Stock rally, upbeat data point to better times

NEW YORK The recent rally in restaurant stocks and a trickle of more upbeat economic data have some observers thinking the industry has already suffered the worst of this recession’s hits.

Through last Friday, the Nation’s Restaurant News Stock Index [3] rose to its highest point of the year, save for a few days in early January when the market is typically trading positively on post-New Year’s Eve bliss. On April 3, the market-cap weighted index of all public restaurant companies closed at 983.09, a 0.7-percent increase from the day before and a 3.3-percent increase for the week. Last week marked the fourth consecutive week of NRN index jumps, and the closing value on Friday was the highest since Jan. 7.

Improved data on the industry’s monthly sales and a minor uptick in consumer confidence levels also is convincing some that the end of weak consumer spending, which the industry has faced for more than a year, could be near.

“Various sales metrics suggest that the December 2008-January 2009 timeframe may have been the bottom in terms of sales and traffic declines for the restaurant industry in the current economic downturn,” analyst Jeff Omohundro at Wachovia Capital Markets LLC said in a research note Monday.

He noted that Census Bureau and Bureau of Labor Statistics data show that real sales for restaurants may have bottomed out at a 4.7-percent decrease in December 2008, and have since improved to a negative 2-percent clip in January and February. In addition, CREST survey data from consumer and market research firm The NPD Group show that monthly traffic trends point to January 2009 as a potential bottom, for the full-service sector specifically, when traffic fell 6 percent. A rebound to negative traffic of about 4 percent occurred in February. Finally, Wachovia’s own quarterly same-store sales data for companies under its coverage suggest that the fourth quarter and the just-ended first quarter could be the potential bottom, Omohundro said.

 

Improved consumer confidence could be sparking restaurant sales. Both the University of Michigan and The Conference Board’s U.S. consumer confidence indexes rose in March, although they remain at depressed levels from a year ago. The improvements were greater than the market expected, according to reports, and many pundits predicted that the record-low levels of consumer confidence logged in January and February could be over.

While unemployment continues to rise — it rose to 8.5 percent in March — The Conference Board suggested Monday that “the most intense stage of job losses may be behind us.” Its Employment Trends Index fell in March, like it has for the past 20 months, but not as steeply as it had in the previous four months.

As public restaurant companies head into first-quarter earnings season, set to begin later this month, some analysts are taking these nuggets of good news into account, and said they expect a better quarter, especially when compared with the doldrums of last year’s fourth quarter.

“Based on recent more favorable sales trends and the potential for better margins, we believe first-quarter earnings per share could be at least in line with expectations, if not slightly better,” analyst Bob Derrington at Morgan Keegan & Co said in a note.

Jeff Farmer, an analyst at Jefferies & Co., noted that restaurants should be able to hold onto the recent improvement in the average 2009 price-to-earnings ratio, which jumped to 15 in late March, from 11 earlier in the month.

“With the steady drumbeat of good news out of the financial sector and evidence that retail sales potentially began a É recovery in February and March É it will likely take results [in line with expectations] at a very minimum to hold onto the expansion,” he said.

Contact Sarah E. Lockyer at [email protected] [4].