Restaurant industry's outlook improving

Analyst points to easing commodity prices and positive sales trends

October brought more signs of stability, and possibly recovery, in the restaurant industry as commodity prices eased slightly, same-store sales improved and consumer confidence climbed, an analyst said Monday.
 
Brad Ludington, an analyst with KeyBanc Capital Markets Inc., wrote in his Monthly Restaurant Roundup that various data points from last month indicate that the industry outlook is improving. Ludington pointed in particular to companies with “differentiated brands” that continue to “execute at a higher level than their peers, despite other macro pressures,” such as The Cheesecake Factory Inc., Ruby Tuesday Inc., Darden Restaurants Inc., CEC Entertainment Inc., and Papa John’s International Inc.

Ludington highlighted three key areas with positive signs for the industry:

Commodity prices remain high, but fell slightly in October.

KeyBanc’s Restaurant Commodity Index fell to an average level of 144 in October, down 2.6 percent from September’s high for the year of 147, Ludington said. The October result, however, is 24 percent above the index level of 116 the firm reported for the same month last year.

While corn prices were up in October this year, prices declined for chicken breast, potatoes, eggs and some seafood and produce. Wheat prices also eased somewhat despite ongoing volatility, Ludington said. Dairy prices were relatively flat, but butter prices declined 2 percent in the month, the first monthly decrease since February.

Industry indicators point to improvement.

The National Restaurant Association’s Restaurant Performance Index reached 100.3 in September after four months of languishing below the 100-point benchmark. The Current Situation Index improved in August, with respondents reporting sequentially improving same-store sales, customer traffic and hiring, though capital expenditure activity dropped slightly. The NRA’s Expectations Index stayed above 100 for the 11th consecutive month, and operators said they expect overall same-store sales levels to be higher in the next six months.

In addition, the Knapp-Track survey of same-store sales also rose, with a 1.2-percent uptick in September, the best results the index has seen since mid-2007. Traffic rose 1.4 percent — the best traffic results since December 2006, Ludington noted.

September’s Knapp-Track results also marked the third consecutive month of positive same-store sales after 25 months of declines.

“We continue to believe that performance remains stratified between the best and worst performing chains, but we believe the continued positive index results indicate strength in the sector for high-performing chains,” Ludington wrote.

Slow growth in consumer confidence and private payrolls.

Unemployment stayed at 9.6 percent nationally in September with private sector jobs increasing for the ninth straight month, the report said. Consumer confidence, new home sales and housing starts moved in a positive direction, although still low for the year.

“While economic numbers released in the month of October do not exactly inspire confidence in a rapid recovery, we continue to believe data is moving in the right direction, although slowly,” wrote Ludington.

Contact Lisa Jennings at [email protected] [3].