Lane Cardwell

The Worms of Spring

About this time every year you can see birds checking out the warming ground for signs of worms to eat.  The worms are in the ground during the cold months of winter, but the earth is just too hard to get at them. At the same time there are a lot of people checking for signs of a restaurant sales turnaround in the warming months of spring. CEOs, CFOs, restaurant analysts, consultants of all shapes and sizes, restaurant writers, investors, you name it, they are all looking for signs of life in the hopefully thawing restaurant ground.

The restaurant analysts are all busy doing their jobs trying to be among the first to be able to call a turn in the sales of the industry. They are asking the same question a dozen different ways, but each variation means the same thing--any sign that sales are turning in your company?

Looking around the industry there are some signs that we may have bottomed out, that the worst may be over. But as the robin knows, there is a long wait from “no more snow” to pulling worms out of the thawed ground. 

The quarterly earnings reports are starting to come in from the public companies. What the analysts are listening for are two magic words regarding sales trends. “Sequential improvement” during the quarter is the worm that they are looking for. Sequential improvement means that each month in the quarter is better than the prior month. It doesn’t even have to mean that sales have turned positive. It is way too early in the cycle to be hoping for that. We get excited over negative comp sales being less negative each month…sequential improvement.

It’s not just in the restaurant industry that we are looking for a positive turn; it’s across the entire market. The stock market’s performance through this week is the strongest four-week gain since 1933. Everyone is looking for the turn and trying to catch it early.

The most recent reporting company to announce sequential improvement in sales during the quarter was Ruby Tuesday. During their third quarter earnings release this Tuesday they talked about the monthly improvement in sales, sequential improvement, through the quarter. Sales were down 9% in December, 6% in January, and down 5% in February.  March marks the start of the fourth quarter for Ruby Tuesday and they stated the trend of sales improvement has continued. The market’s reaction to this, among other elements of their earnings report, was a 70% increase in their stock in a two day period. Now that's a big fat worm.

What’s the lesson? Be looking for signs of sequential improvement. When things turn, when spring arrives and the ground thaws, the birds want to eat. After the long winter that the industry has experienced in sales, even a juicy worm looks pretty appetizing.

Posted by Lane Cardwell on April 9, 2009 | Comments (3)