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TheStreet Open House

Restaurant Stocks: Earnings to Watch

(Restaurant stocks earnings article updated with Darden Restaurants results.)

NEW YORK ( TheStreet) -- Expectations were high for the $184 billion restaurant sector this earnings season.

With the inherent limits to the number of new stores any one brand can open, still-uncertain economic times and trends pointing toward rising commodities all converging, valuations in the restaurant space were relatively swollen, noted Deutsche Bank analyst Jason West.

>> Bankruptcy Watch: 20 Riskiest Restaurant Stocks

The industry as a whole is expected to grow 2.5% annually through 2015. Key drivers of the sector, according to IBISWorld analyst Nima Samadi, include consumer spending, elevated health consciousness, competition from full-service restaurants, per capita disposable income and overall consumer sentiment.

West was more optimistic in the short term, citing the combination of "still-recovering sales and still-benign costs (both food and labor)" making for "a positive backdrop to third quarter of 2010 results." The analyst also noted that weak economic data stokes the likelihood of more federal aid in the way of stimulus, which tends to be good for discretionary stocks like those in the restaurant sector.

>>5 Restaurant Stocks to Buy Now

Stifel Nicolaus analyst Steve West said that "easy comps and extensive cost savings should offset strained sales from depressed consumer spending, boosting restaurant third-quarter 2010 earnings-per-share growth of 6% (though still less than 10% on average)."

He expected average comps growth of 18% in the casual dining space to outpace a 2% comps uptick in the quick-service space -- the first time in years that casual restaurants would outpace.

Same-store sales, also known as comps, which measure sales at stores open at least one year -- a closely watched metric in the restaurant industry -- were expected to grow modestly in the third quarter, Deutsche Bank's West said, with the group averaging 1.2% growth in the period. Despite the expected uptick, the analyst expected demand would "just hold steady in coming months, rather than show robust acceleration," and that comparisons would be more difficult in the fourth quarter for most stocks in the sector.

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