GLASS HALF FULL VS. GLASS HALF EMPTY PANEL COMMENTARY

Earlier today, management from CPKI, CKR and TXRH participated in a panel discussion in which they were asked questions about the current environment and whether the outlook was “glass half full” or “glass half empty” on varying industry topics. 

Although the restaurant operators were seemingly optimistic on the current restaurant industry outlook, I think the most important question was left unanswered.  When asked about their outlook on demand and future guest counts, they all said there was no way to know, saying “no crystal ball” and “it’s kind of a crapshoot.”   In my opinion, it is difficult to get extremely optimistic about the group until demand returns because the industry as a whole will not be able to maintain its current pace of cost cutting and as CPKI’s Co-CEO Rick Rosenfield correctly pointed out, “You can’t cost cut your way to prosperity.”

To that end, Keith McCullough shorted DRI and CKR (ahead of reporting earnings after the close today) in the Research Edge portfolio earlier today.  CKR already preannounced its fiscal 2Q10 sales and earnings so we are not expecting an earnings miss.  We will be looking at the quality of those earnings though as the company guided to relatively flat YOY margins with Carl’s Jr.’s same-store sales down 6.1% and Hardee’s down 2.7%.

Glass Half Full:


Are you glass half full or half empty on outlook for restaurant supply next year?  Each participant seemed confident that the industry is in a better place now than it was last year.  Supply has come down with fewer openings and more closures than openings.  There are great real estate opportunities now at more reasonable prices.  Construction costs are coming down a bit as well.

Can you continue to outperform if the current economic environment stays the same?  All of the respondents seemed to think they will continue to outperform.    All of them said they just need to continue to focus on the business.  Mr. Rosenfield said specifically that slowing growth has allowed the company to become a much leaner, more efficient business.

Are consumer behaviors forever changed? All three seemed to agree that we are currently in a down cycle which should be followed by an up cycle.  Additionally, people like to eat out and that will not change.

Can you retain recently implemented cost saves?  All seemed to agree that they are constantly focused on managing costs but that there is always a point where cutting costs too much will impact the customer’s experience in food quality or service.  Additionally, they stated that the current cost environment is relatively favorable as a result of lower construction costs which they intend to capitalize on while it still exists.

How do you feel about value?  All three responded that value is important and very prevalent now but that they are seeing their competitors diminish their brands by focusing too much on value and discounting.  They all think they are offering value by offering a better product for the price but are not engineering products to bring low cost items to the menu.  CKR’s President and Chief Legal Officer Michael Murphy talked about the company’s new “Big Carl” product that has double the meat than the Big Mac but costs less, which he thinks points to the type of value being offered by CKR. 

Do you have the ability to raise prices if need be?  All agreed that people are definitely more price-resistant now than they used to be.  Mr. Rosenfield commented that he thinks CPKI has pricing power, but now is not the right time to increase menu prices.  Should the cost structure change, the company will have no choice but to raise prices.

How is the credit environment faring? Mr. Murphy stated, “It can’t get much worse than it was so I would say the outlook is improving.”  Specifically, he said CKR continues to attract high quality franchisees.  He said the credit environment could potentially slow growth over time, but that it has not been an issue as of yet.

Glass Half Empty:


Do you see the level of value offers coming down?  They all agreed that they are seeing more value items now and “more desperation.”

What is your view on increased regulation?  The respondents all seemed to believe that a public healthcare plan will really hurt business and will have a huge inflationary impact.  Increased costs will lead to increased prices.  Relative to required menu labeling, they have not seen much impact but agreed that all restaurants and all businesses selling food (regardless of size) should be held to the same requirements.