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Bailout defeat sends restaurant stocks into freefall

NEW YORK Echoing the crash in the broader market, the NRN Stock Index fell 5.12 percent on Monday, its largest one-day loss in four years, on news the House of Representatives had failed to pass a $700 billion bailout plan that investors hoped would provide liquidity to the U.S. financial sector and spur lending, spending and economic growth.

The NRN Stock Index’s decline, however, was not as bad as the major indexes, indicating restaurant stocks may be buffered from larger dips because the sector is seen as an early-recovery story once an economic turnaround begins.

“Given the market and consumer uncertainty, investors may want to wait for the light at the end of the tunnel,” said restaurant securities analyst Larry Miller at RBC Capital Markets. “But we believe waiting for the turn means potentially missing the move in restaurant stocks, as they should recover well in advance of any fundamental improvement.”

On Monday, however, almost all restaurant company stocks were hit. The biggest losers include Casa Ole parent Mexican Restaurants Inc., O’Charley’s Inc., and IHOP and Applebee’s parent DineEquity Inc. On their last day of trading as separate companies, Wendy’s International Inc. and Triarc Cos. Inc. went in different directions, with Wendy’s posting a double-digit loss and Triarc posting one of few gains for the industry, boosted by the day’s news that its purchase of the No. 3 burger brand was complete. In addition to Triarc, other gainers on Monday included Pizza Inn Inc., J. Alexander’s Corp. and Star Buffet Inc.

Arescue plan for the crisis on Wall Street is seen as imperative for many in the restaurant industry, as the sector relies on debt financing -- now frozen -- for growth, remodels and purchases. The bailout is also seen as crucial for buoying consumer spending, which is near all-time lows, for traffic gains and system sales growth. Both the National Restaurant Association and the International Franchise Association had urged Congress to pass the bailout plan.

Although the compromise bill failed to garner passage in the House on Monday, reports suggested it would be up for vote again by the end of the week. It is expected to be considered by the Senate at midweek.

The NRN Stock Index closed on Monday at 1,114.86, just 14 points above the index’s lowest annual close on July 11. The index’s all-time low for the year, including intraday trading, was 1,076.97 on July 15. Its largest one-day decline for the year, prior to Monday, also took place in July, when macroeconomic data covering employment, consumer spending and cost inflation had hit -- at that time -- near all-time lows. The NRN Stock Index is market-cap weighted and includes all 63 restaurant companies trading on the major exchanges.

The Dow Jones industrial average fell nearly 7 percent, or a record 777.68 points, to close at 10,365.45, its worst one-day decline in 21 years, reports said. The Nasdaq Composite fell 9.14 percent, the New York Stock Exchange Composite fell 8.70 percent, and the Standard & Poor’s 500 Index fell 8.81 percent. The Russell 2000 Index, a small-cap index including such restaurant companies as Bob Evans Farms Inc., CKE Restaurants Inc. and P.F. Chang’s China Bistro Inc., fell 6.68 percent.

For the latest financial data in the restaurant industry, including the NRN Stock Index, visit Nation's Restaurant News' Market Monitor.

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