S&P: Large QSRs Positive, Casual Chains Weak

McDonaldsAs the recession drags on, stock performance for McDonald's, Burger King and other large quick-service chains continues to be generally positive, but performance for most casual chains is weak, according to Standard & Poor's year-end 2008 RatingsDirect retail industry report card.


S&P's analysts noted that McDonald's and Burger King each achieved "meaningful" same-store sales increases last year, reflecting their leveraging of breakfast, snack and late-night opportunities. In addition, their stable-to-improved margins reflected their advantages as franchisors that directly operate only small percentages of their total restaurant systems (less vulnerability to rising food/labor costs and ability to leverage fixed and administrative costs).

Yum Brands Inc. also performed well, according to the report. The company's repurchase of nearly $1.7 billion of its shares in 2008's first three quarters (partially financed with debt) weakened its credit metrics, but these are expected to improve in 2009, given that Yum has stated that it will not buy additional shares this year.



Casual and family dining chains, on the other hand, saw same-store sales that generally ranged from mid-single-digit declines to modest increases, with performance worsening as the year progressed, according to S&P. Furthermore, most that saw gains did so as a result of price increases that offset traffic declines.

The major exception was Darden Restaurants Inc.'s Olive Garden chain, which saw "healthy" same-store sales gains last year, the analysts noted.

Darden's other restaurant properties (which include Red Lobster, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52), as well as the chains within the Brinker International Inc. portfolio (including Chile's Grill & Bar, Romano's Macaroni Grill, On the Border Mexican Grill & Cantina and Maggiano's Little Italy) saw declining same-store sales, S&P reported. However, both Darden's and Brinker's credit metrics remain in line with their current ratings.

Among the 30 speculative-grade restaurant stocks rated, issuers that have "significant near-term default risk" include Uno Restaurant Holdings Corp., Perkins & Marie Callender's Inc. and Real Mex Restaurants Inc., according to the S&P report.

Many speculative-grade restaurant issuers have recently been purchased in leveraged transactions or have "highly leveraged capital structures," and narrowing operating margins have contributed to worsening credit metrics for some, the analysts noted.


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