Mr. Brundage: The environment improved in a couple of ways. Given that restaurant industry sales are highly correlated with factors like disposable income growth and consumer confidence, the strong domestic economy has enabled the major restaurant chains to grow their same-store sales at low to mid single digit rates for most of 1998. Second, the rate of unit growth that is, the rate at which capacity has been growing has continued to slow. I think this deceleration in unit growth has been driven by two factors. First, the amount of capital flowing into the restaurant sector has declined dramatically during the last three or four years (there was one casual dining IPO in 1998: P.F. Chang's (PFCB); in 1993, there were very often two or three IPOs a week). Second, as capacity increased rapidly earlier this decade, returns on investment (ROIs) plunged. And as managements at the major casual dining chains recognized that lower ROIs were probably here to stay, they began to allocate their capital more intelligently (i.e., they scaled back unit growth and bought back stock instead).
TWST: Have same-store sales trends improved on an industry wide basis or
have they been stronger in some sectors rather than in others?
Mr. Brundage: In general, comps have been positive at most large
capitalization restaurant stocks this year. Specifically, we've seen
strong numbers from companies like Wendy's (WEN) and Tricon (YUM) on the
fast feeder side and Brinker (EAT) and Darden (DRI) in the casual dining
area. So at least in terms of the bigger cap names, which is the sector
on which we concentrate, same-store sales gains have been solid
throughout 1998.
Tickers included in this excerpt: CBRL, DRI, EAT, MCD, WEN, YUM
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