Restaurants Find Dining Sales Taking Longer To Bounce Back

Restaurants are finding tight consumer spending is putting a sales recovery on hold, with July's results dashing hopes that a low hurdle could yield improving trends.

As earnings trickle out, chains including P.F. Chang's China Bistro Inc. (PFCB), Cheesecake Factory Inc. (CAKE) and Texas Roadhouse Inc. (TXRH) have said same-store sales declined further in July.

The second-half of 2009 was expected to offer easier year-ago sales comparisons for restaurants, with July a turning point. Last year, restaurant sales began to tank in July after benefits from a government stimulus ran out and consumers grappled with gasoline at $4 a gallon. From there, television events like the Olympics and election news coverage kept people at home and out of restaurants, while the latter financial meltdown kept wallets shut.

The thinking in some circles heading into the earnings season was that there were so many unique events that restaurants would be hard-pressed to see same-store sales get much worse.

But they have.

"It hasn't mattered that comparisons are easier, and a lot of people were hanging their hat on that," Jefferies & Co. restaurant analyst Jeffrey Farmer said. But, he said, "anyone who talks about July says its one of the worst months they reported."

Morgan Stanley (MS) analyst John Glass said that with better same-store sales failing to materialize in July, September is next in line for easier comparisons, though the delay comes with more risk.

"Investors should be aware that for every day shares move up and for every day sales fail to materialize, the risk to [casual-dining] stocks grows," Glass wrote in a note on Texas Roadhouse, whose stock fell 6.5% Tuesday after topping second-quarter earnings on lower beef prices.

Thursday, Chili's Grill & Bar-operator Brinker International Inc. (EAT) is the next casual-dining chain to report earnings. UBS AG (UBS) upgraded Brinker Wednesday to buy from neutral, hoping that a new promotion offering an appetizer, dessert and two entrees for $20 will help sales recover from "alarming levels" in June and July. Brinker shares closed Tuesday at $17.62, up 67% this year.

Disappointing July sales comes from unprecedented macro pressures, though some pain may be self-inflicted, analysts say. With the unemployment rate at 9.5% and projected to rise, consumers are reluctant to part with their dollars and are stockpiling savings. Grocery stores are cutting prices, making eating at home a better deal.

Restaurants also relied in large part on discounts and other promotions to attract customers earlier this year, though analysts say most of the bargains failed to pay off. Now that restaurants have pulled back on deals, diner's aren't coming to the tables.

"The consumer has been trained to respond to deals," Stifel Nicolaus analyst Steve West said.

While sales slump, restaurants continue to find inefficiencies to improve on while benefiting from lower food costs, helping companies surprise to the upside on their earnings reports. That theme has played out over the last two quarters, helping restaurant stocks, particularly casual dining chains, rally. But analysts say investors will only tolerate that for so long before expecting sales to pick up, which is largely reliant on improving employment.

The second-quarter "may be the last quarter that investors will be acceptant of casual-diners beating on less-bad trends," West said. "They're getting impatient and wanting to see the consumer come back."

West thinks continuing struggles in casual-dining sales could set fast-food operators for out-performance in the back half of the year.

Shares of chains like McDonald's Corp. (MCD) and Burger King Holdings Inc. (BKC) have slumped in 2009, with investors trying to get a jumpstart on a recovery in casual dining.

-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; [e-mail]