Will 2014 Be Better for Restaurants?

What's the outlook for The Cheesecake Factory, McDonald's, and Red Robin Gourmet Burgers?

Mar 5, 2014 at 1:19PM

According to the the National Restaurant Association, restaurant and food-service sales are anticipated to total $683.4 billion in 2014, up 3.6% year over year. This is very good news, as it will mark the fifth consecutive year of growth in restaurant sales. So, it might be time to consider starting a position in this industry and profit from some of the growth coming up.

Very recently, The Cheesecake Factory (NASDAQ:CAKE)McDonald's (NYSE:MCD), and Red Robin Gourmet Burgers (NASDAQ:RRGB) released fourth-quarter and fiscal-year 2013 reports. Let's examine them and determine what 2014 may have in store for each restaurant.

The Cheesecake Factory, an upscale casual-dining company, operates 178 restaurants(NASDAQ:CAKE). The Cheesecake Factory improved its earnings and revenue on year-over-year terms in the fourth quarter, which is good. Revenue in particular grew 2.4%, but the inclement weather affected comps, which remained flat at 0.9%.

Certain things are encouraging about The Cheesecake Factory for 2014, and these include its pricing actions, the introduction of a new menu, and international expansion. In fact, regarding internationalization, the company opened a new restaurant last quarter in Jeddah, Kingdom of Saudi Arabia under a licensing contract.

This year, management expects to open three to five restaurants in the Middle East and Mexico, where local middle-income populations have proven to like the company's products. In the U.S, the expansion will be larger, as the company projects it will open 10 to 12 company-owned restaurants.

Prepared for growth in 2014
2013 was a challenging year for McDonald's, as global comparable sales increased just 0.2%, reflecting a slightly higher average check but negative comparable guest counts. Despite the introduction of the Dollar Menu & More, the fourth quarter also brought weakness, as comparable sales decreased 1.4%.

For 2014, the company has a capital expenditures target of $2.9 billion to $3 billion, which will be used to open 1,500-1,600 new restaurants and the reimaging of more than 1,000 existing locations. So,  McDonald's will continue to expand, which is very encouraging. But the cool thing is that after these investments, it will return all free cash flow to shareholders through dividends and share repurchases. In fact, this year management expects to return approximately $5 billion to shareholders.

Another remarkable aspect about McDonald's is its constant striving to add new offerings to cater to the ever-changing palates of customers. The company evolves constantly, trying new products and discarding what does not work in terms of sales.

Finally, there's Red Robin Gourmet Burgers(NASDAQ:RRGB), one of the most recognized restaurant chains in the casual-dining segment.

The fourth quarter brought mixed results for the company, as earnings per share grew 5.1% year over year to $0.62, but revenue only increased 0.5% to $242 million. Looking deeper into these results, it's clear that higher franchise royalties, fees, and other revenue managed to slightly offset the decrease in traffic.

For full-year 2013, performance was better, and it showed 4.1% revenue growth to about $1 billion. For 2014, the company expects sales to grow in the high-single digits, driven by new openings and comps growth. In fact, the company has been showing comps sales growth for the past three consecutive years, and this year should not be the exception. Expansion-wise, the company plans to open 20 new Red Robin restaurants and five Red Robin's Burger Works, pretty much in-line with the 21 new restaurants opened last year.

Red Robin is strong in the family category, as more than 30% of its clients are younger than 18 years old. Plus, its loyalty program -- Red Robin Royalty -- is very encouraging, as it holds 2.7 million registered clients already and continues to grow.

Bottom line
The overall outlook for the restaurant industry in the U.S. is positive, so fortunately there is space for growth. However, U.S. consumers are facing the brunt of government budget cuts, higher gasoline prices, payroll-tax increases, and delayed tax-refund checks, which could reduce discretionary spending and affect overall sales. That's why you should keep an eye on these variables, as they could change the prospects for these companies.

Regarding The Cheesecake Factory, its expansion, although not very significant, is encouraging. 2014 should bring slight improvements in sales, but do not expect huge surprises.

McDonald's remains solid, and 2014's performance will very likely be better than last year's. The company is no newbie, and is very focused on growth.

Red Robin's continuous comps sales growth is remarkable, but growth for 2014 looks like it will be in-line with last year's.

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Louie Grint has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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