Company-Owned Eateries More Sensitive To Sales Swings

CNNMoney:

Restaurant companies that own most of their stores are showing their sensitivity to swings in sales, a recipe that puts their earnings at a greater risk in the short term while positioning them for a higher rebound when diners return. Last week, Darden Restaurants Inc.’s (DRI), which owns all 1,700 Olive Garden, Red Lobster and other restaurants under its umbrella, missed its first-quarter earnings target and cut its outlook, a result analysts attributed to a dip in sales.

That day, Darden shares lost more than 12% of their value, showing the vulnerability of the company-owned-store model as diners continue to eat out less. Such business models fully bear the brunt of any changes in revenue, and also assume all the costs — including those for labor, energy and ingredients, all of which have been rising — related to operating their restaurants.

With the restaurant slump largely expected to extend into 2009, Darden and others with all company-owned stores, including Cheesecake Factory Inc. (CAKE) and Chipotle Mexican Grill Inc. (CMG), face a bleak outlook for the remainder of the year.

“They’re going to have more profit erosion in a weak sales environment,” said Larry Miller, restaurant analyst at RBC Capital Markets Inc.

The flip side, however, is that when the diners start coming back, these companies may be better-positioned to ride the rebound further. Similarly, as cost pressures ease, companies with this structure stand to benefit most.
“As things eventually start to improve, you will see a greater benefit to earnings,” said Lynne Collier, senior restaurant analyst at KeyBanc Capital Markets Inc. More.