MRT Same-Store Sales in Free-Fall

Highlights include Morton’s Restaurant Group Inc. (MRT - Snapshot Report), Ruth’s Chris (RUTH - Snapshot Report) and McCormick & Schmick’s Seafood Restaurants Inc. (MSSR - Snapshot Report).

Sales at Morton’s Restaurant Group Inc. (MRT - Snapshot Report) sales are going from bad to worse as the economy sinks. The upscale steakhouse operator reported that same-store sales plunged 24.1% in 1Q09, pushing adjusted EPS to a loss of $0.06 -- a penny better than the expected $0.07 loss -- from positive $0.16 earned in the year-ago quarter.

The company doesn’t expect improvement soon. Management forecasts same-store sales to fall at a rate of 20-22% in 2Q09 and revised downward the revenue and EPS guidance it issued just one month ago -- illustrating how rapidly business is deteriorating. For 2009, Morton’s now expects EPS to be between $0.14-$0.19, nearly 30% lower than the guidance of $0.20-$0.25 it issued on March 9.

Though the company trimmed food costs and G&A overhead, fixed operating expenses ballooned as a percentage of falling sales, crushing margins. Restaurant cash flow margins sank to 10.2% in 1Q09 from 16.3% in the year-ago quarter.

Roughly 80% of Morton’s diners are on expense accounts, leading to a higher average check in good economic times, but making the expensive restaurant chain particularly vulnerable to recessions. This extreme reliance on corporate spending, together with a heavy debtload that amounts to 45% of the company’s capital, works in reverse as the economy slows down. Not surprisingly, Morton’s is faring much worse than competitors, Ruth’s Chris (RUTH - Snapshot Report) and McCormick & Schmick’s Seafood Restaurants Inc (MSSR - Snapshot Report).

As operating cash flow fell into the red last year, Morton’s used debt to open new units, refurbish others and, incredibly, buy back stock.  Consequently, we expect a continued rise in leverage, fueled by negative free cash flow.

We are maintaining our Hold rating.