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Investors Feast on Restaurant Stocks

Strong Casual-Dining Growth Helps Sector Outpace Broad Market


Restaurant stocks have become the flavor du jour on Wall Street, with shares of the companies that own such eateries as California Pizza Kitchen, Cheesecake Factory, Macaroni Grill and Olive Garden outpacing the broad market in recent weeks.

Several of the stocks have hit 52-week highs in the last week, and many are up more than 20% year to date--while major market indexes are still in the red.

The hottest restaurant sector with investors has been the casual-dining category, as investors focus on strong growth at key franchises where the typical patron check ranges from $10 to $15.

But some less expensive restaurant chains, including pancake standby IHOP Inc. and fast-food giant Jack in the Box Inc., also are getting fresh attention on Wall Street.

In part, restaurant stocks have benefited from the flight of money from the battered technology sector in recent months, analysts say. Investors hunting for decent earnings growth--and perhaps less share-price volatility--have zeroed in on some eatery stocks.

But attractive fundamentals in much of the restaurant business also are luring investors. Many chains have seen several years of improving profit as Americans eat out more frequently and spend more when they do.

"The [casual-dining] industry is concentrating on the right things," said David Overton, chief executive of Calabasas-based Cheesecake Factory. "What you are seeing is a combination of hard work in both food and service, and efforts to modernize their decor," Overton said.

Cheesecake shares have rocketed 95% so far this year, closing up 94 cents at $45.50 on Nasdaq on Monday.

By contrast, the blue-chip Standard & Poor's 500 index is down 3% this year, while the Nasdaq composite index is down 16%.

Overton credits competing chains such as Olive Garden (owned by Darden Restaurants), P.F. Chang's China Bistro and Chili's Grill & Bar (owned by Brinker International) for paying greater attention to their menu offerings and raising industry standards.

Frederick Hipp, chief executive of Los Angeles-based California Pizza Kitchen, said the chain is seeing people eating out more during the course of the week rather than saving a trip to a restaurant for a special occasion. CPK's business is now split evenly between dinner and lunch, he said.

Shares of the wood-fire oven pizza specialist have more than doubled from their initial offering price of $15 in August. They fell $1.50 to $31.88 on Nasdaq on Monday, after hitting a new high of $35 last week.

Increase in Dining Out

The percentage of Americans who have visited a casual-dining establishment three or more times in a month climbed from 61% in the first half of 1998 to 63.3% in the first half of this year, according to a study of 11 urban markets nationwide by Bob Sandelman, a Villa Park restaurant consultant. The average spending per person during that same period rose 4.6% to $12.39.

Increases in dining and the average check are even more pronounced in Southern California, according to Sandelman.

The percentage of people who have visited a casual-dining establishment three or more times in a month jumped from 59.3% to 67.1% during the same time period. The average check rose 7.5% to $11.96.

CPK's Hipp attributes increased dining and spending to the growth in two-income households and to hectic family schedules that have resulted in people eating fewer home-cooked dinners.

A strong economy hasn't hurt, of course.

Even so, Wall Street has a history of being suspicious of restaurant stocks, and for good reasons, analysts say. Consumer tastes are fickle, after all.

What's more, such "theme" restaurant chains as Planet Hollywood and Rainforest Cafe have been big flameouts in recent years.

But investors' lack of interest in many restaurant stocks has made them bargains, some experts say.

"What's happened is that restaurants have had several years of good operating results but little attention from Wall Street, which has been focused on technology and biotechnology," said analyst Andrew Barish of Robertson Stephens in San Francisco.

"The fundamentals of this industry are strong," said analyst Greg Schroeder at Josephthal & Co. in New York. "There's been no food inflation for many years and that has allowed the chains to improve profit margins."

There's also room for growth--at least in the casual-dining category--because the industry is highly fragmented, with no single player or even a handful of chains that dominate.

Moreover, casual-dining chains often start out regionally, honing their concept and business skills. That leaves plenty of room for expansion, their fans say.

CPK, which has 80 sit-down restaurants, plans most of its expansion in markets where it already operates.

"We want to take advantage of our brand name as long as we don't cannibalize sales," Hipp said. But the company is also looking for new markets such as Denver, where it is about to open its third restaurant.

Strong Growth Expectations

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