Weak May comps pose worries for summer sales

Weak May comps pose worries for summer sales

Lower-than-expected May same-store sales and concerns that competition and gas prices will worsen before they get better have operators bracing for a summer season that’s not so hot.

As disappointing late-spring same-store sales reports rolled in, reflecting difficult times across several segments, some operators disclosed plans to ramp up value menus. Many reduced profit projections. Casual-dining chains in particular remained locked in their prolonged slump.

“Early same-store sales results suggest that May results have not really improved, particularly in casual dining,” Andrew M. Barish, a securities analyst at Banc of America Securities LLC, said in a research note. “In fact, given the easy comparisons [with] last year, one could argue that results have actually worsened.”

Popeyes Chicken & Biscuits [3], the 1,876-unit chain operated and franchised by Atlanta-based AFC Enterprises Inc. [4], said late last month that it would expand its value-menu offerings and marketing “to counter the continued aggressive pricing strategies from the competition.”

Still, the stiff competition within the quick-service segment and the expected increases in gas prices throughout the summer have forced AFC to reduce both its same-store sales and profit expectations for the year. Systemwide domestic same-store sales for 2007 are now expected to be flat to slightly negative, compared with previous guidance of positive same-store sales of between 1.5 percent and 2.5 percent.

The company also cut its annual per-share earnings guidance by 6 cents per share.

Popeyes is not alone in its muted outlook for the year. The latest results for the National Restaurant Association’s Restaurant Performance Index, reflecting data from about 400 restaurant operators collected in April, showed that operators are not optimistic about the state of the industry.

The NRA’s Expectations Index, which measures operators’ six-month outlook based on four industry indicators—same-store sales, employment, capital expenditures and business conditions—hit its lowest level in four months.

Furthermore, just 46 percent of restaurant operators that responded to the NRA survey expect to have higher sales in six months, versus the same six months a year ago, down from 55 percent who reported similar expectations in March.

Facing stiff macroeconomic headwinds, like increased gas prices and the slumping housing market, operators are also less optimistic about the direction of the overall economy, according to the NRA index. Only 28 percent of operators expect economic conditions to improve in six months—the lowest level in eight months. Twenty-two percent of operators said they expect economic conditions to worsen in six months, and 50 percent expect economic conditions to remain about the same.

May same-store sales results indicate that operator pessimism may not be misplaced. Outback Steakhouse [5] parent OSI posted declines at four of its casual-dining concepts, Applebee’s recorded continued declines, and CBRL Group Inc. [6], owner of the 559-unit Cracker Barrel Old Country Store [7] chain, also had a decline in a same-restaurant sales.

Even quick-service burger giant CKE Restaurants Inc. [8], whose Carl’s Jr. [9] flagship chain had posted a string of positive results, reported a dip in May in its same-store sales. CKE’s Hardee’s [10] chain notched positive same-store sales for a 19th consecutive month, but it was not enough to yield positive blended results for the parent company.

Some restaurant analysts had hinted in mid-May that May sales would see improvement from year-earlier results because weather for the month was mild in much of the country and many brands were lapping weak results from May 2006.

But higher gasoline prices—at record levels in some states and still rising—and continued decreases in housing values may have kept consumers from spending money on dining out, other analysts contended.

“May should be free of weather excuses,” securities analyst John S. Glass at CIBC World Markets said in a note to clients. “Next worry will be gasoline prices, which have recently hurt [casual dining] more than [quick service].”

At Tampa, Fla.-based OSI, domestic systemwide same-store sales fell 1.4 percent at Outback Steakhouse, 2.1 percent at Carrabba’s Italian Grill, 2 percent at Bonefish Grill [11] and 0.9 percent at Roy’s [12]. Same-store sales increased 1.2 percent at Fleming’s Prime Steakhouse & Wine Bar [13] for the May period, which comprised the four weeks ended May 26.

OSI, which operates or franchises a total of 1,457 restaurants under eight brands, has posted negative same-store sales trends, especially at its flagship Outback chain, for more than a year.

Overland Park, Kan.-based Applebee’s International Inc. [14], which operates or franchises 1,938 namesake restaurants, said domestic systemwide same-store sales fell 2.1 percent for the four weeks ended May 27. Same-store sales fell 1.9 percent at domestic franchised restaurants and 2.9 percent at domestic corporate locations, the company reported.

The company-owned locations recorded a decrease in guest traffic between 3 percent and 3.5 percent, Applebee’s added.

At Lebanon, Tenn.-based CBRL, same-store restaurant sales fell 0.4 percent despite a 2-percent uptick in average check, aided by a 2-percent increase in average menu price, the company reported. Same-store retail sales increased 3.7 percent for the four weeks ended May 25.

Carpinteria, Calif.-based CKE posted a same-store sales drop of 0.9 percent at Carl’s Jr. and a same-store increase of 0.6 percent at Hardee’s. The company’s blended result, which reflects both chains, dipped 0.1 percent for the four weeks ended May 21.

For the quarter ended May 21, Carl’s Jr.’s same-store sales remained unchanged from the year before, while Hardee’s same-store sales rose 1.8 percent, the company reported.

NRN Stock Index [15]