EARNINGS PREVIEW: U.S. Restaurants Could See Tough 2nd Quarter
07/11/2012| 03:41pm US/Eastern
By Ben Fox Rubin
TAKING THE PULSE: An economic slowdown in China and continued weakness in Europe are expected to continue dragging on major U.S. restaurant companies' profits in the second quarter. The slower-than-expected pace of the U.S. market's recovery could cause additional headwinds, along with increased competition from Yum Brands Inc.'s (>> Yum! Brands, Inc.) Taco Bell and newly public Burger King Worldwide Inc. (>> Burger King Worldwide Inc), which are making comebacks.
Wall Street expects the most year-over-year improvement from growth-focused companies such as Chipotle Mexican Grill Inc. (>> Chipotle Mexican Grill, Inc.) and Starbucks Corp. (>> Starbucks Corporation), while McDonald's Corp. (>> McDonald's Corporation), the reigning leader in fast-food, is expected to post minor growth during the quarter amid the tough global economy.
COMPANIES TO WATCH:
Yum Brands Inc. (>> Yum! Brands, Inc.) -- July 18
Wall Street Expectations: Analysts surveyed by Thomson Reuters predict an adjusted profit of 70 cents a share on revenue of $3.12 billion. A year ago, Yum posted income of 65 cents, or 66 cents excluding some items, on revenue of $2.82 billion.
Key Issues: The parent company of Taco Bell, KFC and Pizza Hut has seen its struggling domestic business show signs of a comeback recently, posting a promising 5% rise in same-store sales for its first quarter. Much of that improvement came from Taco Bell's successful launch in March of its Doritos Locos Tacos, with a nacho cheese Doritos taco shell. The chain hopes to build on that strength with a rollout of its "Cantina Bell" menu, which will focus on fresher and higher-quality ingredients, taking after Chipotle Mexican Grill Inc.'s (>> Chipotle Mexican Grill, Inc.) offerings. Yum continues to focus most of its energy on China and other emerging markets, where its Pizza Hut Casual Dining and KFC chains are booming in urban areas. However, the company could be losing its edge there, as commodity and wage inflation pressure margins and as the country shows signs of an economic slowdown. In the company's first quarter, China posted 14% same-store sales growth, trailing previous quarters, which had same-store sales growth of around 20%.
Chipotle Mexican Grill Inc. (>> Chipotle Mexican Grill, Inc.) -- July 19
Wall Street Expectations: The company is expected to report earnings of $2.30 a share and revenue of $707 million. Last year, Chipotle's income came in at $1.59 and revenue was $571.6 million.
Key Issues: The chain has become a leader in fast-casual Mexican food, generating strong sales productivity and restaurant margins, as customers have responded to its mix of high-quality, freshly prepared foods and an industrial-chic decor. The long-time investor favorite has repeatedly posted double-digit quarterly earnings growth, but its shares have sagged since April, as concerns about decelerating sales have taken hold. Also, federal investigations into Chipotle allegedly hiring illegal immigrants may linger for years, the company has warned. The burrito chain may be able to allay investors' worries about its growth with its expansion plans in Europe and a push to speed up its sometimes discouragingly long lines during the lunch and dinner rushes. But, the continuing federal investigations should cost the company more in legal fees, while also potentially disrupting its business.
McDonald's Corp. (>> McDonald's Corporation) -- July 23
Wall Street Expectations: Analysts expect a profit of $1.38 a share on revenue of $6.95 billion. A year earlier, the company reported earnings of $1.35 and revenue of $6.91 billion.
Key Issues: McDonald's has seen its sales growth threatened by a challenging global economy, marked by high unemployment in Europe and a cooling economy in China. Considering those pressures, the world's largest fast-food operator could see weaker-than-expected second-quarter results, R.W. Baird recently said, as same-store sales grew less than anticipated during both April and May. Still, the company is expected to continue outpacing its rivals, as it has for several years running. McDonald's should be aided by the U.S. market, which as become its biggest growth engine despite over-saturation of fast-food restaurants and resurgent competitors. A diverse menu and a continuous pipeline of new products, including its Blueberry Banana Nut Oatmeal and Cherry Berry Chiller, should also support guest traffic and sales.
Starbucks Corp. (>> Starbucks Corporation) -- July 26
Wall Street Expectations: Analysts expect fiscal third-quarter income of 45 cents a share on revenue of $3.33 billion. A year ago, Starbucks posted a profit of 36 cents a share and revenue of $2.93 billion.
Key Issues: Starbucks continues to build beyond its core cafe business in the U.S. with aims of becoming a global consumer powerhouse. Its broad array of growth projects include energy drinks, expansion plans in China and a single-serve espresso machine. The company hopes to make food a bigger part of its business with its $100 million acquisition of La Boulange Bakery, and is piloting new stores in Seattle--a juice-bar called Evolution Fresh and a Tazo Tea Store. However, Europe--though a small part of its overall business--continues to weigh on earnings, as a soft economy and some company missteps there have harmed store sales more than it anticipated. China, though, continues to be a major growth engine, with seven consecutive quarters of more than 20% growth.
Brinker International Inc. (>> Brinker International, Inc.) -- Aug. 9
Wall Street Expectations: The market forecasts a fiscal fourth-quarter profit of 58 cents a share on revenue of $735 million. The company a year earlier reported earnings of 49 cents a share, or 48 cents excluding some items, on revenue of $717.5 million.
Key Issues: Brinker is in the second stage of an overhaul plan of its Chili's Grill & Bar chain, in which kitchen remodeling and other cost-cutting efforts are helping it better manage margins. It is also working at making its menu and image more attractive. The turnaround strategies appear to be taking root, as fiscal first-quarter revenue rose at its strongest rate in years, and its same-store sales and guest traffic rose in its third quarter. Like others in the casual-dining sector, Brinker remains challenged by high commodity prices and cost-conscious customers. Darden Restaurants Inc. (>> Darden Restaurants, Inc.), owner of the Olive Garden and Red Lobster chains, late last month reported weaker same-store sales, casting uncertainty over the rest of the casual-dining industry.
Write to Ben Fox Rubin at firstname.lastname@example.org
Stocks mentioned in the article : Yum! Brands, Inc.
, Starbucks Corporation
, McDonald's Corporation
, Brinker International, Inc.
, Darden Restaurants, Inc.
, Chipotle Mexican Grill, Inc.
, Burger King Worldwide Inc