Economic challenges for casual-dining chains will persist into 2012, according to a new report from Goldman Sachs securities analysts Michael Kelter and Chris Cerrone.
The two analysts said Darden Restaurants Inc. is the only company positioned to weather the slow recovery’s drag on consumer spending. Meanwhile, they said The Cheesecake Factory’s plans to reaccelerate growth in the face of several risk factors have prompted them to take a bearish position on the upscale-casual chain’s stock.
Kelter and Cerrone noted that the damage done to casual dining during the recession and the customer’s continuing reliance on value promotions have left most brands ill-positioned to struggle through another period of consumer retrenchment.
“The group has suffered from a multiyear pocket of stagflation,” they wrote, “with same-store sales growth not keeping up with the Consumer Price Index in any year since 2005. We expect already depressed same-store sales figures to moderate further in 2012, given a statistically significant relationship with U.S. consumer cash flow, which we forecast to slow.”
The analysts said that uncertainty regarding consumer spending makes it hard to get a read on near-term prospects for many casual dining brands — Goldman cited Brinker International, DineEquity Inc. and P.F. Chang’s China Bistro Inc. as examples.
Applebee’s, for example, has improved its standing in Goldman’s proprietary consumer survey after its 2007 acquisition by DineEquity brought about menu changes, new advertising and a remodeling program. But the struggles of sister chain IHOP are limiting earnings for DineEquity, Kelter and Cerrone noted.
They added that Chili’s same-store sales have underperformed the industry average in 18 of the past 22 quarters, yet that chain has room for unit growth. If Chili’s finds a way to revitalize its brand through menu or décor tweaks, the analysts said, it could add 500 locations and reach parity with Applebee’s, and growing internationally could be its “fountain of youth.”
P.F. Chang’s is at a crossroads in its lifecycle, Kelter and Cerrone wrote. Its namesake chain likely has reached saturation, and now the company must decide whether to pursue growth with secondary brands Pei Wei or True Food Kitchen or age “gracefully” by shoring up falling same-store sales at the China Bistro concept. If it fails to do so, through investments in remodeling or advertising, P.F. Chang’s namesake brand could simply get old and lose its positioning.
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Darden: Potential to break out
However, Goldman’s analysts were optimistic about Darden. They cited the renewed strength of Olive Garden and Red Lobster, the opportunity for LongHorn Steakhouse, and the long-term growth potential for its Specialty Restaurant Group, comprising Capital Grille, Bahama Breeze and Seasons 52.
Olive Garden, whose same-store sales have outperformed the industry average in all but six of the past 44 quarters, has room for more growth due to its No. 1 position in advertising share of voice in casual dining, the analysts wrote. They also noted that the full-service Italian sector’s market share is 79-percent controlled by independents, who are struggling to remain open and thus could be “share donors” to Olive Garden in the near future.
“We believe Olive Garden has further room for unit growth in the U.S. and are modeling 4 percent to 5 percent unit growth per year over the next three to five years,” Kelter and Cerrone wrote.
RELATED: Darden outlines 5-year growth plan
Red Lobster likely is near saturation in the United States, they wrote, but remodels have helped rejuvenate the brand. In addition, the $15 Seafood Feast in August drove an 11-percent spike in same-store sales.
“We generally do not believe that value promotions are a fix for any brand,” the analysts wrote. “This said, we would note that Red Lobster’s brand equity score improved dramatically in our latest survey, leaving us to believe that this particular promotion may have left a permanent mark on consumers’ view of the brand.”
LongHorn is an attractive growth story, Kelter and Cerrone added, because it has grown its market share from 14 percent in 2001 to 23 percent today. Advertising spending at the brand has quadrupled since 2000, they said. The brand also is reporting a sales lift between 3 percent and 4 percent at locations that have been remodeled.
Darden has developed multiple growth vehicles through the 2008 acquisition of LongHorn and Capital Grille and organic growth through Bahama Breeze and Seasons 52, the analysts wrote. They expect 55 percent of future revenue growth to come from the two flagship chains in the next few years, with 25 percent of revenue growth coming from LongHorn and the remaining 20 percent from the Specialty Restaurant Group.
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Cheesecake: Potential to get battered
On the other hand, the analysts said, The Cheesecake Factory’s once-rapid growth has cooled off, as falling consumer discretionary spending drove many recent quarters of same-store sales declines.
“We believe The Cheesecake Factory has entered the ‘middle age’ stage of its lifecycle,” Kelter and Cerrone wrote. “Despite early warning signs, the brand is starting to reaccelerate unit growth, which we see as a risky strategy.”
The first sign of trouble for expansion is declining traffic and same-store sales at The Cheesecake Factory’s existing 153 locations, the analysts noted. Since 2002, the brand’s cumulative traffic is down more than 15 percent and average unit volumes have fallen from $11 million to $9.8 million.
The chain also has lowered its targets for return on invested capital in new units, Kelter and Cerrone said, suggesting that the brand is nearing saturation. They also noted that The Cheesecake Factory’s stated intent to build smaller-footprint units is “a tacit admission that Cheesecake Factory has exhausted most of their full-sized potential locations.”
Aside from the prospect of beginning to expand too fast, The Cheesecake Factory’s sensitivity to changes in consumer discretionary spending has the Goldman analysts pessimistic about the brand’s prospects in the near future.
“Cheesecake Factory is the most macro-sensitive stock in our casual-dining universe,” they wrote. “Since 1999, the brand’s same-store sales have closely tracked changes in savings-adjusted discretionary cash flow. … Given this relationship, we would become more positive on Cheesecake Factory if the underlying macro environment were to improve dramatically.”
Kelter and Cerrone also conceded that their outlook would prove too pessimistic for The Cheesecake Factory’s stock if the company were able to grow the namesake brand successfully in international markets or develop the 13-unit Grand Luxe Café or one-off Rock Sugar Pan Asian Kitchen concepts into growth vehicles.
Goldman Sachs has received compensation for investment banking services from Darden and DineEquity and expects to receive similar compensation in the next three months from those companies, as well as from The Cheesecake Factory, Brinker, and P.F. Chang’s.
Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN
