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Versace: Restaurants Do Not Pass Inspection

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The restaurant industry is known for entrants and exits. Last year saw Potbelly's' (PBPB) IPO, and recently both Papa Murphy's and Zoe's Kitchen have filed to go public. It's a difficult business, and the recent high-profile Sbarro and Quiznos bankruptcies suggest that it is becoming even more so.

Combined the pizza chain and the toasted sandwich company have thousands of locations across the U.S. Despite that size, however, this is not the first time that Sbarro has gone through bankruptcy. In 2011 the company went through a Chapter 11 reorganization. And Sbarro was not the only pizza chain to file bankruptcy in 2011 -- according to Pizza Today, it was the third large pizza chain to declare bankruptcy in less than a year alongside Round Table Pizza and Uno Chicago Grill.

What's plaguing these companies today?

According to Bob Goldin, executive vice president at Chicago-based restaurant researcher Technomic, "it's a survival of the fittest" because the quick-service food industry is not growing.

Third-party research firm NPD found that that total restaurant traffic was flat overall for most of 2013, with the only bright spot being breakfast. NPD's findings revealed that U.S. consumers made more than 12.5 billion visits at breakfast time for the 12 months ended December 2013, marking the third consecutive year of increased breakfast traffic. By comparison, traffic for lunch and dinner fell 1% last year. Lunch and dinner traffic, however, still represent a far greater proportion of overall restaurant traffic -- at least for now. Per NPD, morning meals account for 21% of all visits, while lunch and dinner account for 34% and 31%, respectively.

Is the breakfast growth expected to continue? NPD thinks so and is calling for breakfast traffic to increase 7% over the next nine years, with faster growth at quick-service restaurants. That level of expected growth when viewed against flattish growth for quick-service restaurants overall in 2013 tells us where the battleground will be.

We're already seeing Starbucks (SBUX) and Yum! Brands' (YUM) Taco Bell attack breakfast. Panera Bread (PNRA) can't be far behind, and McDonald's MCD is testing McCafe Petite Pastries, which are pastries made with real butter and containing either raspberry or cinnamon cream cheese filling. It does make one wonder about quick-service chains such as Chipotle Mexican Grill (CMG), Domino's Pizza (DPZ) and Papa John's (PZZA) that don't currently cater to the breakfast market.

With input costs such as beef prices climbing and a consumer grappling with higher utility bills and increasing gas prices, the short-term outlook is not compelling for restaurant companies or their shares. That along with the bankruptcies I mentioned above and others could spell problems for food distributor Sysco (SYY) in the near term.

Editor's Note: This article was originally published at 9 a.m. EDT on Real Money Pro on March 18.

At the time of publication, Versace had no positions in the stocks mentioned. Christopher Versace writes the "PowerTrend Profits" newsletter and "ETF PowerTrader" trading service, which both use a thematic investing perspective that ties in economics, demographics, psychographics, technology and more. He's also the host of PowerTalk, a weekly podcast that features conversations with public and private management teams, as well as other thought leaders, for the benefit of both individual and institutional investors.

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