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Five analysts and top management from fourteen sector firms examine the Restaurant Industry sector in this special 91-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info404.htm

TWST: To what would you attribute the disappointing earnings in the fast-food sector relative to casual dining?

Mr. Buckley: I think there are a couple of factors. I think that the underlying secular growth rate is far slower in fast food, far faster in casual dining. As sales in casual dining slow, they slow from a mid-single-digit rate to a low single-digit rate of increase, whereas in fast food they’ve slowed from a low single-digit rate to flattish or negative numbers in some instances. That’s part of it. I think, too, that the breadth of the casual dining menu has permitted price increases to be implemented much more easily. In fast food, that’s a lot harder to do. I think, on top of that, although energy costs are starting to go back down, energy costs hit the fast-food consumer much harder. The fast-food sector, historically, has been viewed as very defensive, the most defensive sector of the industry, and that has really not been the case in the last 15 months. We saw quick service sales start to slow down in the spring of 2000, and they’ve been a lot more volatile and a lot more erratic ever since. While casual dining has clearly slowed down most recently in the last quarter, the sector still has had a lot more underlying strength behind the numbers.

TWST: Joe, the much-touted second half recovery appears to be getting pushed further out, and I’ve seen predictions ranging from the first quarter of 2002 to one that suggested the first quarter of 2003. What, in your opinion, will dictate the timing of the recovery?

Mr. Buckley: I think that there are a lot of factors. At some point, we think that the Fed rate cuts will take hold, and the economy will start to come back. At Bear Stearns, we’re looking for the economy to begin to recover by the end of the year. The expectations for recovery in general, though, keep getting pushed further and further out, and there is more of a macro risk, not only to this industry group, but to all industry groups, than perhaps anyone would like. The restaurant business is not very cyclical, but on the margin, it is. It does reflect what’s going on around it, and right now there is an interesting tug of war going on, because the fundamentals of this group have held up very well, on a relative basis, but sequentially, fundamentals clearly slowed in the second quarter. The debate right now is whether lower gasoline prices, tax rebate checks, and lower interest rates overall can stimulate the business, or whether the cyclical drag of a slowing economy pulls it down. It’s a tough call, but we are optimistic. But it’s much more of a macro call than an industry-specific or company-specific call.

TWST: Joe, tell me, are you sticking with the recommendations that you made in casual dining?

Mr. Buckley: Yes, but our points of emphasis are somewhat different. We are still biased toward casual dining. We think there’s a reasonable chance that the mainstream casual dining companies come through this economic slowdown with estimates intact. And if they do, we think the stock valuations are higher at the back end of that because it would be harder and harder to dispute the secular growth story underlying casual dining. The names that we like most right now would include Brinker (NYSE:EAT), which is somewhat of a laggard this year. We also like Ruby Tuesday (NYSE:RI), which is the fastest growing of the established casual dining players, as opposed to the rapid growth casual dining players. They have dramatically changed their business model, implementing a franchising system and instituting a managing partner compensation plan for company general managers. We think it’s a 20% plus growth story.

This special conference issue includes:

1) Restaurant Industry - In an in-depth (13,000 words) Analyst Roundtable, Andrew Barish, Managing Director at Banc of America Securities, Joseph Buckley, Senior Managing Director at Bear, Stearns & Company, Mark Kalinowski, Vice President at Salomon Smith Barney and Janice Meyer, Managing Director at Credit Suisse First Boston, examine the outlook for the sector including, economic outlook, new restaurant concepts and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at nineteen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Restaurant Stocks - In an in-depth (3,500 words) Analyst Interview, Damon Brundage, Vice President of Equity Research at Raymond James & Associates examines the outlook for the sector and shares specific stock recommendations.

4) CEO and Sponsored interviews (average 2,500 words). Top management of fourteen sector firms examine the outlook for their firm and the sector.