The fast-food business is going great guns. McDonald's (NYSE:MCD) just finished 30 consecutive months -- two and a half years! -- of increasing same-store sales. Sonic (NASDAQ:SONC) just completed 19 consecutive years of higher same-store sales. YUM! Brands (NYSE:YUM) expects 10% earnings-per-share growth in 2006 as the Chinese welcome KFC with open arms. But not every fast-food restaurant is enjoying similarly tasty growth.
Backyard Burger (NASDAQ:BYBI), home to gourmet Black Angus hamburgers, turned in a disappointing second quarter (see results in PDF format). Year to date, company-owned restaurants have seen same-store sales sink 2.2%, and franchisees are nursing a 0.7% decline.
Declining results aren't just for the small-fry operators. News from Wendy's (NYSE:WEN), the home of the square burger, makes Backyard's results look appetizing. Wendy's namesake restaurants turned in a 5% decline in its latest quarter.
Backyard Burger's turning point may have come when Yum! Brands declined to continue using the vendor in its multi-brand units. Since then, Backyard has continued to add outlets, but the last four quarters have seen declining gross profits.
Backyard is also hurt by its presence in the southeastern U.S., where Hardee's, a CKE Restaurants (NYSE:CKR) brand, sells a premium-priced 100% Angus Thickburger. That's a lot of competition for higher-priced fare, especially when fast food is usually characterized as value-oriented. For that matter, at 37 times trailing earnings, I have to wonder what investors are watching when buying Backyard shares, particularly given recent earnings and less-than-positive behavioral signals from partners.
Wendy's, however, presents a different problem for investors. The company is restructuring by shedding its Tim Horton's unit. Can it get its namesake restaurants back on track after buying back $1 billion in stock? Investors will have to wait and see. At 18 times trailing earnings, net of restructuring charges and impairment of goodwill, Wendy's provides a less expensive way -- at least as measured by its earnings multiple -- to do so.
The big lesson here: Industry trends can point you to promising stocks, but that doesn't mean everything you find will agree with your portfolio. Choose carefully before you chow down.
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Fool contributor W.D. Crotty owns shares in Yum! Brands and McDonald's. Click here to see The Motley Fool's disclosure policy.
