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UPDATE 1-Economy to bite restaurants in 2009-Fitch
March 30, 2009 / 9:13 PM / in 9 years

UPDATE 1-Economy to bite restaurants in 2009-Fitch

* Fitch warns U.S. restaurant sector will stay depressed

* Restaurant traffic to fall overall in 2009

By Lisa Baertlein

LOS ANGELES, March 30 (Reuters) - The embattled U.S. restaurant industry is unlikely to turn around this year as a deepening recession, credit crunch and rising unemployment gnaw at performance, Fitch Ratings said on Monday.

Restaurant traffic will decline overall in 2009, although some operators, such as McDonald’s Corp (MCD.N), will better weather the downturn with mid- to low-end menus.

“Fitch does not anticipate a sustainable turnaround for the restaurant industry in 2009,” it said in a report.

“Unfortunately, conditions that normally would be positive for the industry, such as declining gas prices and additional government stimulus, are being muted by rising unemployment and continued downward pressure on both the housing and stock markets.”

Fitch expects restaurant operators to serve up a smorgasbord of new value offerings in the face of rising joblessness, poor consumer sentiment and pinched discretionary spending.

McDonald‘s, home of the Dollar Menu and one of the industry’s best performers, has the strongest operating and financial fundamentals, according to Fitch, which says the quick-serve segment it leads is best positioned to ride out the recession.

But Fitch warned that small or regionally concentrated fast-food chains like Jack in the Box Inc (JACK.O) could underperform national players like McDonald’s and Taco Bell parent Yum Brands Inc (YUM.N) because unemployment in states like California and Michigan is above the national average.

Also, nonhamburger chains such as Domino’s Pizza Inc (DPZ.N) and fried chicken sellers like Yum’s KFC and AFC Enterprises Inc’s AFCE.O Popeye’s Louisiana Kitchen are grappling with rising competition from grocery stores and retailers like Wal-Mart Stores Inc (WMT.N).

Full-service restaurants will also struggle, with chains like Ruby Tuesday Inc (RT.N) and steakhouses from OSI Restaurant Partners Inc’s [OSI.UL] Outback Steakhouse to Ruth’s Hospitality Group Inc’s (RUTH.O) Ruth’s Chris projected to lag stronger performers like Darden Restaurants Inc’s (DRI.N) Olive Garden.

Olive Garden, Red Lobster and other established brands, including Brinker International Inc’s (EAT.N) Chili’s and DineEquity Inc’s (DIN.N) Applebee‘s, could benefit as restaurant closures escalate and fewer operators open new outlets, Fitch said.

Most at risk are chains loaded up on debt and experiencing severe sales declines, Fitch said. Publicly traded chains that have suffered significant declines in share price are also at risk, it said. Fitch did not cite examples.

It expects financial flexibility and access to capital to be limited for highly leveraged chains like DineEquity and OSI, which at the end of 2008 had debt of $1.9 billion and $1.8 billion, respectively.

Neither chain, however, has any near-term debt maturing, it added.

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