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Fitch: Risk for restaurants moderating

Fitch: Risk for restaurants moderating

NEW YORK Despite continued weakness in same-store sales growth for nearly all U.S. restaurants, corporate financial risk and bankruptcy fears for leveraged companies are moderating, according to a Tuesday report from Fitch Ratings, a corporate credit rating agency.

Cost controls, including aggressive expense reductions, eased commodity costs and decreased capital spending, have helped companies contain further deterioration of cash as sales growth still remains elusive, the report by Fitch Ratings analyst Carla Norfleet Taylor said.

“Most operators remain cautious on the outlook for the consumer and the broader economy, and are therefore making balance sheet management and liquidity a priority,” the report stated.

Operators are more effectively managing labor expenses by reducing hours worked, using less costly cuts of meat, minimizing waste, offering less free bread and cutting back on condiments, the report highlighted.

The moves have helped companies maintain or improve restaurant-level profit margins and have driven growing investor confidence in the sector — a key factor in any sort of thaw to the credit freeze. The dynamic has helped companies from Wendy’s/Arby’s Group Inc. to Real Mex Restaurants close capital-raising bond offerings this summer.

Still, rising U.S. unemployment and the continued sales slowdown is a concern for the restaurant industry. Cost-containing strategies can only help margins to a point, Fitch indicated.

“If the economic downturn lasts longer or becomes deeper than already anticipated, forcing the high level of discounting — particularly in casual dining — to continue, the industry could again experience an increased level of financial stress,” the report said. “Accelerating declines in restaurant traffic will result in revenue shortfalls that cannot be offset by cost reductions.”

Fitch has projected that cash flow growth for the industry will remain below average this year, and that U.S. unemployment will peak at about 10 percent in 2010 and fall modestly in 2011.

Contact Sarah Lockyer at [email protected].

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