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McDonald's Low Prices Send Its Stock Up 5%

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By LAUREN SHEPHERD The Associated Press

The Tampa Tribune

Published: January 2, 2009

NEW YORK - Declining consumer confidence took a bite out of restaurants' sales and profits in 2008, leading to bankruptcy filings at casual-dining chains, such as Bennigan's, and the closure of more than 600 Starbucks locations.

For most restaurants, particularly the "casual dining" or sit-down chains, it was a tough year.

Sales began to slide at the chains in late 2007 when the housing market deteriorated, and consumers started cutting back on small luxuries such as eating out. High gas prices were also taking their toll on wallets, giving consumers less cash to use at restaurants.

"The big story really is negative same-store sales," said KeyBanc Capital Markets analyst Brad Ludington. "There was an expectation for negative same-store sales, but not to the levels we've seen here in the back half of the year."

Same-store sales, or sales at locations open at least a year, are a key indicator of restaurant performance since they measure sales at existing locations rather than newly opened ones.

In 2008, the Dow Jones U.S. Restaurants & Bars index dropped about 13 percent. The index is made up of 12 restaurant companies, including McDonald's Corp., Starbucks Corp., Olive Garden and Red Lobster owner Darden Restaurants Inc. and Ruby Tuesday Inc.

In comparison, the Dow Jones Total Market index fell 40 percent and the Standard & Poor's 500 index lost 39 percent.

The casual-dining sector performed the worst.

The drop in sales and profits, combined with a glut of choices for consumers in the bar and grill segment, helped force the privately owned parent company of the Bennigan's and Steak & Ale chains to file for Chapter 7 bankruptcy protection in 2008.

The decline in the sector was led by Ruby Tuesday Inc. which saw its shares sink 85 percent. The chain was hit hard by falling sales and high costs from remodeling its restaurants.

Fast-food chains that offered lower prices or those sit-down restaurants considered a good deal by thrifty consumers fared better.

Shares of McDonald's, which reported big increases in sales through much of 2008, jumped nearly 5 percent.

Falling traffic and an overzealous growth strategy led Starbucks to shutter more than 600 U.S. stores.

Although the year was difficult for most restaurant investors, 2009 may offer some opportunities as long as the economy begins moving toward a recovery. Restaurant stocks typically are some of the first to rise at the end of a recessionary period.

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