OUTLOOK FOR THE RESTAURANT SPACE

Our outlook for the restaurant space at this point remains negative.  The combination of a bleak jobs picture and sticky commodity prices (gasoline and foodstuffs) spells a scenario where we see several names within the restaurant space seeing a decline in the fundamental state of their business.

From a top-line perspective, the jobs picture continues to depress expectations for comparable-store sales growth in the restaurant space.  As the chart below shows, the inverse correlation between initial jobless claims and the S&P 500 is quite tight.  Unless the high level of weekly jobless claims declines, we wouldn’t expect significant gains in stocks, particularly restaurant stocks, whose top line growth anchors so heavily on employment.

OUTLOOK FOR THE RESTAURANT SPACE - claims  inv  spx

The two charts below show the inverted initial claims again, this time versus a quick service restaurants index and a casual dining index.  The casual dining index seems to track closely which makes sense to us given that it is the more discretionary of the two categories.

OUTLOOK FOR THE RESTAURANT SPACE - claims  inv  vs qsr

OUTLOOK FOR THE RESTAURANT SPACE - claims  inv  vs cd

Consumer confidence is also a key metric for us to monitor as we attempt to decipher how restaurant revenues will look in the back half of the year.  Casual dining trends, on a two-year basis, closely track the Conference Board Consumer Confidence Index, as the chart below shows.  Gas prices, which are a key driver of negative consumer sentiment, remain at an elevated level despite having come down from peak May levels.  The inelastic demand for gasoline in the U.S. as well as the asymmetric pass-through of changes in the price of crude oil to wholesales gasoline prices is largely to blame for this; gas prices, as discussed in a recent report by the Federal Trade Commission, tend to go up like rockets and down like feathers.

OUTLOOK FOR THE RESTAURANT SPACE - knapp 2yr confidence

OUTLOOK FOR THE RESTAURANT SPACE - gas prices

Foodstuffs, also, have remained sticky to the upside and we believe that the combination of softening top-line trends and continuing commodity headwinds will hamper earnings growth for many companies in 2H11.  BWLD and TXRH are two of the names that are on the top of our list in this regard but we will be doing more granular work on both of those names in the coming days.

Howard Penney

Managing Director

Rory Green

Analyst