Restaurant Stock Outlook – Jan 2014 – Zacks Analyst Interviews

The U.S. restaurant industry was a little under the weather in the latter half of 2013. The downbeat mood was accentuated by Fed's "taper talk," the temporary government shutdown in October and concerns regarding consumer spending trends. The consumer confidence index was under pressure, declining from September to November straight due to the government shutdown and concerns regarding consumer spending over the next six months. But sentiment had started steadily improving, though the recent stock market weakness could potentially reverse that.

The industry is dependent on broad macroeconomic factors, with dining out being a largely discretionary activity. The economic climate largely influences restaurant choices for customers. We believe issues related to "Obamacare," volatility in housing data and fuel prices and excess supply may continue to cast shadows on the long-term picture. Additionally, an extensive focus on value proposition along with moderate pricing power could prove unfavorable for margins if exercised on a long-term basis.

However, we expect the outlook for the restaurant industry to get better driven by innate fundamental strengths, reflecting an improving economic backdrop. Statistics bear out this relatively favorable environment. Restaurant-and-foodservice sales are anticipated to be $683.4 billion in 2014, up 3.6% year over year, as per the National Restaurant Association. In real terms, this will mark the fifth consecutive year of growth in restaurant sales. The strength in the U.S. restaurant industry is backed by pent-up demand from consumers to live and eat well.

A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI), measuring the present condition and outlook on the U.S. restaurant industry, was 101.2 in November, up 0.3% sequentially and the highest since Jun 2013. The Current Situation Index, which measures comparable store sales, traffic count, labor costs and capital expenditures in the industry was 101.2 in November, also up 0.3% sequentially and the highest in the last six months. The latest index is indicative of the underlying strength in the industry.

Moreover, yearly hikes in dividends on a regular basis by some restaurateurs like The Cheesecake Factory Inc. ( CAKE ), Brinker International, Inc. ( EAT ) and McDonald's Corp. ( MCD ) underscore their efforts to consistently return shareholder and franchisee value irrespective of the economic peaks and valleys.

OPPORTUNITIES

Domestic and International Unit Expansion

After emerging from a lackluster economy that lasted for three years, most of the companies had stepped up their pace of restaurant openings.

Not content with domestic expansion alone, the companies were looking to test waters as well as developing taste buds in foreign shores. Restaurateurs are primarily concentrating on the emerging markets that provide ample opportunities for expansion. The burgeoning middle income population in emerging countries encourages these companies to shift their spotlight from the somewhat saturated domestic market. DineEquity, Inc. ( DIN ), Red Robin Gourmet Burgers Inc. ( RRGB ) and The Cheesecake Factory have been quite active on this front.

Refranchising, Revamping & Innovating Menus - a Common Trend

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Restaurant Stock Outlook - Jan 2014 - Zacks Analyst Interviews