Zacks Industry Outlook Highlights: BJ's Restaurants, Red Robin Gourmet Burgers, Starbucks, McDonald's and Yum! Brands

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Jun 21, 2012, 10:03 ET

CHICAGO, June 21, 2012 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Restaurants, including BJ's Restaurants (Nasdaq:BJRI), Red Robin Gourmet Burgers Inc. (Nasdaq:RRGB), Starbucks Corporation (Nasdaq:SBUX), McDonald's Corp. (NYSE:MCD) and Yum! Brands Inc. (NYSE:YUM).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at

Link: http://www.zacks.com/stock/news/77367/restaurant-stock-review-outlook-june-2012

The U.S. restaurant industry has ended the first half of 2012 on a positive note despite nagging sovereign debt issues in Europe and faltering domestic consumer confidence. The strength was backed by modest traffic improvement and the consequent rise in comparable store sales. Easy comparisons from 2011 will likely place forthcoming performance of 2012 in a brighter light.

Statistics bear out this relatively favorable environment. A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI), measuring the present condition and outlook on the U.S. restaurant industry, was 101.6 in April, slightly down from the extremely strong level of 102.2 in March. Despite the decline, January characterized the sixth consecutive month in which RPI stood above 100. This RPI run-rate in the last six months connotes improvement in comparable store sales and customer traffic.

Most of the restaurant operators reported positive same-store sales and a majority of them expect business to gain momentum in the months ahead.

The Current Situation Index, which measures comparable store sales, traffic count, labor costs and capital expenditures in the restaurant industry, was 101.0 in April, down 1.0% sequentially. The Expectations Index, which measures restaurant operators' six-month outlook on the above indicators, was 102.2, slightly down from 102.4 in March. This was the eighth consecutive month that the Expectations Index remained above 100. Restaurant operators' capital spending plans are also riding uphill, reaffirming their positive outlook on the industry.

All these culminate to the general optimism in the sector. We are hopeful that restaurant companies will continue to deliver better numbers in the upcoming quarter despite macroeconomic weaknesses. An improving outlook can be validated by the NPD foodservice market research report, which stated that annual visits to restaurants will increase by 8% in the next decade.

Road Ahead

We see modest top- and bottom-line trends in 2012. According to a research conducted by National Restaurant Association, the restaurant industry is projected to expand in 2012 despite the sluggish U.S. recovery. Focus on cost containment, extra value-for-price and international expansion are on most restaurateurs' wish-list to tide over the macro difficulties. The research firm estimates total restaurant industry sales to increase 3.5% year over year to $632 billion in 2012, thus marking the second consecutive year of total industry sales of more than $600 billion.

Most of the restaurant operators are passing on higher costs to consumers in order to mitigate commodity pressures. The companies that are well positioned are likely to enjoy pricing power and in turn same-store sales increase. The improvement in the U.S. economy is slow but palpable. But a sluggish labor market, over-supply of restaurants in the industry, a still-hot food cost environment, a still elevated unemployment level, credit unavailability, and weak income growth may weigh on industry profitability.

Restaurants have been trying to win back cash-conscious guests by revamping promotions and focusing on value-for-meal menus. However, the tendency to offer discounts has been moderating. We remain cautiously optimistic over the near-to-medium term.

OPPORTUNITIES

Improved Californian Market

The core California market, which was badly hit by the recession resulting in a high rate of unemployment and weak consumer confidence, has turned around. We see plenty of growth opportunities in the California and Texas markets. BJ's Restaurants (Nasdaq:BJRI) and Red Robin Gourmet Burgers Inc. (Nasdaq:RRGB) are expanding rapidly in California.

Job Growth in the Sector

The restaurant industry is one of the major contributors to job growth in the U.S. In 2011, total U.S. employment grew 1.0% while restaurant employment increased 1.9%. According to the National Restaurant Association, overall restaurant industry employment will reach 12.9 million in 2012, accounting for 10% of the total U.S. workforce. This projected employment figure represents year-over-year growth of 2.3% while total U.S. employment is believed to grow 1.3%. Among all markets, Texas and Florida are envisioned to see maximum job growth, among all other markets in the restaurant industry over the next 10 years.

Domestic and International Unit Expansion

Emerging from a lackluster economy from more than two 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.

In fact, the companies are also exploring international markets. Restaurateurs are primarily concentrating on emerging markets that provide ample opportunities for expansion. Several chains, including Starbucks Corporation (Nasdaq:SBUX), intend to tap the fast-growing Indian market. McDonald's Corp. (NYSE:MCD) and Yum! Brands Inc. (NYSE:YUM) already have considerable coverage in India. They are aggressively expanding in China to capitalize on the fast-paced economic growth over there. Some European countries including U.K., Germany and France are also not far behind.

Remodels and Menu Innovations Remain Key to Success

Additionally, restaurants are accessing different means to plug the problems of heightened competition in a somewhat over-supplied domestic market. Companies continue to reduce their energy consumption and are remodeling their restaurants to give an upmarket feel. They are rolling out new, smaller prototypes to augment the perception of value and drive traffic, thereby reducing construction and occupancy costs to enhance returns on capital. McDonald's is continuously benefiting from its reimaging. This year, the company expects to see a comps gain of 5-6% from its "facelifts."

This is not the end. Having stabilized their financial positions, the operators are well poised to bring newer offerings to their menu card in 2012 in order to cater to the ever-changing demands of customers. Limited Time Offers are also gaining attention.

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