There's a special on restaurant stocks, with many down 50 percent or more in price because of the weak economy.
The restaurant industry certainly is never going away. But the question is whether it is too early to invest now, because many of these companies are struggling.
Industry concerns were dramatized by the closing of many Bennigan's and Steak & Ale restaurants after their owner, S&A Restaurant Corp., filed for bankruptcy last month. Vicorp Restaurants Inc., operator of Village Inn and Bakers Square, filed for Chapter 11 in April, which lets it reorganize and remain open. Both firms are private.
"Americans have not stopped going out to eat and aren't going to stop, but they are being forced to decide," said Allan Hickok, managing director and head of the restaurant group for the Houlihan Lokey investment bank. "Their discretionary income pool is smaller, so if a restaurant isn't on their personal 'A' or 'B' list, they will drop it." Whenever they do opt to dine out rather than stay home, they are increasingly sticking with the basics and cutting back on appetizers, desserts and beverages, experts said.
Pin some blame for the fix that restaurants are in on the easy credit that encouraged them to borrow in order to expand. They committed the same mistakes that everyday consumers and other industries did in recent years.
"The restaurant industry is overstored, especially in casual dining, with demand nowhere near the increased supply of stores over the past five years," said Ron Paul, president of Technomic, a food industry research and consulting firm. "The companies could get the money, so they opened up the stores."
Although major chains won't go out of business, they are going to be closing stores, Paul said. It will be 12 to 18 months before demand catches up to supply in the restaurant business, he said.
"These stocks are very, very, very cheap because their fundamentals keep getting a little worse," said Bryan Elliott, senior restaurant analyst with Raymond James & Associates. "But if you have a time horizon of two or more years, at some point they're going to have a big, big recovery."
The economic downturn presents a significant challenge for restaurateurs: Of restaurant operators responding to a recent tracking survey of the National Restaurant Association, 29 percent identified the economy as their No. 1 challenge.
The problems are likely to last, although stocks could be in for a turnaround first, experts said.
