Restaurant Earnings a Smorgasbord

Third-quarter earnings season will be potluck for the restaurant industry.

Despite recent progress in the economy, profits for some 20 dining chains are forecast to be up only 6%, on average, in the quarter, according to consensus estimate calculations by independent research firm Puglisi. S&P 500 earnings, by contrast, are expected to jump 14% over the same period.

Analysts cite a slew of factors -- including a still-weak economy, the late summer blackout in the Northeast and Hurricane Isabel -- that made the latest quarter a relatively difficult one.

"The third quarter was tough," said John Glass, an analyst at CIBC World Markets.

Several chains guided below analyst expectations this summer, including Brinker International ( EAT), Lone Star Steakhouse ( STAR) and Rare Hospitality ( RARE), according to Thomson First Call.

More recent, pizza chain Papa John's ( PZZA) lowered its 2003 outlook Tuesday, and said it might close underperforming restaurants.

Among companies that have already reported, Yum! ( YUM) -- which operates Taco Bell, Pizza Hut and KFC, among other chains -- said earnings were up 12% in the third quarter. But underlying results were poor.

Yum! had flat sales, as well as higher occupancy and commodity costs. KFC continued to be a drag on the quarter, and the company said it does not expect a significant turnaround there until summer 2004.

Elsewhere, Darden Restaurants ( DRI) posted lower first-quarter earnings in September, due to higher crab costs at its Red Lobster chain. And the company said it would not meet analyst projections for the second quarter.

Nevertheless, there are expected to be some sweet spots for the eatery group this reporting period.

In advance of their earnings releases, fast-food chains McDonald's ( MCD) and Wendy's ( WEN) announced solid same-store sales this week.

McDonald's notched a sixth-straight month of sales gains in September, as it promoted new products and launched an ad campaign. The burger giant said U.S. sales rose 10%. Wendy's said sales were up 3.5%. The news prompted some research analysts to raise earnings estimates for both companies.

Over the last few months, quick-service chains have put healthier items on their menus. McDonald's introduced a meal-sized salad. Burger King, meanwhile, started offering a line of low-fat sandwiches.

"The evidence is out there that September saw an uptick in business," said Glass, who expects fast-food earnings to outperform casual diner results going forward.

Looking to next year, several restaurants are expected to be hurt by rising beef costs, particularly steak chains such as Outback Steakhouse ( OSI), Lone Star Steakhouse and Rare Hospitality.

Mark Kalinowski, an analyst at Salomon Smith Barney, recently lowered his 2004 earnings estimates for Outback Steakhouse, citing an increase in cattle prices to near 10-year highs.

"We believe Outback is in negotiation with its beef suppliers," Kalinowski said in a research note. "But in our view, it's wise to expect rising prices, given higher demand for beef in general, the lack of resumption of importation of live cattle from Canada and lower U.S.-born cattle supply."

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