Restaurants Show There's Still Fat To Trim
09 April 2009 - 6:02AM
Dow Jones News
Casual-dining restaurants are still finding plenty of fat to
trim as the industry cuts expansion plans, manages labor expenses
and sees other costs fall, all of which could help companies post
higher profits despite continued sales declines.
Combined with slightly improved sales outlooks for the sector,
some analysts say companies could offer rosier-than-expected
earnings reports in the coming weeks, even though sales in the
industry continue to remain sluggish.
After the market closed Tuesday, Ruby Tuesday Inc. (RT) reported
third-quarter earnings ahead of Wall Street estimates on improving
same-store sales trends helped by a bevy of promotions.
The struggling casual-dining operator also posted margins that
were wider than some analysts expected, as the company kept a
tighter lid on costs, including a new scheduling system that
reduces hourly wage costs at the restaurant level.
"It's a sign that there are opportunities for cost controls
across a lot of these brands," said Brad Ludington, restaurant
analyst at KeyBanc Capital Markets Inc. "In spite of lower
same-store sales, you're probably going to see a lot of earnings
beats."
Ruby Tuesday, which also raised its outlook for the year, saw
its shares spike Wednesday. In recent trading, shares were up
$2.14, or 55%, to $6.03.
Earlier this week, Brinker International Inc. (EAT)
pre-announced third-quarter earnings ahead of expectations despite
disappointing sales. The operator of Chili's Grill & Bar and
other chains, though, said it was able to grow margins as food
costs fell and the company saved money by cutting back
expansion.
Also, Brinker told analysts that it's saving money by keeping
employee turnover low, a trend echoed by Ruby Tuesday and fellow
casual dining giant Darden Restaurant Inc. (DRI) last month. With
workers reluctant to leave their jobs, restaurants have to devote
less time and money to hiring new employees and training them.
"It's less training expenses, less hiring, less costs involved
with any travel," Raymond James restaurant analyst Bryan Elliott
said. "All in all, much less drag."
Falling prices for commodities like meat and dairy and utility
costs could also provide opportunities for margin growth in the
tough sales environment, analysts say.
Robert W. Baird analyst David Tarantino said Wednesday that cost
containment could emerge as a theme in the upcoming earnings
season. He raised the price target on a number of restaurant
companies, including Buffalo Wild Wings Inc. (BWLD), California
Pizza Kitchen Inc. (CPKI) and Chipotle Mexican Grill Inc. (CMG), on
expectations that companies could either meet or exceed already
muted earnings estimates in the upcoming quarter due to better
traffic.
While restaurants cut costs, the big question is how long the
margin improvements are sustainable. Same-store sales are improving
from earlier lows, but they are still decidedly negative, even
though many are up against easy year-ago comparisons.
"At the end of the day, you need same-store sales growth to
generate sustained margin recovery in this business," Elliott
said.
-By Paul Ziobro, Dow Jones Newswires; 201-938-2046;
paul.ziobro@dowjones.com