The Zacks Analyst Blog Highlights: McDonald's, Yum! Brands, Domino's Pizza and Darden Restaurants

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Apr 12, 2013, 09:30 ET

CHICAGO, April 12, 2013 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include McDonald's Corp. (NYSE:MCD), Yum! Brands, Inc. (NYSE:YUM), Domino's Pizza, Inc. (NYSE:DPZ) and Darden Restaurants, Inc. (NYSE:DRI).

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Here are highlights from Thursday's Analyst Blog:

Can Deals Still Draw Restaurant Traffic?

According to a new survey from market research and global information company The NPD Group, the effectiveness of deals in driving traffic to restaurants has declined considerably. NPD's foodservice market research says that compared to a year earlier, restaurants visits using a "meal deal" had declined by 3% in 2012.

Some examples of deals which are currently on offer include the $1 menu from McDonald's Corp. (NYSE:MCD) and the $10 dinner box from Pizza Hut, which is part of Yum! Brands, Inc. (NYSE:YUM). Also, two-medium, two-topping pizzas are being offered by Domino's Pizza, Inc. (NYSE:DPZ) for $5.99 each. One example from sit-down casual dining is Red Lobster, owned by Darden Restaurants, Inc. (NYSE:DRI), which offers a $7.99 lunch special.

Traditionally the most frequently used types of restaurant deals -- combo meals and value menu item offers -- were primarily responsible for the decline in traffic. However, visits based on coupons, "buy one, get one free" and discounted prices have increased.

These figures were captured by NPD's CREST from more than 4,000,000 consumer restaurant visits every year. That said, this data in no way undermines the importance of deals in the restaurant business. Deals were the force driving visits during the peak of the recession when restaurant traffic had otherwise declined. Non-deal traffic had fallen by 1% while deal traffic gained 5% in 2008.

In comparison, deal traffic had increased by 3% in 2009 whereas non-deal traffic had declined by 4%. Deal traffic was nearly flat in 2010, non-deal traffic had declined by 1%. Both deal and non-deal traffic were unchanged in 2011.

By 2012, the picture had changed completely. Non-deal traffic had gone up by 2% whereas restaurant visits on deals had fallen by 3%. This is particularly significant because the trend had changed even though deal traffic made up 23% of all traffic. Of course, by this time many of the deals that were offered first during the recession had been in place for quite a few years.

On the other hand, deal checks have gone up since the recession. In 2012, the average deal meal could be purchased at $5.97 compared to $7.04 for non-deal meals. Therefore, the price differential between deal and non-deal meals has declined sharply, reducing their draw significantly.

But the major issue is that of the comparative value of the deal itself, even if the price is significantly lower. NPD is of the view that if a deal remains in place for too long then customers believe that the deal price is the regular price of those items. For instance, "two for $20" lunch deals have been offered at casual dining restaurants for quite some time now. This is applicable in every case, particularly for combo meals and value menu items as shown by the study.

Harry Balzar, chief industry analyst at NPD, is of the view that there is a need to get creative and make sweeping changes to the way these offers are conceived. Restaurants, retailers and food service departments should all alter these deals to attract higher traffic.

One of the major issues to be highlighted by the report is the behavior of younger customers. As far as this group is concerned, deal visits have clearly declined, almost drastically in the case of deals related to combo meals and value menus. This trend has been particularly strong over the last few years.

NPD's restaurant industry analyst believes that deals must reflect the tastes and needs of this younger segment. Relying on existing value items and bundled meals may no longer be a choice. This is significant across customer segments given the prevailing customer sentiment and economization. Clearly, deals have to undergo radical retooling to drive traffic for the industry in the future.

Yum! China Sales Tumble Again

It seems that the Chinese division of Yum! Brands Inc. (NYSE:YUM), which is also the largest contributor to its revenue stream, is going through a bad phase. In a recent SEC filing, Yum! Brands stated that its China division's same-store sales (comparable sales) have suffered a 13% decline in March with a 16% fall in same-store sales for KFC. Increasing fear from the recent outbreak of H7N9 Avian flu affected KFC's performance in China.

Moreover, same-store sales for Pizza Hut Casual Dining registered a 4% growth in March, but the sales were well below the February comparable sales (comps) growth of 13%.

Yum! Brands has declared that it has and always will take the necessary precautions to ensure the safety of its products.

Previously in Dec 2012, Yum! Brands faced an allegation regarding the quality of chicken supplied to its KFC unit in China. Although food safety regulators in Shanghai cleared Yum! Brands, the incident shattered consumer confidence about the quality of food offered by this U.S. restaurateur leading to a steep fall in the company's sales during the last two weeks of Dec, 2012. Management rolled out a new brand quality campaign and aggressive marketing initiatives to counter the bad publicity.

Comps in the China division plunged 20% in the first quarter of 2013 (first quarter results of Yum!'s China division always include the financial performances of just two months, January and February) with KFC same-store sales falling 24% and Pizza Hut Casual Dining sales dipping 2%. This was however better than management's expectation of a 25% decline.

However, China witnessed a surprising 2% rise in comps in February despite the fact that KFC registered flat comps. The shift in the timing of the week-long Chinese New Year celebrations from January to February this year helped drive sales in the month.

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