America's fast-food industry is slowly but surely munching its way out of recession.
Recent sales figures have shown some improvement. It appears as though this diverse group, which typically slides into an economic slowdown sooner than other industries, will once again climb out faster.
There have been some real successes: Stock of restaurant chains such as Chili's Inc., Wendy's International and Cracker Barrel/Old Country have performed splendidly this year.
On the other hand, there have been troubles: Big Mac is under attack, TCBY Enterprises is melting from increased competition and Al Copeland Enterprises, owner of Popeye's and Church's, is feeling a financial crunch.
The biggest of them all, McDonald's Corp., has become controversial in investment circles because its stock hasn't kept pace with some other prospering chains.
While still capable of launching its usual publicity blitz with the likes of its McLean low-fat burger and strong international expansion, McDonald's no longer attracts across-the-board praise. Oh, it should do all right, most analysts agree, but truly rapid earnings growth may be a relic of the past.
"I don't think truly health-conscious people go to McDonald's, but those consumers have been able to go to Wendy's for some time because of its salad bar and baked potatoes," said Caroline Levy, restaurant analyst with Shearson Lehman Brothers. "The McDonald's menu is simply going to have to change to become more healthful, and the company may need to take further steps . . ."
The 320-calorie McLean burger is replacing the McDLT, which McDonald's had been hailing as a success since its introduction.
There's a danger that the next three to four quarters could continue to disappoint investors, Levy believes. She notes that same-store sales comparisons are weak; that profit margins are under pressure because it must discount food to battle the competition; and that overseas growth makes it more vulnerable to foreign exchange fluctuations.
She's neutral on the stock, believing it will simply move along with the industry. A better bet is the stock of Wendy's, a maverick in the industry benefiting from its value menu introduced last fall and the effective promotional work of founder Dave Thomas, Levy believes.
On the other hand, Peter Oaks, restaurant analyst with Merrill Lynch & Co., is convinced that McDonald's is capable of pulling off the necessary changes to get its growth rate rolling once again.
"McDonald's had said it didn't need to compete on price, but after losing market share the past two years, it now realizes that it must," said Oaks. "One positive portion of its strategy is value pricing, in which lower-priced burgers, cheeseburgers and breakfast sausage biscuits are being offered at prices designed to combat low-priced competitors."
Its "combo" meals in which 50 cents is taken off the price for buying several items is another example.
Levy likes Chili's, a chain blessed with exceptional management and well-positioned for midscale customers; Old Country Buffets, offering "all you can eat" value with $5 lunches and $6 dinners; and National Pizza Co., the largest franchisee of Pepsico's Pizza Hut chain. Among other companies, he's currently neutral on Luby's Cafeterias Inc., which is still suffering from declining customer count, and Shoney's Inc., which is paying down debt.