Lane Cardwell

PO NO MO

A few years ago I pulled up behind a brand new Mercedes convertible at the traffic light. I couldn’t help but notice the personalized license plate of the older woman driving the car: PO NO MO. I also couldn’t help but notice the waves and thumbs up she was getting from other drivers who were passing her after having read her license plate. Everyone can appreciate an underdog who has apparently worked their way from being poor, to having more, even without really knowing if they actually deserve it. Casual dining stocks find themselves driving a new convertible after a solid week of earnings reports from several chains. Will they be able to keep the car, or is it a loaner?

We have seen several casual dining stocks report strong earnings, even as sales are still in negative territory. And why shouldn’t these companies be rewarded with higher stock prices? Isn’t it the job of the CEO and the management team to deliver results in good times and bad? Now that we are starting to see the management teams at casual dining companies figure out the balance between cost cutting and traffic retention shouldn’t we be cheering them on with higher stock prices? I believe that the answer is a qualified yes.

"The casual dining numbers we're seeing aren't good numbers; they're just less bad," said Stifel, Nicolaus &Co  restaurant analyst Steve West. "Less bad is the new good.” 

The reason that the numbers aren’t good is that they are being driven by cost containment, cost cutting, and cost relief. Let me repeat: There is nothing wrong with making more money than Wall Street is expecting by managing costs. But at some point we need to start growing customer traffic in order to sustain these earnings increases.

Ruby Tuesday kicked off the earnings frenzy a couple of weeks ago with their earnings release with news of higher than expected earnings and that their sales declines were improving sequentially. Net result: a stock that you could have purchased for $1 less than two months ago will now cost you $7. Ruth's Hospitality Group (the artist formerly known as Ruth’s Chris Steakhouse) is up 270% from their March bottom.

Brinker International reported strong earnings on still weak sales and their stock has gone up 100% in about 6 weeks. Not all stocks are seeing gains this large, but the announcing companies for the most part are being rewarded for being on the right side of earnings expectations. Cheesecake Factory reported earnings that were significantly higher than analysts were looking for, with comp sales that showed, repeat after me slowly, a sequential improvement in the rate of decline over the fourth quarter. The stock is trading heavily today and is up about 20%.

Other casual dining companies reported during the week. P.F. Chang’s China Bistro and Famous Dave’s of America both topped analyst expectations and each was rewarded with nice increases in their stock prices ranging from 20-30%. BJ’s reported higher than expected earnings and that their first quarter comp sales were essentially flat, a real testament to a restaurant company with two thirds of their comp restaurant base in California.

Casual dining wasn’t the only segment reporting impressive numbers to Wall Street. McDonald’s, YUM Brands, Steak & Shake, and Chipotle all had results that were greater than expected and saw their stocks increase.

A market basket of restaurant stocks is up by more than 30% so far this month. The investment community is very familiar with the strong gains that restaurant stocks usually exhibit in the early months of an economic recovery. Many of the stock moves over the past couple of weeks are indicative of the kind of performance to be expected from a strengthening restaurant sector. Be watching for signs that the casual dining category is seeing growth in customer traffic, and remember, no turnaround is complete without feet. With them, we will be PO NO MO.

Posted by Lane Cardwell on April 24, 2009 | Comments (5)