Baird Bullish On Restaurants As Demand Trends Strong

Robert W. Baird�s David Tarantino has a note out today about the firm�s November restaurant survey, which showed modest comparative sale improvement month-over-month, and he maintained outperform ratings on Panera Bread (PNRA), Buffalo Wild Wings (BWLD), Chipotle Mexican Grill (CMG), Chuy�s Holdings (CHUY), Yum Brands (YUM), Ignite Restaurant Group (IRG) and McDonald�s (MCD).

Tarantino writes that last month�s data points to slightly improved trends for demand; while restaurants face some difficult comparison in the coming months related to weather, he writes that �we think most chains are on track to reach estimates and believe that the underlying demand trend (ex-weather) can remain healthy into 2013.�

Here are highlights of the data:

Overall, 29 chains (51% of sales-weighted sample) noted better trends in November than in October, while 15 chains (34%) indicated slower comps.

The sequential improvement from October was driven largely by better performance for casual dining (comps up 1.5%+ after down slightly in October), directionally consistent with the rebound seen for the Knapp-Track benchmark (November +0.7% after October -0.9%). We were not overly surprised to see casual dining rebound, given our view that trends in recent months were dampened by some transitory factors (election cycle, Olympics).

Fast-casual comps were near +6-7%, remaining healthy and near- to modestly better than the strong level seen in October.

The majority of chains (53%) indicated that comps were roughly consistent throughout the month.

However, Tarantino notes that the coming months could be difficult for restaurants, as they face average comp deceleration of 50-100 basis points, given weather benefits in 2011.

Nonetheless, the 2013 outlook is bright: On a combined basis, the restaurants surveyed are expecting comps to grow2.5% to 3.0% for the year. This includes average pricing of just under 2%, as restaurants are planning to pass cost pressures onto consumers�despite this, margins are still projected to be largely flat year-over-year.

On average, survey respondents are planning slightly more pricing in 2013 (relative to 2012) to offset cost pressures; restaurant-level margins are projected roughly flat versus 2012 figures.

�Outside of [the weather] issue, our proprietary traffic model suggests underlying trends can hold up well (assuming possible tax hikes are isolated on the highest-income consumers), supporting the earnings growth outlook for companies that possess visible top-line drivers,� he concludes.