Economic Repercussions Of High Unemployment Reverberate Throughout Restaurant Sector According To Best On The Street Analyst
November 27, 2009 - The Wall Street Transcript has just published Travel and Leisure--Airlines, Hotels, Resorts, Cruise Lines, and Restaurants Report offering a timely review of the Restaurants sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
View Details of This Special Report
Recent Wall Street Transcript Special Reports.
RACHAEL ROTHMAN, CFA, is the lead Analyst responsible for coverage of the restaurant, gaming, lodging and leisure industries at Wedbush Securities. Ms. Rothman's research leverages over a decade of direct operational experience in the hospitality industry, with nearly 10 years of experience in equity research and the academic expertise provided by her graduate degrees in hotel and restaurant management, and economics. Ms. Rothman is a recognized expert in the field and has been selected to the Institutional Investor "All-American Research Survey," The Wall Street Journal's "Best on the Street," and the Financial Times' "World's Best Analysts." Prior to joining Wedbush Securities, Ms. Rothman was a Managing Director and Senior Analyst at Merrill Lynch, focusing on the restaurant and gaming sectors. Ms. Rothman began her equity research career at Morgan Stanley.
TWST: Where are you focusing your attention in the restaurant space these days?
Ms. Rothman: We continue to encourage our clients to remain defensively positioned and focus on those companies which have what we consider to be the four key differentiators in a downturn. Those are a high degree of franchising, high degree of real estate ownership, economies of scale in purchasing and advertising, and strong demand trends or pricing power. That would leave our top pick as McDonald's (MCD). And for those investors looking for something with more leverage to the upside in the cycle, we are recommending Brinker (EAT), owner of Chili's.
TWST: The one that strikes me is pricing power. That's a tough thing to come by these days, isn't it?
Ms. Rothman: It is. I think the truest measure of demand and a chain's competitive positioning is the degree to which you have positive traffic. We only have two companies currently that are reporting positive traffic: Panera Bread (PNRA) and McDonald's.
TWST: How do you measure whether a company has pricing power or not?
Ms. Rothman: Elasticity of demand, which is the change in price over the change in quantity demanded. So how much price did the company take and what happened to its traffic as a result? If you can put through price without seeing a falloff in traffic, then you know that you have pretty strong pricing power.
TWST: Is it a particular segment that's doing well in that area, or particular companies?
Ms. Rothman: The companies that are doing best, again, are McDonald's and Panera. And to a certain extent, Chipotle (CMG) has shown some decent pricing power until recently, when price and elasticity of demand has become increasingly negative.
TWST: How would you characterize the industry so far this year? The stocks have been up and down obviously.
Ms. Rothman: They have. Our bigger-picture view is that the overall industry is saturated, and that has left everybody exposed to the cyclical downturn in the economy because there is no pent-up demand or demand on the sidelines. So oversupply is leading to declines in same-store sales, which is leading to significant semi-fixed cost and fixed-cost deleverage.
TWST: How are things going in the various segments, in comparison to each other - quick service versus casual versus fine dining?
Ms. Rothman: From a same-store sales perspective, the worst in our coverage is fine dining, which would be closely tied to business demand. A public fine-dining chain like a Ruth's Chris Steakhouse (RUTH) or Capital Grille (DRI), those are essentially business dining. Following that would be casual dining, and following that would be fast casual and fast food, fast casual being slightly better than fast food at this point.
TWST: Is it a situation where people are just trading down a lot?
Ms. Rothman: I think they are trading down, but they are also trading out, meaning if you went to Applebee's (APPB), you may be going to McDonald's. But if you used to get your breakfast at McDonald's on your way to work, and you are not working, you are not eating breakfast out. Or if you went to Denny's (DENN) at five o' clock in the morning because you worked in construction starting at six, you are not going if you are not employed. So breakfast and late night are under tremendous pressure.
The remainder of this 137 page Travel and Leisure--Airlines, Hotels, Resorts, Cruise Lines, and Restaurants Report can be immediately viewed by purchasing online.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 137 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673