The credit outlook for U.S. restaurants should be mostly stable in 2014, despite some weak industry fundamentals, according to a new report published by Fitch Ratings. Rising shareholder demands, however, will test credit trends for the industry, Fitch predicts.
Median total debt-to-operating EBITDA and total adjusted debt-to-operating EBITDAR are projected to be flat versus 2013 at 2.3x and 3.8x, respectively. However, returning cash to shareholders will be a key priority for most firms, even though same-store sales growth will be challenged and costs continue to rise.
Fitch predicts dividends will garner a larger share of earnings and cash flow while share buybacks are viewed as a wildcard given the emphasis on shareholder returns and less restrictive covenants.
The weak global economy, characterized by high unemployment and low GDP growth, and pressure on discretionary spending is expected to affect food-away-from-home spending. Also, increasing regulation portends higher wage and benefit cost. Fitch projects that SSS will average 2 to 2 percent for the year, up slightly from 2013 due mainly to price and mix.
Fitch also writes that regulatory issues — including the Affordable Care Act, higher federal minimum wages, immigration reform, and reduced supplemental nutritional assistance — could all have adverse effects on the industry.
Promotions will remain prominent in the industry but are likely to become more strategic due to concerns around restaurant-level profitability. Chains that appeal to higher income consumers are expected to continue to outperform.
Read more about restaurant industry trends.