Reduced capital spending and shrinking capacity favor large cap casual dining names.
I’m now focused on what is the critical component to the recovery and improved health in the casual dining segment. The industry behaving rationally!
As you can see in the accompanying chart, the industry has been slashing capital spending for the past year and this trend will continue into 2009. This will allow the industry to focus more on running its existing operations better, which always leads to improved ROI. On top of this, we expect to see existing capacity of the weaker players close, benefiting the strong.
This is evident in the actions of RT last night. Last night, RT announced it will incur restructuring charges in its 2Q09 and 3Q09 related to impairment and lease charges. Importantly, these charges are associated with the closure of approximately 40 locations in 3Q09 and approximately 30 additional locations anticipated to close over the next several years, as well as a non-cash impairment charge related to approximately 35-40 surplus properties which are marketed for sale.
One of my favorite themes in the restaurant industry is “shrink to grow.” See my November 12 post titled “Shrink To Grow” that briefly explains the thought process. RT is playing into that theme perfectly. RT’s announcement, while extremely difficult for the company on a number of fronts is the right one for the company. The company has effectively improved the profitability of the company by eliminating 11% of the store base that was unprofitable. For RT, specifically, it pushes out the threat of bankruptcy by 6-12 months.
I also want to point out that EAT is a big beneficiary from the closing of the RT stores as they are direct competitors within the bar and grill segment. Importantly, RT is not alone. As we move into 2009 I would expect to see the casual dining industry shrink capacity significantly.