Is Fast Food Slowing Down?

Are American consumers retracting even further? When the Great Recession began, consumers were trading down -- sales of private-label brands increased, vacations were postponed or pared back, and of course, fast-food chains became more popular as Americans opted for value meals over sit-down restaurants.

Investors noticed. Shares of fast-food king McDonald's (NYSE: MCD) held their value relatively well during the darkest days of the recession, falling only about 20% (and recovering fully) while the overall market fared much worse.

However, as The Wall Street Journal noted last week, the nation's high unemployment rate is charbroiling fast-food chains, even as the rest of the economy recovers. It seems consumers may be trading down even further, opting for the cheapest items on the menu, or buying only value promotions. Those moves ultimately cut into margins.

This trend squeezed four players in their most recent quarters:

*U.S. results only.

However, not all chains are hurting. McDonald's continues to perform, although perhaps not as robustly as before. Chipotle (Nasdaq: CMG) didn't miss a beat, growing sales 12% with comps up 2%. And even the relatively more upscale Buffalo Wild Wings (Nasdaq: BWLD) grew sales by 19.6% in the fourth quarter, with same-store sales up around 2%, though profit growth slowed to 8%, down from prior quarters.

Still, the performance of the lagging firms indicates that American consumers are still trying to stretch their dollars, creating both short-term pain and long-term opportunity for fast-food companies. While the Journal theorizes that these financial results are an indication of a growing dichotomy between income classes, it also must be considered that stronger fast-food brands are simply outperforming their weaker brethren, setting the stage for future outperformance.

As the fast-food industry gets shaken up, McDonald's once again looks like the king of the hill. Investors should note that while McDonald's may appear pricey, the company seems to have earned its premium, and it remains a very safe and defensive stock.

Upstarts Buffalo Wild Wings and Chipotle are also taking advantage of their stumbling rivals, and both look attractive in the long term. However, high growth expectations, high multiples, and a lack of dividends mean that they're fairly expensive these days.

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