Fitch: U.S. Restaurants Face Broad-Based Challenges in 2008

NEW YORK--(BUSINESS WIRE)--The weakening economy, growing pressure on discretionary income and rising food and labor costs will challenge the entire U.S. restaurant industry in 2008, according to Fitch Ratings.

“While some element of optimism remains, revenue expectations have been tempered by most of the major restaurant chains that have reported”

"While some element of optimism remains, revenue expectations have been tempered by most of the major restaurant chains that have reported", according to Carla Norfleet Taylor, Director, Fitch Ratings.

Darden Restaurants, Inc. is projecting its combined same-restaurant sales (SRS) growth to be 2%-3% for fiscal 2008, down modestly from its previous guidance of 2%-4%. Brinker International, Inc. expects SRS to remain slightly negative over the next couple of quarters. According to the report, Fitch expects the casual dining segment to continue to experience average SRS declines in the low to mid-single-digit range during 2008.

McDonald's Corporation estimates that the weak economy will trim 1%-2% off its U.S. SRS; implying approximately 2.5%-3.5% growth in 2008. After showing improvement during the December quarter, YUM! Brands, Inc. believes it can achieve blended U.S. SRS comparisons of 2%-3% in 2008. Burger King Corporation maintained its 6%-7% revenue growth projection for fiscal 2008 stating that it has not seen any slow down in SRS growth. The company's projection assumes world-wide SRS growth of 2%-3%. Fitch views some of these expectations as still somewhat optimistic but does anticipate U.S. SRS growth in the quick-service segment to remain positive.

Inflationary pressure will also continue to be a concern for the industry as labor and commodity costs rise to levels above historical averages. This is in part due to the phasing in of a higher minimum wage and mid-single digit increases in commodity meat costs.

"Due to greater competition for fewer dollars, many restaurants will be less aggressive with pricing", said Taylor. "The margins of restaurants with a higher mix of franchised units will be less directly affected by rising operating costs."

"Strong investment grade companies are generally better positioned to withstand the downturn", said Taylor. Management teams should focus more on navigating through the difficult operating environment and less on shareholder-friendly actions in 2008. Highly leveraged restaurants will be more vulnerable to the economic slowdown given the magnitude of their fixed obligation commitments.

The full Fitch Ratings' outlook report is titled 'U.S. Restaurants/Foodservice: Weakening Economy Will Present Challenges in 2008' and is available at www.fitchratings.com.

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