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Restaurant stocks outstrip market’s decline on darkening outlook

NEW YORK Bleaker analyst expectations for restaurant companies’ third quarter and continued concern over the availability of financing, especially for franchisees, stoked a deep dip in restaurant stock values Monday before the damage was tempered in the late afternoon.

Even with the late-day uptick in prices, the NRN Stock Index, which tracks all 63 public restaurant companies, fell 4.94 percent Monday, a larger decline than the broader market indexes and one of the largest one-day losses in years.

Aslew of analyst reports sent to clients last week and Monday predicted a third quarter earnings season -- which begins tomorrow with Yum! Brands Inc. -- filled with weaker-than-expected consumer traffic results, hurricane-related unit closures and a possible slowdown in business spending. The mix of all three could affect upscale, casual-dining and quick-service sectors alike, analysts said.

“For most of our coverage, we expect [third quarter earnings per share] near or below our low estimates -- which are under consensus in many cases,” said securities analyst David Tarantino at Robert W. Baird & Co.

He said his recent field research and surveys of restaurant chains suggested even more depressed guest traffic in September versus August, mainly because of turmoil in the financial markets, severe weather in many parts of the country and continued pressure from falling housing values.

Securities analyst Jeffrey Omohundro at Wachovia Capital Markets LLC agreed that most restaurant companies have the potential to underperform when reporting results for the September-ended third quarter. Full-service chains will continue to be hardest hit by macroeconomic pressures, he said, while quick-service chains could be hurt by severe weather and financing concerns that franchisees may not be able to garner cash for remodels or unit expansion, or that debt loads have become too much to bear.

The stock price at Carrols Restaurant Group Inc., a Burger King franchisee, for example, has been hard hit over fears of debt covenant breaches. Carrols' stock fell 18.7 percent on Monday to close at a 52-week low of $2.00 per share.

“We continue to think that the quick-service chains are best-positioned in the current challenging macroenvironment relative to the casual and upscale dining segments, which continue to lag,” Omohundro said. “However, this segment has recently been impacted by Hurricane Ike as well as by concerns over franchise development given tightening credit markets.”

Omohundro said he predicts a sequential improvement in restaurant industry same-store sales trends during the fourth quarter, although any gains would be based on easier comparisons to year-earlier results rather than actual traffic improvement.

The stock market was roiled on Monday as investors feared that credit would remain frozen for some time and that consumer spending would remain weak, even after the $700 billion Wall Street bailout package was approved by Congress on Friday and immediately signed into law by President Bush. Economic data released last week and Monday pointed to continued job losses and predictions for dampened retail spending during the holiday season.

The Dow, Nasdaq and S&P 500 fell 3.6 percent, 4.3 percent and 3.8 percent, respectively, an end result that reflected a large rally from the day’s worst dips when the Dow, Nasdaq and S&P 500 were down 7.8 percent, 8.8 percent and 8.3 percent, respectively. During intraday trading, the NRN Stock Index dropped as much as 8.3 percent, a decline not seen during at least the past four years.

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