Mr. Hickok: Industry fundamentals have not been this positive in about 10 years, to the best of my recollection. We are particularly confident about the earnings prospects and stability of the group, and we have been very bullish about the price appreciation potential for these stocks for a while. We made comments at the very end of February, which we wanted to project to the Street about this point. Our caveat was that we might be early and that we needed the technology sector to soften, but our message was very simple. The irony was that in spite of very strong fundamentals, the valuations had never been lower. Our conclusion was that if there was any softening in the technology sector, the restaurant sector was going to be a solid place to put money, and at minimum, a defensive place to invest. We are not prescient, but as it turns out, just about two or three weeks later we had the softening of tech that we needed. And since mid-March, the restaurant sector has significantly outperformed the market. The macro environment has never been as favorable as it is right now. We expect to have very solid, if not spectacular earnings coming out of the segment defining restaurant companies in the fourth quarter and in the first quarter.
TWST: What do you include among the positive macro fundamentals?
Mr. Hickok: The positive macro environment starts with sales. Sales
trends for the restaurant industry have not been this high since the
very early 1990s. And industry sales trends have been accelerating for a
couple of years. We look at industry sales on a lagging basis, and the
last month I have is January. We haven't seen February industry sales
yet, but they were up over 5% in January, compared to 2% in January
1999. So sales have been accelerating steadily through 1999, and sales
drive everything. If you have positive sales trends and cost side
pressure is neutral, including labor, that is a good recipe. Strong
sales and neutral cost pressure should generate better profitability for
the performing companies. Historically, the Street rewards companies
with rising profits. Why are sales trends so strong? It's very simple.
The consumer is back. There are some who will argue that the reason
sales are so strong is because there is a decline in the unit growth
rate of the industry and that now supply and demand are more in balance.
I think that this is true only in a very small way, however. The real
sales driver is the consumer's wallet. For example, I don't notice any
fewer restaurants in my neighborhood. Are they opening them at a slower
rate in my neighborhood? Not as far as I can tell. Has national new
construction declined on a percentage basis? Yes, but again, the
critical variable is the rate of consumer spending. We have a very
strong economy, low unemployment, a high degree of consumer confidence,
and a high level of disposable personal income. That is a great backdrop
for strong sales at consumer companies in general. It certainly applies
to the restaurant chains.
Tickers included in this excerpt: APPB, BUCA, CAKE, EAT, MCD, OSSI, PFCB, SBUX
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