U.S. Restaurant Sales Signal ‘Resiliency’ of Consumer Spending

U.S. Restaurant Sales Signal ‘Resiliency’
A customer leaves an Applebee's Restaurant in Boston, Massachusetts. Photographer: JB Reed/Bloomberg

Sales at DineEquity Inc., parent of Applebee’s Neighborhood Grill and Bar, are rising at restaurants open for at least 18 months, thanks to its new Sizzling Skillet entrees starting at $8.99.

BJ’s Restaurants Inc. and The Cheesecake Factory Inc., based in based in Huntington Beach and Calabasas Hills, California, also are reporting more revenue this year, indicating consumers are eating more at casual eateries. Cheesecake’s meals, for instance, range from $5.95 to $27.95.

Restaurants, a proxy for discretionary consumer spending, have “surprised some investors with their resiliency,” said Lawrence Creatura, a Rochester, New York-based fund manager at Federated Investors Inc., which oversees about $350 billion. The $160 million Federated Clover Small Value Fund he manages is planning to buy restaurant stocks, he said.

Consumers are loosening purse strings on some items more than a year after the end of a recession that cost about 8 million workers their jobs, and in spite of a 9.6 percent unemployment rate that’s near a 26-year high. A Bloomberg index that tracks 19 full-service restaurant chains has more than tripled from its November 2008 low and is near an all-time high relative to the Standard & Poor’s 500 Index.

“What I’m starting to see is stability,” said Christopher O’Donnell, president and chief executive officer of Famous Dave’s of America Inc. in Minnetonka, Minnesota, which owns and franchises 180 restaurants in 36 states. “I’m feeling better about consumers’ willingness to spend.”

‘Bit Guarded’

“People still want to have a nice affair, but are going to be a little bit guarded about where they spend,” O’Donnell said in an Oct. 5 interview.

A year ago, only 8 percent of U.S. adults planned to increase household spending, which accounts for about 70 percent of the economy, and almost one-third said they would spend less after retrenching during the worst recession since the 1930s, a Bloomberg News survey showed at the time.

“Anecdotally, it does appear discretionary spending, the kind of spending hit hardest during a recession, seems to be holding up better than you would think,” said Gary Schlossberg, senior economist at Wells Capital Management Inc. in San Francisco, which bought 246,614 shares of Cheesecake Factory that were reported in June. He isn’t involved in his firm’s stock purchases and can’t comment on them.

To be sure, investors remain concerned about the pace of the recovery and hiring, as reflected in shares of staffing companies such as Manpower Inc. and Robert Half International Inc., that have dropped this year. The Standard and Poor’s Supercomposite Human Resources & Employment Services Index, which includes Manpower and Robert Half, has fallen 14.8 percent from its 52-week high on April 23.

Rational Choice

“The choices investors have made are economically rational,” said Creatura, whose small-value fund sold all its shares in staffing companies about two months ago. “Staffing businesses are waxing and waning with the state of unemployment. Restaurants have evolved into becoming a more stable part of the lifestyle of consumers. For that reason, they deserve to be rewarded at the margin.”

Household wealth in the U.S. fell 2.8 percent in the second quarter to $53.5 trillion, according to the Federal Reserve’s Flow of Funds report issued last month. The personal savings rate averaged 6.1 percent, up from an average 5.5 percent in the first three months of the year, according to Fed figures.

Enjoy a Dinner

“The economy is losing momentum so it makes sense that the leading indicators of hiring would still be on the soft side,” Schlossberg said. Still, tourism, as well as sales of wine and luxury autos, are doing well, which suggests “upper-income people may be spending more,” he said.

“People want to go out and slowly start” to enjoy themselves, said Sirio Maccioni, owner of seven restaurants in the U.S. and the Dominican Republic, including Le Cirque, which is located in the same Manhattan building as the headquarters of Bloomberg News parent Bloomberg LP.

Maccioni, who opened his first restaurant in 1974, said his three Las Vegas restaurants are sold out every night. Clients are instead controlling spending, for example ordering wine by the glass instead of a bottle, he said.

At Darden Restaurants Inc., whose restaurants include Red Lobster, Olive Garden and LongHorn Steakhouse, sales at units open at least 16 months rose an average of 1.1 percent in the quarter ended Aug. 29, compared with a 5.3 percent drop in the year-earlier period.

“A lack of consistently positive jobs numbers makes people conservative about their spending,” said Daniel Popowics, fund manager at Fifth Third Asset Management in Cincinnati, which has $18 billion under management including Darden shares. “Consumer discretionary spending is challenging.”

‘Stopped the Bleeding’

Shares of Glendale, California-based DineEquity gained 4 percent to close at $46.57 yesterday in New York. BJ’s gained

2.3 percent to $29.33, Cheesecake Factory gained 4.5 percent to $27.50, while Famous Dave’s gained 2.2 percent to $9.68.

“Consumer spending is definitely up,” said Tilman Fertitta, chief executive officer of Landry’s Restaurants Inc. in Houston, which operates more than 200 restaurants, as well as the Golden Nugget hotel and casino in Las Vegas.

“The economy is definitely coming back, but it’s very slowly coming back,” Fertitta said in an Oct. 5 interview. “We’ve stopped the bleeding and are now healing.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE