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Four analysts and top management from twenty-eight sector firms examine the consumer sector in this special 119-page Bear, Stearns & Co. 8th Annual Retail, Restaurants & Apparel Conference issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info501.htm

TWST: Are the broader trends and issues for the general consumer services area applicable to the restaurants that you cover?

Mr. Buckley: What’s been most interesting and most beneficial for the stocks is that the restaurant business has fared very well over the last 18 months even as the economy has slowed. We attribute that performance to a very controlled rate of expansion in the industry over the past several years. When we look at supply and demand, supply, which is driven by the rate of expansion and the number of restaurants in existence, is the much more volatile of the two factors and therefore it’s the more critical factor in the supply/demand relationship. Demand will ebb and flow with the economy, but pretty modestly. When we look historically at periods when the industry has done well and periods when the industry has done poorly, it has been driven more by the rate of expansion or the supply side of the equation. This is an industry that in the early 1990s over-expanded. There were 46 restaurant IPOs in about a three-year period in the early 1990s that fueled some of that expansion, and the established companies in the industry responded to the new competitive threat by opening more restaurants as well. By the mid-1990s you had an industry that was underperforming due to over-storing. You had too much supply, which led to negative same-store sales, disappointing earnings, and poor stock performance. However, capital inflows into the industry have been very minimal over the last seven years, and the established companies generally have slowed their rate of expansion. So the overall rate of expansion has been very moderate. We started to see the benefits of this moderation show up in positive same-store sales beginning in late 1997, early 1998, and it has continued right through today. It has permitted this industry to put up strong sales and earnings growth in a soft overall economic environment, and that’s been very positive for the stocks.

TWST: What are the top stocks at this point?

Mr. Buckley: Our top pick has been and remains Brinker. Another stock that I like is AFC Enterprises (Nasdaq:AFCE), which remains one of the restaurant stocks that we think has significant upside potential. This is a company that is comprised of Popeyes, Church’s, Cinnabon, and Seattle’s Best Coffee. We like the positioning of their brands. They each have a distinctive niche or place within the market. They each have very significant growth potential. AFC is increasing the mix of their restaurants that will be franchised from the current level of about 80% to a 90% target. As they do that they’re getting more aggressive expansion commitments from their franchisees, which will push the overall rate of expansion higher at AFC. Given the relative state of underpenetration of their concepts, we think that makes a lot of sense. As they sell restaurants to franchisees to move toward that targeted 90% mix, the company is raising capital and using that with free cash flow to pay down debt. So you have an attractive situation where the systemwide sales growth for the company’s brands can exceed the QSR average. We think that their earnings per share growth will far exceed the QSR average, approximating 25% a year over the next couple of years as a result of the sales growth and deleveraging, and the stock is basically selling in line with its peers. There is significant appreciation potential at AFC.

This special conference issue includes:

1) Outlook for Restaurants - In an in-depth (3,100 words) Analyst Interview, Joseph T. Buckley, Senior Managing Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

2) Specialty Stores & Hardline Retailing - In an in-depth (3,300 words) Analyst Interview, Dana Telsey, Senior Managing Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

3) Food & Drug Retailing - In an in-depth (4,000 words) Analyst Interview, Deborah H. Weinswig, Managing Director covering Retailing/Food and Drugstores and Retailing/Department Stores at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

4) Outlook for Retail - In an in-depth (3,300 words) Analyst Interview, Brian Tunick, Associate Director at Bear, Stearns & Co., examines the outlook for the sector and shares specific stock recommendations.

5) CEO interviews (average 2,500 words). Top management of twenty-eight sector firms examine the outlook for their firm and the sector.