Spending at family-dining restaurants improving following winter-time slump, helping to offset concerns that US consumption may soften, industry officials say
May 23, 2014
– Spending at family-dining restaurants, including Cracker Barrel Old Country Store Inc., Bob Evans Farms Inc. and Denny’s Corp., is improving after a winter-time slump, helping to offset concerns that U.S. consumption may soften.
“Sales in the second half of the year probably will be better than the first” amid “encouraging signs” the economic recovery is aiding these establishments’ core customers: middle- income households earning about $40,000 to $75,000 a year, said Malcolm Knapp, a New York-based consultant who has monitored the industry since 1970.
Family eateries, which provide a barometer for these consumers’ expenditures, could show a modest sales rebound when they report earnings, with spending “starting to gain some traction,” he said.
Anything beyond that would be a big surprise, especially because family dining has been in the “doldrums” since the early 2000s, said Larry Miller, founder of MillerPulse.com in Atlanta, which provides a restaurant-industry performance benchmarking service. He sees some signs of improvement, with growth at about 2 percent this spring, similar to the pace before the harsh winter caused it to fall below 1 percent.
Shares of DineEquity Inc. rose 6.7 percent on May 1 after the Glendale, California-based company reported first-quarter earnings that beat the consensus of analysts’ estimates. U.S. system-wide same-restaurant sales increased 3.9 percent at its IHOP chain.
Cracker Barrel, based in Lebanon, Tennessee, is scheduled to announce fiscal third-quarter results on May 28, followed by Columbus, Ohio-based Bob Evans’s fiscal fourth-quarter report June 17. The implied one-day stock-price move after the announcements is 3.4 percent for Cracker Barrel and 4 percent for Bob Evans, according to data compiled by Bloomberg.
Cracker Barrel declined to comment, saying it’s in a pre- release quiet period. Bob Evans and Denny’s didn’t accommodate interview requests.
Inclement weather kept many Americans at home last winter, particularly older consumers. They account for a large share of diners at family establishments, which include buffet-style eateries and typically serve breakfast, though not alcohol. Now warmer temperatures and job creation are helping to revive sales, said Knapp, who estimates the average check at these eateries is about $8.80 a person.
U.S. employers added 288,000 workers to payrolls last month, the biggest gain since January 2012, Labor Department figures show.
As middle-income Americans benefit from the increased hiring, consumer sentiment has risen close to the highest since the recession ended in June 2009, said Samuel Coffin, an economist at UBS Securities LLC in New York. That “allows for a better pace of spending.”
Consumer expenditures for the second quarter, including on services, will grow at a 3.1 percent annualized rate after adjusting for inflation, Coffin forecasts. That compares with a 3 percent pace in the first quarter that got “a big boost” from energy-related expenses.
Investor Marty Leclerc is optimistic that macroeconomic drivers such as rising home prices will continue to support middle-income households. Even though Cracker Barrel’s customers have been “struggling for a while,” he holds its stock because this “well-run company” has maintained solid earnings growth while generating cash flow it has used partly to boost its dividend and buy back shares.
Cracker Barrel’s dividend yield of about 4 percent means investors are “paid to wait” for stronger revenue growth from consumers seeing a slow improvement in their finances, said Leclerc, founder and chief investment officer of Barrack Yard Advisors, which oversees $270 million in Bryn Mawr, Pennsylvania.
Denny’s, in Spartanburg, South Carolina, also has attractive investment attributes, said Jim Tringas, senior portfolio manager in Boston at Wells Capital Management, which holds the company’s shares. Denny’s has been a “reliable cash- flow generator” despite modest sales gains, and its locations are primarily franchises, which requires lower capital spending and bolsters earnings growth.
The stock closed at $6.55 yesterday and is trading at less than 10 times enterprise value to earnings before interest, taxes, depreciation and amortization on a trailing 12-month basis, according to Tringas’ calculations. “That’s not expensive for a franchised business model.”
Even so, a lack of wage growth and weakness in the housing market could restrain spending at family eateries, Knapp said. Average hourly earnings were a seasonally adjusted $24.31 in April, unchanged from March, according to Labor Department data. Sales of existing single-family homes have fallen almost 15 percent to a 4.1 million seasonally-adjusted annual rate in April from July 2013, the highest in almost four years, based on National Association of Realtors figures.
Americans’ expectations for the economy deteriorated to a seven-month low in May, as a gauge in the Bloomberg Consumer Comfort Index declined to 42.5 from 48 in April. The share of respondents who said the economy was getting worse climbed to the highest this year.
Meanwhile, some investors may not find Cracker Barrel enticing because of its valuation. That’s why Christopher O’Cull, an analyst in Brentwood, Tennessee, with Keybanc Capital Markets Inc. maintains a hold recommendation on its shares.
The stock -- which closed at $98.24 yesterday -- is trading at about nine times enterprise value to EBITDA on a forward 12- month basis, based on his calculations. That’s “at the high end” of its historic range, with the 10-year average 7.6 times, he said.
Still, April showed signs of a recovery among family establishments. Comparable restaurant sales contracted 0.2 percent last month from a year earlier after falling 2.3 percent in January-March, Knapp said, citing data he collects. Last year, these sales rose 0.5 percent, outpacing the 1.4 percent decline for casual-dining eateries, he said.
Bob Evans sees signs of “slow and steady” financial gains for U.S. consumers, Chief Executive Officer Steven Davis said at a March 12 conference hosted by UBS. The value of their homes is appreciating and the amount of debt they carry is declining, suggesting “there will be a gradual improvement.”
Americans also are reporting an increased desire to eat out, Miller said. The share of survey respondents who plan to spend more money minus those who said they’ll spend less rose the most in the first quarter since 2011, according to data collected by MillerPulse and ChangeWave Research.
That’s encouraging for investors, as they try to get a read about how “the average U.S. household” is faring when family- dining chains report results in the next month, Miller said. “A significant improvement in sales would be noteworthy.”
--With assistance from William Maloney in New York.
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