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Higher costs offset rise in consumer spending

NEW YORK Restaurant stocks fell and then recovered Monday on news that a bump in consumer spending in June was offset by increased costs, leading investors to worry about future discretionary spending on restaurant meals.

The NRN Index increased 0.65 percent Monday, after dropping earlier in the day by as much as 1 percent.

According to data released Monday by the federal Bureau of Economic Analysis, consumer spending rose 0.6 percent from May to June, but when accounting for price inflation of 0.8 percent, consumer spending actually fell. Personal disposable income also fell from May levels, when the government stimulus plan bolstered individuals' earnings. Disposable personal income fell 1.9 percent in June, following the 5.7-percent uptick in May, the bureau report said.

“The expected [restaurant] sales benefit from tax rebate checks appeared to be swallowed by the record high gasoline prices,” said Bob Derrington, restaurant securities analyst at Morgan Keegan.

Midway through second quarter earnings reports, 18 restaurant companies have reported mixed results, Derrington said, with 12 companies that have either hit or beat expectations and six companies that have missed earnings expectations. The outlook among most investors already was cautious because of weakened consumer spending and higher food and energy costs.

Data points don’t look to get any better for the restaurant industry in the coming months, Derrington added.

“Likely weaker August and September same-store sales could add further stress to industry trends,” he said in a Monday report. “While operator dreams of a tax rebate summer sales bump have been fading, further duress appears on the horizon in the form of the Summer Olympics and the fall national elections.”

He said the “couch potato” effect that keeps consumers at home to watch the Olympics and the presidential elections happens every four years and typically hurts casual-dining chains the most.

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