Restaurant stocks are early casualties in any recession. When the time comes to cut back on discretionary spending, eating out is a luxury that's easily pared back.
What does it mean when the eateries begin to bounce back?
We're not there yet, but we're getting close. Darden Restaurants (NYSE: DRI ) and CKE Restaurants (NYSE: CKE ) have delivered their quarterly reports this week. They're not perfect, but they do show signs of improving.
Darden is holding up well. Sales from continuing operations rose 8% to $1.98 billion for its fiscal fourth quarter. Earnings from continuing operations rose 21% to $0.87 a share. Comps at its flagship Olive Garden and Red Lobster chains fell by a reasonable 0.6% during the quarter. The bigger hits came from the RARE Hospitality properties it acquired two years ago, with LongHorn Steakhouse off by 6.5% and the upscale Capital Grille sporting a brutal comps blow of 22.1%.
The rough showing at Darden's Capital Grille isn't a surprise. There's a reason why shares of standalone chophouses Morton's (NYSE: MRT ) and Ruth's Hospitality (Nasdaq: RUTH ) are trading for $3 or so these days.
Darden's more accessible eateries, accounting for most of its 1,773 restaurants, are holding up, and that's huge. It's giving Darden enough breathing room to increase its dividend by a whopping 25%. Darden is also targeting a profit from continuing operations of between $2.59 and $2.85 a share in its brand new fiscal 2010. The company earned $2.65 in its recently concluded fiscal 2009, and that was with the benefit of an extra week.
CKE isn't doing as well as Darden, but the fast-food chain is hanging in there. Total revenue fell by 4% to $446.8 million in its latest quarter. Earnings fell to $0.26 a share -- after earning $0.31 a share a year earlier -- but most of that drop can be explained by a mark-to-market adjustment on CKE's interest rate swap agreements. The move jacked up interest expense by $1.8 million this quarter. Operating income actually checked in marginally higher this time than it did during last year's fiscal first quarter.
The soft California economy dealt CKE's flagship Carl's Jr. chain a 5.1% hit in comps, though Hardee's came through with a 2.5% increase in same-store sales.
Few burger chains are holding up as well as McDonald's (NYSE: MCD ) . Burger King (NYSE: BKC ) is trading close to its 52-week low. Wendy's Arby's Group (NYSE: WEN ) shares can be swapped out for Morton's or Ruth's Chris certificates, given its $3-ish price tag.
The industry isn't going to bounce back in a single serving. However, seeing Darden and CKE hold up better than analysts expected -- both earnings reports topped Wall Street's expectations -- is encouraging. The early casualties are showing new signs of life.
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