Video: Diners reach tipping point

updated 7/17/2008 3:28:10 PM ET 2008-07-17T19:28:10

Consumers may have had a bit more money this spring courtesy of Uncle Sam, but that small windfall is unlikely to translate into big second-quarter profits for restaurants.

And with the average price of gas now topping $4 a gallon, industry analysts are also no longer expecting much improvement in the months ahead.

"Frankly, I don't think we're going to go back to the good old days," said Bob Goldin, executive vice president of consumer research firm Technomic Inc. in Chicago.

It's been a difficult year for the restaurants, which depend on consumers' willingness to spend their cash to indulge in a lunch away from their desk or a dinner out. Falling home values, higher utility bills and skyrocketing gas prices have taken a big bite out of discretionary income.

"People are looking at more restrained spending when they do go out and ordering fewer sides, less expensive cuts of meat or one beer instead of two," Goldin said.

While sales are declining, a federal minimum wage hike and big increases in commodity costs are squeezing margins at most restaurant companies, forcing chains to raise prices. That has led some consumers to gravitate more to grocery stores and cook at home.

But as economic stimulus checks poured into bank accounts and mailboxes at the end of April, things seemed to be looking up. Sales rose more than 7 percent in May from a year earlier, raising some hope that restaurants could report strong second-quarter results.

"That's a stronger sales trend than in the first four months of the year," said Morgan Keegan analyst Bob Derrington.

But by June, that boost was nearly wiped out by a more than 40-cent rise in gas prices, he said. June sales rose just 1.1 percent from a year earlier, according to Commerce Department data.

Some companies, including coffee chain Starbucks Corp., have already cut their profit outlooks because of disappointing sales and higher costs. Others — including Ruby Tuesday Inc. and Jack in the Box Inc. — have said they expect sales at locations open at least a year, to decline.

The markets appear to expect mostly dismal earnings. With many restaurant companies reporting their financial results next week, investors have been selling off shares and driving down stock prices. Shares of at least eight restaurant companies hit new yearly lows earlier this week.

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Standard & Poor's restaurant analyst Mark Basham said he expects stronger results from fast-food and other quick-service chains, which benefit from lower prices, convenience and a recent focus on better-quality food. McDonald's Corp., which reports on Wednesday, has been a big beneficiary of the downturn in the economy and is expected to post solid results.

Basham said restaurants with international operations also may be able to offset slower U.S. sales. Yum Brands Inc., the parent company of Taco Bell, KFC and Pizza Hut, said Wednesday that strong sales in its China and international divisions were responsible for a 4 percent rise in overall profit.

Casual dining chains and companies that cater to leisure travelers — another group that has been cutting back on spending as airfares and gas prices rise — could report the worst results, Basham said.

While chains could see slightly higher sales into the third quarter since some taxpayers have yet to receive their stimulus checks, most analysts are being cautious about whether rosier days are ahead for the sector.

"I think the upward trend is going to be hard to predict," said Wedbush Morgan analyst Brian Moore.

Goldin was even less optimistic that a recovery could still take place this year — a prediction heard frequently just a few months ago.

"It's wishful thinking," he said.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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