Put Your Money on Man. United!

 It has been said that there are only two certainties in this world – Death and Taxation, although an updated version of this would make it three certainties- the third being Man. United winning the Premier League. Only the last one is worth looking forward to.

As if to bring home the lack of certainties in this life, a recent analysis I did reinforced once again that if I ever come back to this life, I want to come back as a Wall Street analyst, for never in the history of man do so many people get it wrong so often and get paid so wonderfully well!

We will illustrate this by looking at some of the predictions made June 2002 by Wall Street analysts on the restaurant sector.

Restaurant Group: McDonald’s. Recommendation – Hold. Price then: $30. Price now $16.

At a price of $30, many must have felt that McDonald’s fall from a price of over $40 in just over one year could not continue. It did – all the way down to $13, mainly on the back of negative same store restaurant sales caused primarily by very poor execution of their concept. It will be a long time before McDonald’s sees north of $40 again but those who are writing off this burger giant may be mis-reading the situation. Newly energized management, new products and an effort to make brand McDonald’s more relevant to today’s consumers will get the burger giant back on growth track and grow foodservice profit. However, that recommendation to hold at $30 does not look too bright now.

Restaurant Group: Darden Inc. Recommendation – Buy. Price then: $25. Price now $18.

This parent of Red Lobster, Olive Garden and Bahama Breeze has been one of the darlings of the restaurant industry with very consistent same store sales growth. Olive Garden has had a run of 34 continuous quarters where comp sales were positive and of course “everyone” knew this would continue. It hasn’t. The chain is to some extent a victim of its own success, given that some quarters it was posting double digit growth. April saw flat same store sales in their Red Lobster and Olive Garden chain but of greater concern to management must be that guest count was down 3-4%. This on top of a difficult 3^rd quarter when earnings per share fall ensured that the equity markets heavily punished this stock price.

Darden’s fate is an illustrative lesson in how difficult it is to grow foodservice profit on a consistent basis. No matter how good the Red Lobster and Olive Garden chains are, and they are good mid -level chains, they may be reaching saturation level in terms of their mature markets. Darden is a well run chain that likely will get back on the growth track shortly but may have to rely more on its new concepts such as Bahama Breeze and their Smokey Bones BBQ concept to get the company growing. But it may be some time before it reaches $25 again.

Restaurant Group: AFC Enterprises. Recommendation – Strong Buy. Price then: $30. Price now $17.  Ouch!

AFC’s main brands are Popeye’s and Church’s Chicken, both of which are medium quality fast food chains. Share price decline here is not due to dramatic fall off in consumer numbers but because of a restatement in earnings which has forced the resignation of the Chief Financial Officer. Of course in the US when you have a restatement of earnings you have law suits immediately. In this case, this is probably justifiable because both 2000 and 2001 earnings are being restated. Neither Popeye’s or Church’s Chicken are performing badly, but right now there is a whiff of “Enronitis” around the brands which will hold back investor confidence.

Restaurant Group: Yum Brands Inc. Recommendation – Buy. Price then: $32. Price now $26.

Formerly Tricon, Yum Brands Inc is in terms of total units the biggest restaurant group in the world! This parent of Pizza Hut, KFC, Taco Bell and new acquisitions Long John Silver’s and burger chain A&W, is probably disappointed with it its share price fall. Same store sales did decline 2% in the first quarter, but the chain is extremely confident that it can grow foodservice profit and that growth will come from its multi-branding strategy which will bring a number of different concepts under the one roof. This for instance could see Pizza Hut and a new Yum concept, Pasta Bravo operating from the one site with integrated kitchen and staff. The strategy also suggests that a KFC might have a Long John Silver’s and A&W in the one unit also. David Novak, Chairman and CEO of Yum Brands believes that this multi-branding strategy is the biggest initiative in the industry since the advent of drive-thru! If so, Yum may well outpace the rest of the fast food industry going forward in its efforts to grow foodservice profit.

Hindsight is a wonderful thing and in retrospect the Wall Street predictions do not look wonderfully bright. Just to show I am well qualified to become an analyst in my next incarnation, I would probably have agreed with all three recommendations but I am not getting paid a few million dollars a year to get it wrong. In the meantime, put your money where it is safe – Man. United to win the Premier League again next year!

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Irishman Conor Cunneen is President of Grow Foodservice Profit (www.growfoodserviceprofit.com) a foodservice consultancy based in Chicago, USA.  The consultancy specializes in providing knowledge and content about the US Foodservice market to interested parties outside the United States. Conor  can be contacted at cc@growfoodserviceprofit.com

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