Steve West of Stifel, Nicolaus & Company, Inc. recently gave us some insight into the Restaurant  Sector . When asked about the recovery of the sector Mr West brought up the fast food segment;

Mr. West:  When you think about a recovery, fast food is already outperforming. They are doing pretty well, and as we get into the back half of 2009, assuming the consumer continues to trade down and eat out at fast food, which I think they will, you will see margins start expanding. They will start reaping the benefits of the cheaper food as well, and then the positive same-store sales should help leverage their fixed cost a little bit better as well. I think fast food will improve more before you see casual dining start to improve at all.

Seems that in this economy the value meal is the key to growth in the sector and your waistline

When we recently spoke with Adrienne Tennant of Friedman,Billings, Ramsey for our Specialty Retail Report she identified one company as her top pick;

Mrs. Tennant: I liked Hot Topic (HOTT) throughout the back half of last year and  into this year, and it is still my top pick for 2009, despite its excessive  valuation. You have to have something that kids or people, or whoever the target  market is, would want to pay full price for. For Hot Topic thus far, it’s been a  connection, which was either one they locked into or it was by design, with this  “Twilight” movie phenomenon that came out in November. It is based on a four- book series, and they have not only taken that “Twilight,” target market, but  they have taken other categories of products around that target customer and  they have merchandised this store not only to capture the customer for  “Twilight”, but also to continue to have the customer come into the store for  all these other things. In the recession of 2001, post that recession, we saw  the teen kid going a bit darker, going for something a bit off the beaten path,  and that fits in nicely with the Hot Topic theme. So I do like that one. 

Once again the younger demographic seems to be pushing this sector and Hot Topic is leading the way

In a recent interview with Thomas A. Filandro of Susquehanna Financial he discussed how Buckle has bucked the trends in Speciality Retail:

Mr. Filandro: Buckle is an excellent example of not being under-merchandised. BKE has successfully expanded its market penetration, delivering 18 consecutive months of positive same-store sales, as well as higher pricing, lower markdowns and improved full-priced selling. Buckle’s offerings, which are both branded and private label, are highly differentiated from the majority of specialty retailers, which have become somewhat homogenous. In this environment, outside of necessities, consumers are only willing to pay up for product that they are emotionally connected to. Since apparel differs from electronics that may provide greater functionality, it’s all about emotional connectivity in this sector.

The complete 39-page Wall Street Transcript Specialty Retail report contains 6 analysts and 2 sector firms and can be read here.

While casual dining may be on the decline, according to Steven West of Stifel, Nicolaus & Co., “we continue to eat out; we are just eating out at cheaper options…” As a result of this, West’s top pick in this space is Burger King (BKC). Here’s why:

Mr. West: They are where McDonald’s was a few years ago. They’ve done most of the McDonald’s playbook, if you will, such as the rationalization, although they didn’t have to re-franchise because they were so heavily franchised already. Now they’re going to the remodeling phase. Pushing forward, I think the focus would be on remodeling their US stores. Burger King’s average store age is over 20 years. One of the big drivers of McDonald’s sales over the last few years has been because their stores are in good shape again. Healthy looking stores attract consumers. That’s where Burger King needs to get. So you will see them really focus on remodeling, which should continue to drive incremental sales. They are seeing about a 15% to 20% boost to sales on their remodeled stores.

For the complete restaurants report, including a roundtable discussion of the sector and more stock picks, click here.  

As part of our recent Specialty Retail Report we spoke with Betty Chen, Vice President and Senior Equity Research Analyst at Wedbush Morgan Securities Inc. She believe the younger demographic is where the growth is ,

Ms. Chen: We are advising investors to look at the younger demographic. Children’s and teen retailers continue to enjoy favorable demographics, with birth rates increasing 3% to 5% over the past several years, and on top of that, kids and teens continue to grow. So there is more of a natural replenishment versus adult. So those are the two areas. And then also, teens continue to find going to malls a social event. So those are probably the areas that we will focus on.

She also offered up some names that seem to be taking advantage of the younger demographic

Ms. Chen: I think in the children’s space we prefer Gymboree (GYMB). We believe they are positioned very well, managing expenses very strategically and using promotions to drive traffic in earnings. In addition to that, we will look at Aeropostale (ARO), which is a teen retailer with very compelling price points and improving fashion and brand positioning; it obviously has done very well in gaining market share throughout 2008.

Youth is where the growth is literally and investment wise

In our March 23rd issue, we focused on Specialty Retail, and how a variety of niche markets are doing in this turbulent economic climate. Linda Tsai of MKM Partners LLC covers Teen & Children’s Clothing retailers. Ms. Tsai has just a single buy rating in this space: Aeropostale (ARO). We asked her why:

Ms. Tsai: Relative to their history, they’ve improved their merchandising and they still continue to improve it. They have gained share successfully at the expense of higher-priced teen retailers like American Eagle, Abercrombie and Pacific Sunwear. This is especially apparent in Aeropostale’s women’s business, which has comped very positively over the past year and a half, more or less.

We also asked Ms. Tsai which companies she felt investors should be particularly wary of in this environment. On the flip side, Ms. Tsai cautions against Pacific Sunwear (PSUN):

Ms. Tsai: Pacific Sunwear is one that I’ve been a bit worried about. That’s a company where they have had some inventory management issues in terms of having too much and being overly skewed. I don’t think they’ve well-articulated a clear strategy to solve some of their problems. They seem to have taken a scattershot approach in terms of how they are trying to fix their merchandising problems. So that’s probably one that I would stay away from right now.

For the complete Specialty Retail report, including a full interview with Ms. Tsai and interviews with analyst covering a variety of areas of this space, click here.

We have just published the2009 Wall Street Transcript Restaurants Report.

Our Roundtable discussion this week focuses on restaurants – and the restaurant operators are clearly in preservation mode. Casual dining has been seeing an exit of customers for a couple of years, but while demand will likely continue its decline in 2009, so will supply. According to Stephen Anderson of MKM Partners LLC one specific category is in danger,

Mr. Anderson: The bar and grill is most at risk of a shakeout, because this is the group that grew by about 6% or 7% in the decade prior to 2007. It’s only now that growth in the segment has dwindled down to about a 1% to 1.5% rate. This suggests to us that there has been overbuilding in that segment and there’s going to be some kind of thinning out process that will need to happen. I think maybe even entire chains may disappear altogether.

Restaurants will be able to control what they can control, but for any kind of full recovery, it will depend on external macro factors.

This is  a great time to be getting a read on this segment of the consumer market.  And the roundtable really highlights the issues these companies are having – and contrast them with the fortunes of the fast food chains.

On the other side of our special focus this week, we spoke to analyst Heather Jones of BB & T Capital Markets about the packaged food space. Here’s her analysis of the last year in this space:

Ms. Jones: Overall, the year was challenging, with mixed results:

• The packaged food companies were challenged by surging commodity costs and, for most, pricing didn’t catch up with inflation until the back half of the year.
• Sales growth, however, for the packaged food companies we follow was relatively strong for the year.
• The fruit names benefited from excellent pricing and good demand, but costs, including fertilizer and fuel, were a significant challenge and much more volatile than prior years.
• For the protein names, it was honestly a very split year. For much of the year, you had very good export demand that helped support pricing, particularly for pork, in the face of excess supply. However, in the back half of the year, export demand flagged and prices weakened considerably.

For the complete Food & Beverages issue, including a complete outlook for 2009 for both food and beverage companies, as well as stock picks, click here.

Our special focus this week is on Food & Beverages. In this issue, we spoke with analyst David Silver of Wall Street Strategies, Inc, who gave us his overview of where beverages are headed in this turbulent time:

Mr. Silver: I do think in North America, a portion of their business should continue to be stagnant. They are going to really see that the companies’ cost control strength and volume growth and their distribution channels are really going to be tested in North America because in order to continue to have the profit margins that they have had in the past, they are going to need to continue to grow volumes despite the slower economy and despite fuel prices….but then again, around the world I do think that we’re going to continue to see really strong growth, specifically in China, India and Russia and maybe a little more delayed in the Middle East.

For the complete Food & Beverages report, including interviews with analysts covering a range of topics in this broad space, as well as interviews with CEOs from top companies, click here.

This week’s Off the Record features a focus on restaurants. In these tough economic times, picks in this sector are tough, but these CEOs and analyst managed to find some bargains:

Three analysts were very positive about BJ’s Restaurants (BJRI):

“I love BJ’s management, with Gerald Deitchle, who was the former CFO of The Cheesecake Factory. He understands how to launch a national, premium chain like this. I like what he is doing there.”

“On the smaller cap side, I think it’s BJ’s management. Gerald Deitchle and his group of executives are among the best in terms of smaller companies in the business.”

“I just really have to compliment their effort, especially in this difficult environment. I admire their taking a long-term approach to their business and staying on course. Also, they are being very strategic about every decision, being very cognizant of current conditions, but not getting too caught up in it.”

And an  analyst and a CEO picked Panera Bread (PNRA):

“In terms of the one that has reacted best to this difficult environment, I’d give Panera the best grade there. That’s partly because they messed up last summer, but they fixed it quickly.”

“Panera is a name that I admire and respect. You can’t buy another franchise at Panera. They’re pretty well sold out.”

For the Off the Record report on Restaurants, including more stock picks despite the current economic climate, click here.