Mr. Siegner: The biggest question is probably the recovery in the top line for the restaurant industry and its concepts, and we see a few key themes. The first is tenuous growth in the near term, and there's little to indicate we are at or going to see a sharp "V." We are less concerned about the rolling off of unemployment that is hurting other consumer sectors - these people won't really go into restaurants in the first place. Second major point: Share gains are key. We continue to believe that value mindshare, remodels, broad product development pipelines and advertising scale remain meaningful competitive advantages into 2011. Third, we see a longer-term shift in purchasing power to the core QSR customer. We don't think this is fully priced in, and this is one of the reasons there is risk to our out-year estimates in casual diners, and one of the reasons we think those stocks have been weak.
TWST: How would you characterize the industry over the first half of the year?
Mr. Siegner: I think fundamentals are more stable than the media or markets would lead investors to believe. Higher-income demographics improved first back in the early part of this year; same-store sales trends improved along with margins. This led to a strong rally in the casual dining stocks through April, as expectations got ahead of fundamentals, with estimates building in a return to long-term normalized comps and all-time peak margins through next year. As momentum stabilized and therefore fell short of these lofty expectations, shares have retraced gains to the point where the recovery is ahead of the recovery trade, as our economists put it.
Tickers included in this excerpt: MCD, PFCB, SBUX, SONC, TXRH, YUM
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.