For Subscribers

Get the complete article now!

TWST: What has been driving the improvement in the environment for restaurants over the past 12 months?

Mr. Kalinowski: From a fundamental perspective, this year has been quite good. 1999 was also a very good year. But there have been very different stock performances this year. Last year, by our reckoning, was the worst year of the 1990s for restaurant stocks. But this year (2000), the stocks have outperformed the S&P 500. I think part of that can be attributed to good restaurant companies tending to their existing restaurants and doing quite well. Also, there has been a very large sentiment shift favoring restaurants. A year ago, two years ago, technology stocks were much more in favor than they are today. Now people are looking for safe havens to put their money in, and restaurants is one place that people are thinking of as a safe haven.

TWST: May we talk about some of the other companies on your list, Darden (NYSE:DRI) and Brinker (NYSE:EAT)?

Mr. Kalinowski: Darden and Brinker are very similar. Both companies have portfolios of casual dining concepts and they have both generated very good track records with regard to beating consensus earnings estimates. Brinker has beaten First Call consensus estimates 12 quarters in a row. Of the 50 companies in our Salomon Smith Barney Restaurants Composite, those are two of the very best track records that have been generated over the last three or four years. It seems as if a lot of that comes down to operational excellence. Five years ago I think many people would have written off some of the concepts at these companies as having seen their best days, but the management teams at Darden and Brinker have done excellent jobs of reinvigorating their flagship concepts, and have shown that brands can be resuscitated when operational excellence is implemented.

TWST: Brinker now seems to be on the front burner again for investors. What’s happened?

Mr. Kalinowski: Brinker, like many other casual dining chains in the mid-1990s, suffered in part because there was a condition of oversupply in that segment. Also, they were making some bad decisions on the operational front. For example, it’s very easy to cut costs by removing an extra tomato from the plate, and keeping the same price on the hamburger. But eventually consumers notice those types of changes, and start to go elsewhere with their business, and that, I think, was hampering Chili’s to some extent a few years back. Brinker management has done a very good job of learning some lessons from that, and now is offering both good service and a great value to consumers.

TWST: What are you telling investors to do with Brinker at this point?

Mr. Kalinowski: Brinker has had a very nice run-up both year to date and since we initiated coverage a couple of months ago. I think that it still has further room to go at this point, and for the investor with a 12-month time frame, owning Brinker in the portfolio will be rewarding.