Casual Dining & the Consumer

Plunging consumer confidence means more pain ahead for the casual and upscale dining restaurant operators. The Conference Board reported Monday that consumer confidence fell to an all-time low of 38 in December from 44.7 in November.

Consumers are worried and don’t see things getting any better. Consumer expectations for the next six months slid to 43.8 in December from 46.2 last month. As a result, we think the struggles will continue for casual dining restaurants, such as Red Robin (RRGB), BJ’s Restaurant and Brewery (BJRI), Famous Dave’s (DAVE) and California Pizza Kitchen (CPKI), and for upscale operators, including McCormick & Schmick’s (MSSR), Morton’s (MRT) and Ruth’s Chris (RUTH).

The decline in same-store sales at the casual and upscale dining sectors is likely to keep accelerating through the first half of 2009 -- from in the mid-single digits now -- as more diners stay home or trade down to fast food. The quick service operators best positioned are McDonald’s (MCD) and YUM! Brands (YUM), which continue to generate positive same store sales.

Restaurant stocks are down 35% on the year, after rocketing 60% from their pre-Thanksgiving lows. A lot of the near-term pain is baked into the prices. But we think the upturn in sales will come later and be more gradual than investors are anticipating -- in the third quarter of 2009 at the earliest.

Therefore, we’d not be buyers of casual and upscale dining stocks, but rather remain with more consistent earnings generators, with strong balance sheets, that can actually benefit from slowing casual dining sales as consumers trade down -- namely McDonald's and YUM! Brands.

Read the full analyst report on RRGB.

Read the full analyst report on BJRI.

Read the full analyst report on DAVE.

Read the full analyst report on CPKI.

Read the full analyst report on MSSR.

Read the full analyst report on MRT.

Read the full analyst report on MCD.

Read the full analyst report on YUM.

Read the full analyst report on RRGB

Read the full analyst report on MSSR

Read the full analyst report on MRT

Read the full analyst report on MCD

Read the full analyst report on YUM