The Consumer & Casual Dining

Consumer Confidence Down; Casual Dining Up?

Today's plunging consumer confidence numbers, released by the Conference Board, suggest more pain ahead for the casual and upscale dining restaurant operators. Consumer Confidence tumbled to 49.3 in June from a revised level of 54.8, falling far short of expectations in the latest Thomson Reuters survey.

Clearly consumers are worried and don't see things getting better. Consumer expectations for the next six months slid to 65.5 in June from 71.5 last month.

To be sure, waning confidence comes as no surprise amid rising unemployment, which economists don't expect to peak until mid-2010. What is surprising is the stock market's reaction. The Zacks Growth Stock Index rose 1.3% today, 1.8% if we exclude Famous Dave's (DAVE - Snapshot Report), versus a 0.85% decline in the S&P 500. The index now trades at more than 19x 2010 consensus estimates, which call for EPS to grow at a high-teens average rate from 2009 estimates.

As a result, we think the restaurant growth stock sector has limited upside and that achieving the high-teens 2010 EPS growth implied by consensus estimates will be challenging. Kitchen and labor scheduling efficiencies, coupled with decelerating commodity prices, should more than offset the margin-squeezing effects of fixed occupancy costs on declining sales.

However, same-store sales are set to continue wilting, while unit growth has been nearly halted at most chains – BJ's Restaurant and Brewery (BJRI - Analyst Report) and Buffalo Wild Wings (BWLD - Analyst Report) remain two exceptions that are rapidly expanding.

Although at some point this year, falling customer traffic will likely level off, there is no reason to expect a resurgence in dining out.  Struggles appear set to continue for casual dining restaurants, such as Red Robin Gourmet Burgers, Inc (RRGB - Analyst Report), BJ's Restaurant and Brewery, Inc., Famous Dave's of America, Inc. and California Pizza Kitchen, Inc. (CPKI - Analyst Report), and for upscale operators, including McCormick & Schmick's Seafood Restaurants Inc. (MSSR - Snapshot Report), Morton's Restaurant Group (MRT - Snapshot Report) and Ruth's Hospitality Group, Inc. (RUTH - Snapshot Report).

The quick service operators are best positioned to continue benefiting from the trade-down from casual dining restaurants, particularly McDonald's (MCD - Analyst Report) and YUM! Brands (YUM - Analyst Report), which continue to generate positive same-store sales.