A Bullish Outlook For Fast Casual & International Growth
TWST: Where do you focus your attention in the restaurant space these days?
Mr. Staszak: In the restaurant space there is fast food, which we're all extremely familiar with, probably too familiar with, and that includes some good stocks like McDonald's (MCD), and good companies like McDonald's are performing well, and Yum! Brands (YUM), which is performing well because people whose budgets are pinched are trading down. This is a very important term in the restaurant industry from casual dining to the fast food service. There's Yum! and McDonald's, and they're doing pretty well.
Next, the big trend that I'm really excited about is fast casual, which combines the best aspects of fast food, fast counter service and high-quality foods. Chipotle (CMG) also offers us fast casual, and those companies have being doing very well even though the restaurant industry is a very mature, fiercely competitive industry. Chipotle has been doing very well, as has Panera (PNRA). I don't cover Panera, but Chipotle Mexican Grill has been doing very well and growing earnings rapidly. As mentioned earlier, I had a "buy" in Chipotle all last year, the shares were up 141%, and this company is just likely to do well. So the second segment is fast casual.
Then of course, the third segment in the restaurant industry is the casual dining industry, where more time is taken to prepare meals. It's better quality food and you sit down and you eat. That would include Chili's, which is owned by Brinker International (EAT) or Darden Restaurants (DRI), which owns Olive Garden, Red Lobster and LongHorn Steakhouse. I do like Darden. They grew again in fiscal year 2011. But getting back to fast casual, it combines the best aspects of fast food, fast counter service and good food at Chipotle that you're going to see do well. I'm still pretty bullish on it. They have a customizable menu, which is very simple, a few simple ingredients and the orders can be customized to suit customers' preferences and done quickly. And that makes it easy to train new employees, which they're going to have to do because they had to replace some employees. And it makes for ease of training and leads to very quick service, and it's high-quality food. They don't get any ingredients from farmers who inject their cattle with growth hormones or anything like that. So it's very high-quality food, sit-down but fast service. Hence the term fast casual, combining the best of both words, if you will. So I'm very bullish on Chipotle. It is very well-managed company, and we might say it's very expensive in terms of valuation. But it has a lot of room to grow, and so that's the fast casual segment.
In the fast food segment I like Yum! Brands because of its international growth component. Realistically it's going to be a little tough here in the domestic industry with KFC struggling to increase same-store sales. But Yum! Brands is growing rapidly in China, and they have a lot of room to grow in China. They just have 1.5 restaurants per million customers, and they usually handle more than that, 60 restaurants per million people here in the United States. So they're far from saturation in China, and they're just even growing very rapidly in China, and it even has an international growth component. I prefer those type of restaurants that have an international growth component like Yum! Brands. Anyway, I like Yum! for that reason. I like Domino's Pizza (DPZ) because they're growing in Mexico, the United Kingdom, France, Australia, India. And Domino's, well, admitted that they had disappointing products - they could improve their products, which they have, and that has led to some very, very impressive same-store sales gains at Domino's. Those are still my top picks, and that's how the restaurant industry is divided or subdivided, if you will. And that's basically where I'm in the restaurant industry.
TWST: Please tell us about the industry over the last 12 months. It seems like a lot of people had a really good 2010, and stocks have been moving laterally so far in 2011.