Americans are back to eating out at Cheesecake Factory Inc. (CAKE) and Texas Roadhouse Inc. (TXRH), putting the restaurant industry on track for its best showing in more than three years as the recovery broadens.
Sales at full-service eateries, where customers pay after a meal rather than before, will rise 0.7 percent in 2011 after adjusting for inflation, the first year-over-year increase since 2007, according to a National Restaurant Association forecast by Malcolm Knapp, a New York-based consultant who has monitored the industry since 1970.
Buoyed by savings from payroll-tax cuts and improving job prospects, households are starting to indulge on discretionary items. The pickup may help jump start a restaurant rebound after a record stretch of sales declines and reinforces growing strength in household spending, which accounts for about 70 percent of the economy.
“Consumers are finding some retail therapy in things like eating out,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “They may not be ready for that two-week vacation in Europe yet, but they’ll go to a restaurant once every couple of weeks. It’s an affordable luxury.”
Company executives also are becoming more upbeat. Cheesecake Factory’s forecast of 1 percent to 3 percent same- store sales growth this year reflects an increase in guest traffic and average check totals, Chief Financial Officer Douglas Benn said on a Feb. 10 conference call.
“Most of the news that I’m reading about the consumer and most of what I’m seeing shows some more optimism for 2011 than what we saw in 2010,” he said. The Calabasas Hills, California- based company’s comparable restaurant sales increased 2 percent last year, after posting a 2.6 percent decline in fiscal 2009.
Texas Roadhouse, a steakhouse chain based in Louisville, Kentucky, projects comparable restaurant sales will rise 3.5 percent this year, up from 2.4 percent in 2010, and is increasing menu prices by an average of 1 percent.
“Our momentum has continued, and we are pleased to have seen continued traffic growth,” Gerard Hart, chief executive officer, said in a Feb. 22 statement.
Investors aren’t as enthusiastic. A Bloomberg index that tracks 18 full-service chains, including Darden Restaurants Inc. (DRI)’s Red Lobster and Olive Garden and Glendale, California- based DineEquity Inc. (DIN)’s Applebee’s, is up 0.8 percent since November 30, compared with a 9.8 percent rise in the Standard & Poor’s 500 Index of stocks.
Persistently higher energy and commodity costs may erode restaurant profits or prompt eateries to raise prices, which “might not be good for their sales,” said David Yucius, president of Aurora Investment Counsel in Atlanta, who oversees $250 million.
The price of a gallon of regular gasoline has surged 16 percent this year to an average $3.558 on March 13, the highest since October 2008, according to Heathrow, Florida-based AAA, the nation’s largest motoring organization.
Even with the increase, “there’s more upside” for restaurant stocks, said Yucius. He owns Darden, which has gained 0.78 percent this year to $46.80 yesterday, and Buffalo Wild Wings Inc. (BWLD), which jumped 21 percent to $53.22. He is “cautiously optimistic” about the industry and says it represents an “opportunity” for investors.
“The financial repair of household balance sheets is going on pretty well, and we’ve crossed the psychological hurdle of how bad things have been,” he said.
“Maybe 2011 is an inflection point when the industry sees some positive trends that gradually keep improving as employment picks up and the tax cuts kick in,” said Tarantino, who has “outperform” ratings on 9 of 15 stocks he covers, including Buffalo Wild Wings and Texas Roadhouse. “The key driver will be how quickly employment comes back.”
The jobless rate fell in February to 8.9 percent, the lowest since April 2009 and the third straight monthly decline, while the economy added 192,000 workers to payrolls, the most since May, according to Labor Department data.
Inflation-adjusted sales for full-service restaurants declined 1 percent last year, following a 5.2 percent drop in 2009 amid job losses, plunging home prices and credit restrictions.
The “turning point” came in late 2010, Knapp said, after the economy expanded in all four quarters of the year for the first time since 2007. Same-restaurant sales have risen in six of the last eight months, with February up an estimated 1.6 percent, the highest in more than a year, according to the Knapp-Track Index, which follows casual-dining locations open at least 16 months. Declines in December and January partly reflected winter storms that curtailed visits.
Now, “there are more markers” for growth, Knapp said. Shoppers are redeeming holiday gift cards and getting extra cash from the extension of Bush-era tax cuts and renewal of emergency jobless benefits for the long-term unemployed. They’re also helped by the government’s 2 percentage-point cut in Social Security payroll taxes, which will account for about a third of the 3.1 percent increase Knapp sees in full-service restaurant sales this year to $194.6 billion.
Additional growth also will come from new locations and being able to charge a bit more, Tarantino said. Companies that “offer the consumer strong benefits relative to the occasion, not necessarily the lowest prices,” are most likely to gain, he said.
Restaurant sales represent 4 percent of gross domestic product, and every dollar spent on dining out generates $2.05 spent in the overall economy, according to the restaurant association. The industry is the second-largest private-sector employer in the U.S., comprising about 10 percent of the workforce, the association said.
“The economic environment continues to improve, and our brands continue to achieve competitively strong results,” Clarence Otis, Darden’s chief executive officer, said in a Jan. 31 statement. The Orlando, Florida-based company, which also owns the upscale Capital Grille steakhouse, said per-share earnings from continuing operations will rise an estimated 17 percent to 18 percent this year from $2.86 in 2010. That’s an improvement from the company’s December projection of a 14 percent to 17 percent increase.
PF Chang’s China Bistro Inc. (PFCB) also is optimistic after posting an increase in traffic at both its Bistro and Pei Wei chains last year.
“After several years of declining traffic, this is a noteworthy accomplishment and hopefully marks the turning point in consumer trends,” Mark Mumford, chief financial officer of the Scottsdale, Arizona-based company, said on a March 7 conference call. “We are hopeful that the economic recovery that we saw in 2010 continues and possibly strengthens in 2011.”
To contact the editor responsible for this story: Chris Wellisz at email@example.com