Restaurants look to hike prices in a trying sales environment

NEW YORK Higher menu prices and lowered earnings expectations are in the cards for many restaurant companies, given their experiences in the second quarter and an increasingly challenging business environment.

Restaurant stocks followed the Dow lower and lower during the week of July 23, as second-quarter earnings reports and other corporate news underscored the double whammy of rising costs and stalled sales. Only superstars like McDonald’s Corp. and ongoing turnaround stories like IHOP Corp. were able to report profit and sales gains that met or exceeded expectations.

“Most of the restaurants reporting earnings saw margin pressure in the current quarter and, with few exceptions, lowered expectations for [the second half of 2007] or cautioned that the cost environment is tougher,” said securities analyst Ashley Woodruff of Friedman, Billings, Ramsey & Co. Inc. “Almost all companies … will raise menu prices, even companies that increase prices infrequently.”

McDonald’s profit gain came in the vein of continuing operations, as its April sale of Latin American and Caribbean restaurants to a developmental licensee led to a $1.6 billion one-time charge that resulted in a net loss, the second in the company’s history. Excluding that charge, McDonald’s second-quarter profit rose 4 percent from a year ago to $869.9 million, or 71 cents per share. Revenue rose 12 percent to $6.01 billion.

IHOP cited new restaurant openings, positive same-store sales and cost controls in its 37.1-percent jump in second-quarter profit to $14.1 million, or 82 cents per share. The company’s revenues rose 5.2 percent to $89.5 million and systemwide same-store sales increased 2.5 percent.

Wendy’s International Inc. swung to a profit in its second quarter from a year-ago loss that was driven by the write-down of its Baja Fresh chain, but its latest-quarter revenue dipped 0.2 percent. Wendy’s earned $29.2 million, or 33 cents a share, in the second quarter, versus a loss of $29.1 million, or 25 cents a share, a year ago when it booked impairment charges of $93 million at Baja Fresh, which would soon be divested. Latest-quarter revenue was down slightly at $632.9 million from $634.1 million a year ago.

P.F. Chang’s China Bistro Inc. recorded a 15-percent jump in second-quarter profit, but sales at its flagship Bistro chain were below expectations, leading the company to cut its annual outlook. P.F. Chang’s said it now expects to earn $1.34 per share on revenue of $847.2 million for the year, down from a previous forecast of earnings of $1.38 per share on revenue of $850.4 million.

Most of the companies with corporate news in late July cited the need to increase menu prices to offset commodity, energy and labor cost inflation. Starbucks, which planned to report its latest quarter results on Aug. 3, said it would increase its beverage prices by an average of 9 cents per cup, the second price increase in its current fiscal year.

Domino’s Pizza Inc., which saw second-quarter profit plunge 90.5 percent from a year ago on the negative impact of its debt recapitalization and legal fees in a California wage and labor lawsuit, said the current cost environment would lead to “material price increase[s]” in the pizza segment.

Domino’s 2.1-percent increase in same-store sales was the first positive result in six quarters, which company management said was “particularly important” during a time of increased labor, commodity and energy prices.

The Cheesecake Factory Inc., which was able to post a 1.1-percent increase in its second-quarter profit to $23.7 million, or 33 cents per share, on a revenue surge of 16 percent to $373.2 million, said it introduced a summer menu in late July that included a 1.5-percent menu price hike “to offset known cost pressures for the second half of the year.”