RBC Capital Markets said February spending plans rise sequentially as its data supports continued sales gains at restaurants. The brokerage said its favorite restaurant stocks are McDonald's Corp. (MCD), Yum! Brands, Inc. (YUM), and Sonic Corp. (SONC).
The results of our February 2011 restaurant spending survey reinforce the view that restaurant comparable-store sales will continue their positive momentum, said Larry Miller, an analyst at RBC Capital Markets.
Miller said there was a 200 basis-point sequential increase in spending plans at restaurants over the next 90 days -- 14 percent planning to spend more and 24 percent to spend less in February versus 13 percent more and 25 percent less in January.
Miller said the February reading was also above last year's level by 700 basis points. Based on this data and the reasonably high R-square of 65 percent, Miller would expect industry comparable-store sales to continue to track in the positive low-single digits over the next several months.
Improving comparable-store sales is a central tenet of our thesis, as we expect there to be a long-lasting period of comp-store sales stability due to supply reductions and traffic gains as the economy recovers. Where our thesis has changed somewhat is flow-through rates may no longer be as high as we hoped due to surging commodity inflation, said Miller.
With inflation potentially being a problem for the next two years (2011 and 2012), Miller is shifting to business models that thrive in this backdrop, namely fast food. Sales rise at fast food as franchisees raise prices and reduce discounting and the highly franchised business provides margin protection.
Our favorites are McDonald's, Yum! Brands, and Sonic. To own company-owned business models, we recommend companies with pricing power, supply chain scale and/or diversified commodity baskets, and a low valuation like Darden Restaurants Inc. (DRI), said Miller.