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Restaurants are joining consumers in re-opening their wallets.
Several chains are showing more of an appetite to invest in new products, store remodels and more marketing as signs emerge that restaurants are cementing a recovery.
The willingness to invest comes after restaurants broadly reined in costs during the downturn by shutting stores, working employees less amid weak demand and cutting back on wasting ingredients. With expenses down to survival-mode levels, restaurants are now reaping healthy profits as consumers begin to emerge from a spending coma.
Investors have taken notice. Most restaurant stocks are trading near 52-week--if not all-time--highs, putting pressure on companies to keep sales momentum going as the year progresses. With high unemployment and potentially higher ingredient costs later this year a weight, the companies that can invest will to stay ahead of the consumer recovery.
"They aren't just riding the rising tide, they're riding the tide with a faster motor," said Matthew DiFrisco, restaurant analyst at Oppenheimer & Co.
Some initiatives planned include McDonald's Corp. (MCD) plunging deeper into beverages with the additions of Frappes and Smoothies coming soon, and spending more than $1 billion to remodel stores around the world. Starbucks Corp. (SBUX) is rolling out its instant coffee, Via, to grocery stores and backing it with advertising later this year, while also investing more behind its packaged coffee business. The coffee chain is also adding ovens in stores to help expand food sales.
Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA), which both joined McDonald's and Starbucks in posting strong sales growth this week, are increasing spending on marketing and developing loyalty programs, while also expanding areas like catering. Other chains, meanwhile, are upgrading in-store televisions or reconfiguring dining room layouts.
Some restaurants are running operating margins near record level, helped by both a leaner structure and low commodities. Thus, even after rewarding shareholders with buybacks or dividends, they have money to put toward increasing sales, analysts say.
McDonald's says remodeling stores, including exterior upgrades, helps those locations post sales growth up to 7% higher than other stores. Starbucks, meanwhile, sees growing food sales, now at 20%, as key to increasing the size of the average transaction, which rose 4% world-wide in the latest quarter.
"It's encouraging to see companies investing in their business rather than closing stores," said Tom Forte, Telsey Advisory Group's restaurant analyst. "Long term, it can translate into a sustained [same-store sales] rebound."
Restaurants that rely more on franchisees may miss out on the boost a broad investment can bring. Franchise agreements generally require some level of store upgrades, though some chains, including Burger King Holdings Inc. (BKC) and Wendy's/Arby's Group Inc. (WEN), are trying to make the case for more sweeping remodels by franchisees.
But if sales start to rise due to the improving economy, operators may balk at the need for a major upgrade to the store. Franchisees are also weighing tens of thousands in higher costs down the road from the new U.S. health-care bill.
"The franchisee community is probably going to be a laggard," DiFrisco said. McDonald's is an exception, DiFrisco said, as the company, which is a landlord to many of its franchisees, also invests a significant amount in makeovers.
Not all investments are paying off just yet. Brinker International Inc.'s (EAT) Chili's Grill & Bar spent $5 million on a revamped menu including tacos and new preparation for its signature ribs in its latest quarter, but sales remained weak as Chili's struggles to wean customers off discounts.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194; email@example.com