• by Karlene Lukovitz  @KLmarketdaily, August 11, 2009

Although most restaurants' same-store sales continue to suffer, positive indicators are reviving investors' interest in the industry.

The industry's financial risk is moderating as aggressive cost reductions, easing commodity cost pressures and less spending on capital expenditures and share repurchases help stem operating cash flow declines and maintain liquidity, according to a new report from Fitch Ratings.

Many brands' profitability and credit numbers are improving, explaining investors' and banks' apparent returning willingness to invest and lend to restaurants, Fitch reports.

One example now in the news: Atlanta-based private equity firm Roark Capital Group. Already an investor in 14 franchised companies that include several restaurant brands (Cinnabon, Carvel, Moe's Southwest Grill, McAlister's Deli), Roark recently told The Atlanta Journal-Constitution that after holding back for about 18 months, it is now in discussions with several companies and expects to invest $200 million to $250 million this year. Restaurant franchisees, as well as brand owners, are among the options being assessed.

"The question now is which firms will benefit most when traffic improves," observes Fitch director Carla Norfleet Taylor, noting that Darden Restaurants, Inc. (operators of Olive Garden, Red Lobster and LongHorn Steakhouse), for example, has managed to cut restaurant expenses without sacrificing food quality or the customer experience.

Still, Fitch concludes that sustainable improvement in restaurant industry same-store sales will require improved employment levels that help reverse the trend to at-home eating. Through June of this year, food-away-from-home sales declined by 2.5%. Unemployment reached 9.4% in July (up from 2008's average of 5.8%), and Fitch predicts that it will peak at about 10% in 2010 before improving modestly in 2011.

McDonald's continues to buck the same-store sales decline trend, this week reporting a gain of 2.6% in the U.S. and 4.3% worldwide during July. McDonald's operating EBIT margin increased to 29.8% (from 27.2%) for the quarter ending in June.

However, Fitch points out that other restaurant/foodservice operators also reported EBIT margin gains during their most recent reporting quarters, including Yum Brands, Starbucks, Carrolls Restaurant Group, Darden, Ruby Tuesday, DineEquity/Applebee's and Brinker.