Frugality Fatigue – Franchise Times

Frugality Fatigue
Jonathan Maze

Same-store sales at Ruby Tuesday restaurants began falling in 2005, and the rest of the casual-dining sector soon followed, beginning a period of struggles that’s lasted nearly four years. “Ruby Tuesday was like the canary in the coal mine,” said John Gordon, principal Pacific Management Consulting Group.

If that’s the case, then casual dining chains may have reason to be optimistic. Teetering on the verge of bankruptcy a year ago, Ruby Tuesday saw modest sales growth in January — not enough to bring same-store sales higher for the quarter, but enough to give the chain confidence in its comeback.

The vast majority of casual-dining chains cannot make the same claim, but there is a growing belief that the restaurant industry, and the casual sector in particular, is finally recovering.

In a recent note to investors, Paul Westra, analyst with Cowen & Company, went so far as to “officially declare that the restaurant consumer recovery began in March 2010.” Economic indicators point to a more favorable environment for the industry.

Unemployment has stabilized and employers have finally starting adding jobs, albeit slowly.

Consumer confidence is up, though it’s still considered to be low. And the National Restaurant Association’s Restaurant Performance Index, a monthly measure of how restaurants are performing, hit its highest level in two years.

Casual-dining chains’ same-store sales fell 3 percent in January and 3.2 percent in February, according to the Knapp Track Index. That was the best performance since mid-2008, and it might have been better had there not been a Super Bowl or bad weather in the East. “They’re doing better than I expected,” Knapp said on a Bank of America Conference Call. “We’ve had several weeks of positive numbers.” Investors have responded to the improvement.

The Barclay’s Capital Restaurant Index of publicly traded restaurant stocks is up 32 percent, year-over-year — compared with 7 percent for the broader, S&P 500 Index.

Several chains are trading at pre-recessionary levels, including O’Charley’s, Famous Dave’s, Brinker International, DineEquity and Red Robin Gourmet Burgers.

Restaurants continue to face headwinds — unemployment is high and gas prices are rising.

But many analysts see a broad recovery. Jeff Bernstein, an analyst with Barclays, believes the improvement in casual dining is no illusion.

“We have had in casual dining some improvements for three, four months over the last year or two, only to go down again,” he said. “Now we’re seeing it over a multiple of months, supported by a larger number of restaurants. It’s more broad-based than in the past.” The NPD Group, a market-research firm, reported that fewer consumers are now trading down to lower-cost restaurants and fewer are sacrificing a restaurant visit. Still, total restaurant traffic was down 3 percent in February, the 14th straight decline, its research found.

Westra said part of the reason consumers have started returning to restaurants could be explained by “frugality fatigue.” After the 2001 recession, he noted that consumers began dining out in 2003, even though employment hadn’t started picking up steam. The same thing is happening here. In effect, he said, consumers have a limit to how long they’ll cut back.

Some longer-term concerns remain for casual dining, namely a “preference shift” in the babyboom population toward casual-dining chains with a more polished feel. So “mass casual” chains, like Ruby Tuesday, T.G.I. Friday’s or Applebee’s, will have to change to lure those customers, or shift focus to compete directly with fast-casual chains.

Ruby Tuesday is targeting the boomers. The chain’s struggles had many observers questioning its survival — burdened with more than $430 million in debt and a lengthy string of big sales declines, its stock in March 2009 was trading below $1. It was also shuttering existing restaurants and adding no new ones.

Yet it was also shifting its business to become more upscale. It avoided discounting during the recession and instead focused on improving check average — it’s currently at $12 and the company wants to increase that to the $13-$14 range. Once known for burgers, the company began offering higher-quality fare like lobster.

It also added brunch and a bar menu. It began making assistant managers more specialized, so those good at customer service will work with customers, while culinary specialists will work on food. “That’s smart, that makes sense,” Gordon said. “They might not have done that three or four years ago.” The efforts, along with cost cuts, were just enough to lure some investors back. The stock more than doubled, and the company was able to sell stock to raise funds to pay off some debt.

Its sales numbers, meanwhile, have gradually improved, and the stock now trades at nearly $12 a share, its highest level since 2007. The company feels strong enough that it is planning to boost advertising to speed up its improvement.

“It’s been a difficult two years for us,” said CEO Sandy Beall in a recent earnings call with investors. “We worked hard. We worked smart, to get the results we got now.”