Restaurant industry watchers at Morgan Keegan Equities Research expect the upcoming round of third-quarter earnings reports to show improved earnings and sales, even as economic headwinds remain.
While commodity price inflation looms on the horizon and the Consumer Confidence Index has retreated to its lowest level since February, Morgan Keegan analysts Robert Derrington, Destin Tompkins and Joe Drake think recent improving same-store sales at 15 of the restaurant companies the firm tracks should continue this quarter and into 2011.
“Though monthly trends are still volatile, we project third-quarter casual-dining same-store sales will show an approximate 200-basis-point improvement from the second quarter,” the analysts wrote. “Though sales headwinds remain — especially from intense competition, stubbornly high unemployment and sluggish consumer spending — we remain optimistic same-store sales momentum will continue to build in the fourth quarter and into 2011, despite more difficult comparisons.”
Ruby Tuesday helped kicked off the latest round of earnings Wednesday, reporting higher profit and its second consecutive quarter of positive same-store sales.
"The positive same-restaurant sales for the quarter, on lower promotional levels and in a continued difficult economic environment, are a strong testament to the new Ruby Tuesday," said chief executive Sandy Beall, referring to the company's turnaround efforts, which included upgraded menu items and décor.
Morgan Keegan's analysts noted that some outside trends still cause concern for restaurant companies. For example, the Consumer Confidence Index fell to 48.5 in September, which was the lowest level it had registered in months, and a rise or fall in that index historically has shown a correlation with increases or decreases in casual-dining sales, the analysts said. They also noted large year-over-year increases in prices for foodservice industry staples like livestock, cheese and wheat.
Yet Morgan Keegan is predicting solid gains in earnings at many restaurant companies, due to favorable same-store sales momentum. In particular, the analysts pointed to the following six companies as having potential for strong earnings in the third quarter:
Buffalo Wild Wings
EPS projection: 44 cents per share
Wall Street consensus projection: 43 cents per share
Company EPS guidance: Not provided
Third-quarter EPS in 2009: 38 cents
Morgan Keegan predicts third-quarter same-store sales to be about 1 percent at corporate locations and flat at franchised restaurants for the casual-dining chain, based on July same-store sales gains of 2.2 percent at corporate and 0.2 percent at franchised units, as well as increased media spending through the quarter. Buffalo Wild Wings currently is running promotions tied to fantasy football and National Football League broadcasts. Morgan Keegan analysts say they are keeping an eye on how chicken wing prices may affect Buffalo Wild Wings, but they still expect the chain to outperform relative to their peers.
The Cheesecake Factory
EPS projection: 35 cents per share
Wall Street consensus projection: 34 cents per share
Company EPS guidance: Between 31 cents and 33 cents per share
Third-quarter EPS in 2009: 29 cents per share
Morgan Keegan analysts based their optimism for the upscale-casual chain based on projected same-store sales increases of 1.5 percent at both its Cheesecake Factory and Grand Lux Café locations, which are slightly above the company’s guidance of between flat and a 1-percent increase. Same-store sales had fallen 2.3 percent at The Cheesecake Factory and 5.1 percent at Grand Lux in fiscal 2009, but improving sales, especially in California, took hold this year, thanks to product additions like a small-plates menu.
Chipotle Mexican Grill
EPS projection: $1.34 per share
Wall Street consensus projection: $1.29 per share
Company EPS guidance: Not provided
Third-quarter EPS in 2009: $1.08 per share
Total revenue is projected to rise more than 20 percent at Chipotle in the third quarter, which is due to an expected 9-percent gain in same-store sales and nearly 14-percent unit growth, Morgan Keegan analysts said. They added that they’ll be watching for the impact of commodity inflation on Chipotle, as well as the effectiveness of a new advertising campaign. Chipotle rolled out a comprehensive marketing push several months ago to highlight its “Food With Integrity” brand positioning, complete with new radio commercials, outdoor billboards and rebranded packaging.
EPS projection: 74 cents per share
Wall Street consensus projection: 74 cents per share
Company EPS guidance: Between 71 cents and 73 cents per share
Third-quarter EPS in 2009: 61 cents per share
Morgan Keegan noted that Panera would be lapping strong same-store sales comparisons in the third quarter, but the analysts still expected the bakery-café brand to post gains of 6 percent at corporate units and 7 percent at franchise stores. They cited “confidence in a strong pipeline of top-line drivers and a relatively benign cost outlook” for their optimism.
Ruby Tuesday (first quarter of fiscal 2011)
EPS projection: 17 cents per share
Wall Street consensus projection: 16 cents per share
Actual EPS: 19 cents per share; 17 cents per share, excluding special items
First-quarter EPS in 2010: 11 cents per share
Ruby Tuesday reported results for its fiscal 2011 first quarter Wednesday, after Morgan Keegan distributed its research note. The company's net income for the latest quarter totaled $12.4 million, or 19 cents per share, compared with profit of $6.1 million, or 11 cents per share, a year ago. Excluding gains from the acquisition of two franchise partners, Ruby Tuesday's earnings would have totaled 17 cents per share, in line with Morgan Keegan's estimate.
Revenue rose 0.7 percent to $302.7 million, reflecting same-store sales increases of 1.2 percent at corporate stores and 0.4 percent at domestic franchised branches. Morgan Keegan analysts had predicted an increase of 1.5 percent at corporate restaurants and a 1-percent decline at franchised locations.
EPS projection: 19 cents per share
Wall Street consensus projection: 18 cents per share
Company EPS guidance: Not provided
Third-quarter EPS in 2009: 15 cents per share
Based on a 3-percent uptick in same-store sales for the first four weeks of the third-quarter at Texas Roadhouse, Morgan Keegan is projecting gains of 2.5 percent at corporate locations and 2 percent at franchised units of the steakhouse chain when its third quarter ends Sept. 28. The analysts noted, however, that they would await an update on the chain’s full-year earnings guidance of between 78 cents and 80 cents per share, which assumed a 1-percent gain in annual same-store sales and food cost deflation of between 2.5 percent and 3 percent.
Contact Mark Brandau at [email protected].