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Until this week, the performance of the restaurant industry has been remarkably resilient.  Driven by the smaller cap names, the group has outperformed every month this year and did not come close to bottoming with the broad market in February.  Today the group is moving higher again with the broader market.  If the restaurant group was more high-profile like the Technology or Financial sectors, it would be considered a leadership group. 

Of course, it’s a leadership group because everyone needs to eat.  So with the Restaurant group rolling over this week, is it a leading or lagging indicator?  

The stocks have been outperforming in 1Q10 as…..

(1)    Top line trends continue to improve sequentially

(2)    Margins are expanding due to lower food costs

(3)    The Private Equity mania

The current pull back centers on….

(1)    Some high profile EPS misses

(2)    Food inflation is around the corner

(3)    Too far too fast….

With the rising tide having lifted all boats so far this year, I don’t expect this run up to continue for the balance of 2010.  I continue to believe there is some powerful momentum behind SBUX and would focus on EAT as we progress toward FY11.  MCD is taking share in the US but upside is limited as valuation is approaching a stressful level.  I see the BWLD business model as being broken and some restructuring is needed to fix the real estate issues.  PFCB has picked up some momentum in the Bistro’s traffic trends, but the risk parameters are on the rise with incremental pricing and lower discounting.


Howard Penney

Managing Director