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10 trends to watch in 4Q reports

Restaurants expected to outline higher sales, future price hikes

Fourth-quarter earnings season kicks into full swing next week, and many restaurant companies are expected to report improving sales and profit, said restaurant securities analyst Jeffrey Bernstein of Barclays Capital.

Restaurants also are likely to discuss plans to raise menu prices in 2011 to combat increased commodity costs, he said in a research note Friday.

Bernstein listed 10 items to watch as companies report final results for 2010:

1. Earnings growth. Bernstein expects the restaurant segment to book a 15-percent jump in per-share earnings for the quarter, which assumes “modest” improvement in sequential same-store sales. He noted that casual-dining and fast-casual companies may record bigger earnings gains in the quarter, while quick-service restaurants are expected to see smaller levels of growth.

2. Outlooks for 2011. Restaurant companies are expected to offer details on targets for same-store sales and unit growth in 2011, as well as expected increases in commodity and menu prices, Bernstein said.

3. Casual-dining sales improve. Same-store sales trends are expected to improve in much of the casual-dining sector on both a one- and two-year basis, Bernstein said. However, Barclays detected a slowdown in sales late in the fourth quarter, even before the harsh winter weather kicked in. “The short-term pullbacks were not surprising,” Bernstein wrote, “and [we] still believe the underlying consumer improvement is intact.”

4. Quick-service sales stabilize. Quick-service chains will benefit in the fourth quarter by lapping their easiest same-store sales comparisons in more than a decade, Bernstein said. However, he cautioned: “With lower-income unemployment showing no signs of easing, don’t expect an improving two-year trend, especially among the smaller, regional chains.”

5. Menu price hikes. Bernstein noted that menu price increases likely would return in 2011, at a rate of at least 1.5 percent to protect unit-level margins against projected inflation in commodities. Most chains would raise prices cautiously, he wrote, because improvements in guest counts remain “very fragile.”

6. Commodity costs up. While the restaurant industry’s commodity cost basket experienced inflation in the fourth quarter, following two years of favorable costs, Bernstein noted that the increases were “more manageable” than operators had expected. “Most restaurants have noted 2011 inflation of 2 percent to 4 percent,” he wrote, “manageable with a modest increase in menu pricing.”

7. Restaurant units still outpace demand. The restaurant industry still is overbuilt in the United States, with the excess supply of restaurants outstripping demand and putting downward pressure on sales. Barclays’ most recent research on unit closures noted that independents, not chain concepts, carried much of the industry downsizing in 2010.

8. Share repurchases. Bernstein noted that “conservatism related to balance sheets and cash deployment was easing,” with companies deploying their cash flow into share repurchases and dividends rather than investing in aggressive unit growth as they had before the recession of the past few years.

9. Pared-down portfolios. More multibrand companies are expected to shed smaller and underperforming concepts, as seen this week with announcements by Yum! Brands Inc. and Wendy’s/Arby’s Group Inc. Yum said it was putting Long John Silver’s and A&W All American Food up for sale, while Wendy’s/Arby’s said it was exploring strategic alternatives for Arby’s, including a possible sale.

10. Foreign currency pressures ease. Bernstein noted that “foreign-exchange pressures have turned into benefits for those with exposure to Europe (i.e. the euro) as well as an easing of the Chinese currency pegged to the U.S. dollar.” However, he added, these benefits have been dwindling recently as the dollar gains strength.

Restaurant earnings schedule
A few restaurant companies have already reported latest results, including Sonic Corp. and Ruby Tuesday Inc., and many more reports are expected next week and in February:

Jan. 24: McDonald’s Corp.
Jan. 25: Brinker International Inc.
Jan. 26: Starbucks Corp.
Feb. 2: Yum! Brands Inc.
Feb. 8: Buffalo Wild Wings Inc., Bob Evans Farms Inc.
Feb. 10: BJ’s Restaurants Inc., California Pizza Kitchen Inc., The Cheesecake Factory Inc., Panera Bread Co., and Chipotle Mexican Grill Inc.
Feb. 15: CEC Entertainment Inc.
Feb. 16: Denny’s Corp., Tim Hortons Inc. and P.F. Chang’s China Bistro Inc.
Feb. 17: Red Robin Gourmet Burgers Inc.
Feb. 22: Papa John’s International Inc., Cracker Barrel Old Country Store Inc., and Texas Roadhouse Inc.
Feb. 23: Jack in the Box Inc.

Companies expected to report in March include Domino’s Pizza Inc. on March 1 and DineEquity Inc. and Wendy’s/Arby’s Group on March 3.

Contact Mark Brandau at [email protected].

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