Zacks Industry Outlook Highlights: Darden Restaurants, Denny's, Starbucks, McDonald’s and Yum! Brands

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Nov 23, 2011, 09:30 ET

CHICAGO, Nov. 23, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Restaurants, including Darden Restaurants Inc. (NYSE: DRI), Denny's Corp. (Nasdaq: DENN), 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

http://www.zacks.com/stock/news/65104/Restaurant+Industry+Stock+Review+%96+Nov.+2011

The restaurant industry is showing improvements and seems poised for long-term growth, but concerns about the health of the U.S. economy and the nagging sovereign debt issues in Europe pose some risks to this outlook. However, if we look back at the last few months, restaurant operators managed to post improved results riding on the back of modest traffic improvement and the consequent rise in comparable-store sales.

A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI), measuring the health and outlook on the U.S. restaurant industry, was 100.1 in September, up 0.7% from August. It was the highest level since June. The RPI run-rate in the last three months connotes improvements in same-store sales and customer traffic.

The Current Situation Index, which measures comparable-store sales, traffic counts, labor costs and capital expenditures in the restaurant industry, was 100.1 in September, up 0.8% from August. The Expectations Index, which measures restaurant operators' six-month outlook on the above indicators, stood at 100.2, up 0.7% from the prior month. Restaurant operators' capital spending plans are also on the rise, 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 as opposed to the year-earlier period. An improving outlook can be validated by the NPD foodservice market research report, which stated that annual visits to restaurants will increase by 8% over the next ten years.

Road Ahead

Looking ahead, we see modest top-line trends. Most of the restaurant operators are passing on higher costs to consumers in order to mitigate commodity pressure this year, and we expect this trend to continue in 2012. The companies that are well positioned are likely to enjoy pricing power and thus same-store sales increases.

However, we expect guest count to remain subdued in the first half of 2012. The U.S. economy is improving, albeit at a lower rate, but a sluggish labor market, over-supply of restaurants in the industry, higher gasoline prices, food cost inflation, a still-elevated unemployment level and weak income growth may weigh on industry profitability.

Restaurants have been trying to win back cash-conscious guests by revamping promotions, offering discounts 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, with consumers continuing to look for value, distinct dining experiences, as well as convenient and enhanced menu deals in a gradually improving economic backdrop.

Drivers of the Restaurant Industry

The U.S. restaurant industry consists of Quick Service Restaurants (QSR), Midscale Restaurants, Casual Dining, Non-Commercial and Fine Dining/Upscale restaurants.

In the midst of what might be called a lukewarm recovery, these are the potential drivers of net income growth for the restaurant industry: unit expansion, same-store sales, cost-containment efforts and marketing tools.

Unit Expansion: Emerging from a lackluster economy in 2008-2009, most of the companies have accelerated their pace of restaurant openings, though not aggressively. A relative recovery in consumer confidence has also encouraged companies to return to unit expansion.

Darden Restaurants Inc. (NYSE: DRI) will also spread its operations in the Middle East. Several food chains, including Denny's Corp. (Nasdaq: DENN) and 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. Companies like Yum! Brands and McDonald's are aggressively expanding in China to capitalize on the fast-paced economic growth in Asia. The companies are also targeting South-East Asia for expansion.

Same-Store Sales: The second driver consists of menu price increases and traffic counts. Most of the restaurant operators reported positive same-store sales and customer traffic growth in the recent months. Growth in menu price has accelerated, as per figures from the Bureau of Labor Statistics.

Cost-Containment Efforts: Some cost cuts have been achieved through integrated information systems, including point-of-sale, automated kitchen display, labor-scheduling and theoretical food cost systems.

Marketing Tools: Social media as a marketing tool has taken the industry by storm. Most of the operators rely on social media for promotion. Hence, we believe they are likely to incorporate Facebook, online review sites, Twitter and blogs increasingly into their marketing mix over the next two years.

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