companies to return to
unit expansion.

Besides spreading their wings in the home country, the companies also aim to
test waters in foreign shores. Restaurateurs are primarily concentrating on
emerging markets that provide ample opportunities for expansion. The
burgeoning middle income population in emerging countries encourages the
companies to shift their spotlight from the somewhat saturated domestic
market. McDonald's, Yum!, Krispy Kreme Doughnut Inc. (NYSE:KKD-Free Report),
Dunkin' Brands Group Inc. (Nasdaq:DNKN-Free Report) and Darden Restaurants
Inc. (NYSE:DRI-Free Report) have been quite active on this front.

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