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RESTAURANTS STRUGGLE AS LOWER-INCOME DINERS STAY HOME

By Brannon Boswell

The American casual-dining sector has been in a general malaise since March, when consumers began reallocating their dining-out dollars to gasoline and other purchases, restaurant executives say. “We’re seeing a lifestyle adjustment as people work around a short-term crunch on disposable income,” said Douglas Brooks, president and CEO of Dallas-based Brinker International, which operates 1,622 restaurants.

Rising wages and declining traffic are hurting P.F. Chang’s China Bistro, which operates 133 P.F. Chang’s full-service restaurants and 88 Pei Wei Asian Diner quick-service restaurants, executives of that company said on a conference call. For the second quarter, ended July 2, the Scottsdale, Ariz.-based chain’s net earnings fell to $8.1 million from $9.2 million 12 months before. The company slashed its third-quarter earnings forecast by $3.1 million and its forecast for the fourth quarter by $3.8 million.

The company also said same-store sales at the P.F. Chang’s division could slip 0.1 percent in the third quarter and lie flat for the fourth. Pei Wei’s same-store sales could fall 2.4 percent for the third quarter and 1.1 percent for the fourth. None of this means people are tired of Chinese food, says Robert T. Vivian, the company’s president. “All concepts, regardless of price, have a set of customers who are reaching to be able to eat there,” he said. The company’s average ticket is $37.83, but the volume of items in the lower-than-$15 range has been declining since third-quarter 2005, he says, while wages have risen 3.8 percent.

Brinker suffered a same-store sales decline across its brands for the fourth quarter ended June 28. The 1,200-unit Chili’s division was down 1.6 percent, the 241-unit Romano’s Macaroni Grill division fell 4.5 percent, and the 144-unit On The Border Mexican Grill & Cantina division dropped 2.5 percent. There was significantly lighter traffic for the quarter during weekend dinner hours, says Charles Sonsteby, executive vice president and CFO. Only the 37-unit Maggiano’s Little Italy division posted positive numbers for the period, up 1.1 percent.

At steak chain Smith & Wollensky, same-store sales dropped 1.7 percent for the second quarter. Even Cheesecake Factory slipped some, with same-store sales there down 0.8 percent during the quarter.

Though some Wall Street analysts say casual dining chains have reached critical mass, restaurateurs and landlords are more bullish. A good restaurant does somewhere between $4 million and $6 million annually, says Taubman Centers CEO Robert S. Taubman. But at the firm’s Stony Point Fashion Park, in Richmond, Va., a collection of restaurants is posting over $25 million a year. “That’s comparable to a department store,” Taubman said. Restaurants, led by the Texas de Brazil chain, helped turn around the firm’s once-troubled Dolphin Mall, in Miami, says Taubman. “The table-service restaurants at Dolphin Mall are bringing in about $850 per square foot,” he said. This has led Taubman to focus on restaurants at coming developments, including Mall at Partridge Creek, in Clinton Township, Mich., and the Fair Oaks mall in Fairfax, Va.

Restaurant chains themselves are charging full-steam ahead. P.F. Chang’s plans to open some 20 units next year, launch a $50 million stock repurchase program and move ahead with Taneko Japanese Tavern, its newest concept. And Brinker plans to boost its restaurant portfolio by 12 to 14 percent in 2007.