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Wednesday, January 16, 2008 12:09 AM


Singing the Restaurant Reality Blues


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The AP is reporting Steak N Shake Warns of 1st Quarter Loss

Steak n Shake Co. shares dropped to their lowest point in nearly seven years Monday as investors digested the restaurant operator's warning that it would likely report a loss in its first quarter. Shares fell $1.68, or 17.7 percent, to $7.80 Monday. Earlier in the day, the stock sunk to $7.75. The shares haven't traded that low since March 2001.

The drop came after Steak n Shake said after the market closed Friday that it would record a loss in its fiscal first quarter mainly because its same-store sales, or sales at location open at least a year, fell 9.5 percent. Same-store sales is a key indicator of restaurant performance since it measures growth at existing locations rather than newly opened ones.

The company blamed the sharp sales decline in a drop in consumer spending, unfavorable weather in December, promotions from competitors and issues with store execution.

Raymond James analyst Bryan C. Elliott in a note to investors called the sales decline "severe" and noted that the first quarter would mark the seventh consecutive period of negative same-store sales.
Let's be real here. Any restaurant that blames unfavorable weather is barking up the wrong tree. That excuse is a sell signal if I ever heard one.

Ronald McDonald Sings The Blues

Reuters is reporting McDonald's shares fall on concern over consumer.
Shares of McDonald's Corp (MCD) fell as much as 8 percent on Friday [Jan 11], as a survey of franchisees showed December same-store sales grew at the lowest level in the six-year history of the poll.

McDonald's share decline led a downturn in many other U.S. restaurant stocks, amid concerns a U.S. recession could hurt even lower-priced restaurants.

"With gas (gasoline) prices at all-time highs, the discretionary income of the consumer is shrinking," said William Lefkowitz, options strategist at vFinance Investments.

Coming into Friday, the stock traded at a multiple of 20 times estimated 2008 earnings, the third highest multiple in the Dow Jones Industrial average. It trailed only Coca-Cola Co (KO) and Procter & Gamble (PG), two stocks that have been boosted by their defensive status as consumers generally buy things like soap and soft drinks even during a recession.

"The P/E (price-to-earnings ratio) is back to a level where for me it's a little bit expensive," Janna Sampson, co-chief investment officer at Oakbrook Investments in Lisle, Illinois, said. "That said, relative to some of its competitors, I'd have to say its P/E still looks reasonable." Sampson's company holds about 205,000 McDonald's shares.

Yum Brands Inc (YUM), which owns Taco Bell, Pizza Hut and KFC chains traded at 23 times estimated 2008 earnings before Friday. Like McDonald's, that company has an extensive overseas presence, which could help shelter it from a U.S. recession.

"People were hoping that their international growth would offset decreased sales in the United States," Lefkowitz said of McDonald's. "However, investors are starting to believe that international growth will not be able to do that."
Restaurant Reality Blues
  • Steak N Shake has overexpanded.
  • Restaurants in general have overexpanded.
  • Retail stores have overexpanded.
  • Strip malls have overexpanded.
  • Commercial Real Estate has overexpanded.
  • Europe and Asia will not disconnect from the US.
  • PEs of 23+ are silly for big restaurant chains.
We do not need more Steak n Shakes (SNS), Pizza Huts (YUM), McDonald's (MCD), Panera Breads (PNRA), Starbucks (SBUX) or any other restaurants for that matter, at least in the US.

Layoffs related to all of the above are coming. Consumers are tapped out.

Those who think Europe will disconnect from the US are likely to be sadly mistaken. Investing in restaurants with PEs of 20+ when the economy is in a recession and you can still get 5% guaranteed on a CD does not make a lot of sense to me.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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