Aug. 11, 2009
Fitch Ratings has found that financial risk is moderating for the U.S. restaurant industry, despite continued weakness in same-store sales performance.
In a recently released special report, Fitch found that aggressive expense reductions, easing commodity cost pressures and less spending on capital expenditures and share repurchases have contained declines in operating cash flow and are helping to preserve liquidity. Other findings include:
- Credit statistics for many companies have stabilized or deteriorated only modestly.
- Investors and banks' appetite to invest and lend to restaurants also appears to be returning.
- Given an improved cost frontier, better access to capital and the absence of massive restaurant closures, bankruptcy fears for highly leveraged foodservice providers should continue to abate.
"Profitability has improved for many restaurants, resulting in near-term stability in credit measures. The question now is which firms will benefit most when traffic improves," said Carla Norfleet Taylor, director at Fitch Ratings. "Companies like Darden Restaurants Inc. which operates Olive Garden, Red Lobster and LongHorn Steakhouse, have been able to effectively reduce restaurant expenses without sacrificing food quality or the customers' experience."
Fitch continues to expect operating cash flow growth to remain limited in 2009 due to uncertainty regarding sustainable improvement in same-store sales.
"It is possible for traffic to improve before the recession ends since dining out is often viewed as more of an affordable indulgence," said Wesley E. Moultrie II, senior director at Fitch Ratings. "But since consumers continue to seek lower cost alternatives to dining out and are simply preparing more meals at home, improvement in employment levels will be the real driver."
Fitch Ratings currently expects the national unemployment rate to peak in 2010 and then improve modestly in 2011.
The full report 'U.S. Restaurants/Foodservice: Financial Risk is Moderating but Same-Store Sales Remain Weak' is available on the Fitch Ratings Web site.
Fitch-rated restaurants/foodservice providers and their current Issuer Default Ratings (IDRs) are as follows;
- McDonald's Corp. ('A'; Outlook Stable);
- Darden Restaurants, Inc. ('BBB'; Outlook Negative)
- YUM!Brands, Inc. ('BBB-'; Outlook Stable)
- Burger King Corp. ('BB'; Outlook Positive)
- DineEquity, Inc. (Not Applicable)
- ARAMARK Corp. ('B'; Outlook Stable)
Other companies mentioned in the report include:
- Brinker International Inc.
- Wendy's/Arby's Group Inc.
- Ruby Tuesday Inc.
- Carrols Restaurant Group Inc.
- NPC International Inc.
- Starbucks Corp.
- CKE Restaurants Inc.
- Sbarro Inc.