Restaurants - Standard and Poor's 2007

Industry Surveys
Restaurants
October 18, 2007
Mark Basham Restaurants Analyst Justin Menza Financial Writer
CURRENT ENVIRONMENT..................................................................1 Challenges persist

Mergers and sales across the industry Operating costs on the rise Casual dining sales under pressure Value and convenience bolster quick service restaurants
INDUSTRY PROFILE...............................................................................8 Satisfying the consumers appetite

Industry segments
INDUSTRY TRENDS ...............................................................................10

Some chains undertake aggressive financial policies Competing for customers Fast-food chains move overseas Industry focuses on health Food safety concerns hurt industry Industry susceptible to new federal, state, and local regulations Americans love to eat out
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HOW
THE INDUSTRY
OPERATES .............................................................17
Restaurants: from take-out to full-service Low entry barriers, high risk/return Franchising: a quick way to grow Restaurant management and training Cost structure Creating and testing new foods
KEY INDUSTRY RATIOS AND STATISTICS ...................................................23 HOW TO ANALYZE A RESTAURANT COMPANY .........................................24
Quantitative issues Qualitative issues
GLOSSARY .............................................................................................29 INDUSTRY REFERENCES.....................................................................30 COMPARATIVE COMPANY ANALYSIS .............................................32
THIS ISSUE REPLACES THE ONE DATED APRIL 12, 2007. THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR APRIL 2008.
Standard & Poors Industry Surveys

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VOLUME 175, NO. 42, SECTION 1 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 2 SECTIONS.
C URRENT E NVIRONMENT
Challenges persist
A number of restaurant chains have been subject to acquisitions or have sold off underperforming concepts in 2007, as activist shareholders have put more pressure on firms to increase shareholder value. These acquisitions and disposals have taken place in both the casual dining and quick-service segments of the industry. While poor strategy and execution are partly behind the increase in restaurant merger and acquisition (M&A) activity, the overall operating environment for the industry has become increasingly challenging as well. Restaurants are facing rising costs for both food commodities and labor, which is undermining profitability. This trend looks likely to persist into 2008. While menu price increases may offset some of the margin pressure, sales trends also have weakened. The high price of gasoline and concerns about the US housing market have forced
FASTEST-GROWING US RESTAURANT CHAINS
(Ranked by percentage increase in foodservice revenues)
% CHG. IN REVENUES PREVIOUS CURRENT YEAR YEAR
many consumers to scale back the portion of the household budget allocated toward dining out. While Americans are still eating out, in many cases they are choosing quick-service restaurants over casual dining establishments.
Mergers and sales across the industry

Declining sales and weaker margins have pressured a number of restaurant operators to sell either the whole business or individual restaurant concepts in an attempt to turn around the brands. In many cases, sales were spurred on by activist shareholders looking for a better return on their investments. While private equity buyers have been involved in a number of restaurant mergers in recent years, strategic buyers have reasserted themselves in 2007.
IHOP to buy Applebees

Applebees International Inc. has been struggling, as same-store sales fell in 2005, 2006, and early 2007. Customer traffic has been declining, as higher gasoline prices have, in general, reduced the amount of money consumers spend when dining out and as Applebees has been unsuccessful in differentiating itself from competitors. Margins also have been shrinking, as the companys strategy of owning many of its restaurants resulted in higher costs, due to high real estate prices and construction costs. After coming under fire from investors in particular, Richard Breeden of Breeden Capital Management Applebees began weighing a sale in February 2007. Activist investors had raised concerns about the casual dining chains strategy, highlighting the impact that owning and operating so many restaurants was having on profitability. Breeden was elected to the Applebees board of directors in April, and the company began to review its strategy and the possibility of a sale. In July 2007, pancake house operator IHOP Corp. agreed to buy Applebees for $2.1 billion in cash, with much of the fund-
FISCAL YR. END
Source: Nation's Restaurant News.
OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY
Zaxby's Dec-06 Buffalo Wild Wings Grill & Bar Dec-06 Chipotle Mexican Grill Dec-06 Starbucks Sep-06 Red Robin Burgers & Spirits Emporium Dec-06 Panera Bread Co. Dec-06 Panda Express Dec-06 Ruth's Chris Steak House Dec-06 Quiznos Sub Dec-06 LongHorn Steakhouse Dec-06 Cold Stone Creamery Dec-06 Texas Roadhouse Dec-06 Chick-fil-A Dec-06 California Pizza Kitchen Dec-06 Bojangles' Famous Chicken 'n Biscuits Dec-06 P.F. Chang's China Bistro Dec-06 Little Caesars Dec-06 Carrabba's Italian Grill Dec-06 Chartwells Sep-06 Whataburger Sep-06
36.0 28.4 33.3 21.6 19.1 29.7 24.3 10.4 19.9 15.2 43.3 22.3 13.1 9.4 6.5 10.4 7.4 20.1 12.0 11.5
35.6 32.4 30.8 21.9 21.1 20.3 19.7 19.6 16.4 16.2 16.2 15.2 15.2 13.7 13.1 12.1 12.0 11.9 11.8 11.7
ing of the acquisition coming from an increase in debt financing. The deal will help diversify IHOPs business, which still caters primarily to a breakfast crowd, with a chain that offers lunch and dinner. (As of midSeptember, the deal was expected to close in the fourth quarter of 2007, pending regulatory approval.) To save costs and generate better cash flow to service a higher debt level, IHOP plans to franchise most of Applebees 508 company-operated restaurants, sell the underlying real estate, and enter into leaseback arrangements on those locations. By franchising, IHOP will be able to shift more of the chains operating costs to the individual restaurants and will reduce the amount of money spent on constructing new locations. Franchising the restaurants also will allow IHOP to undertake a whole-business securitization of Applebees assets in order to generate the cash needed to fund the purchase. (For more information on securitizations in the restaurant industry, see the Industry Trends section of this Survey.) Holders of the bonds created through the securitization would be paid through the franchise license royalties that the company will receive from its new and existing franchisees. Royalty revenues generally represent a stable source of cash for the firm, making it easier to meet its obligations to bondholders. IHOP spent several years restructuring its own operations and reinvigorating its brand, and it hopes that undertaking a similar process at Applebees will help to turn around the companys flagging samestore sales and boost profitability. IHOP chief executive officer Julia Stewart had run Applebees domestic operations from October 1998 to November 2001 and is familiar with both the brand and the companys business. Not all Applebees investors have been happy with the announced acquisition. Sardar Biglari, chairman of The Lion Fund LP, believes that IHOPs offer of $25.50 a share for Applebees is below fair market value and does not reflect the benefits of the franchising strategy. Although Biglari owns only 1.4% of Applebees shares, he has been able to pressure other companies to change strategy. He successfully forced Friendly Ice Cream Corp. to put itself up for sale in March 2007, for instance.
Shareholders pressure Wendys

Applebees has not been the only restaurant chain to come under fire from its shareholder base demanding changes in strategy. Like Applebees, fast-food chain Wendys International Inc. has been unable to keep pace with its competitors, in this case McDonalds Corp. and Burger King Holdings Inc. The No. 3 hamburger chain formed a committee in April 2007 to review a potential sale after investor Nelson Peltz, who controls three seats on the Wendys board, began to show signs that he was considering a purchase of the chain. Other shareholders, including Highfields Capital Management LP (which owns 8.5% of the company), also have put pressure on Wendys to sell. Previously, activist shareholders were successful in forcing Wendys to spin off its Tim Hortons Inc. donut chain and sell its Baja Fresh Mexican grill chain. The Tim Hortons initial public offering and the Baja Fresh sale were both completed in 2006. In late July 2007, Peltz said that his Triarc Cos. Inc., which owns the Arbys Restaurant Group chain, is willing to buy Wendys for between $3.2 billion and $3.6 billion. A deal could allow Arbys, primarily a regional restaurant chain, to expand its operations, as Wendys reduces the number of its locations. After credit conditions turned more negative in August and September 2007, it became somewhat more difficult for Triarc or another suitor to mount a successful bid for Wendys. The volatility in the credit markets has made it more expensive for some strategic buyers to raise funds, and private equity funds also have seen their borrowing costs rise. Still, Triarc and Wendys entered into a confidentiality agreement in late August, which suggests a deal may yet get done. If Wendys were unable to find a buyer, however, it could follow another trend in the industry and undertake a recapitalization and share buyback program to boost shareholder returns.
Outback Steakhouse operator taken private

Although more of the recent M&A activity in the restaurant industry has been among strategic buyers, private equity funds have been active in the restaurant industry in recent years because of restaurant chains predictable cash flows and thus their greater capacity for debt. In July 2007, an investor group led by Bain Capital Partners LLC and
Catterton Management Co. LLC took OSI Restaurant Partners Inc. private through a leveraged buyout worth $3.5 billion. The buyout, which was announced in November 2006, came after activist hedge fund Pirate Capital LLC raised concerns about the casual dining chains strategy earlier in 2006 and began advocating a breakup. OSI had been suffering from falling sales as higher gasoline prices reduced consumer spending and from higher costs associated with developing its brands, which include Outback Steakhouse, Carrabbas Italian Grill, Bonefish Grill, and Flemings. Pirate Capital tried to pressure management to spin off many of these brands. Ultimately, Pirate Capital was unable to force management into taking action on its proposal and the hedge fund eventually sold its entire position in the restaurant chain. OSI Restaurant Partners agreed to a private equity buyout three months later. The buyout is likely to dampen the companys growth prospects in the short term, but being private will allow the company to focus on reenergizing the brands and become more competitive without any external shareholder pressure to immediately enhance value.
al Inc., which operates the LongHorn Steakhouse chain, for $1.4 billion. The deal will allow Darden to continue to operate a range of different restaurant concepts, which offers economies of scale in purchasing and in attracting workers. In August 2007, Brinker put its Macaroni Grill operations up for sale, as the unit struggled to attract customers in the crowded casual dining segment. Macaroni Grill is Brinkers second-largest brand after Chilis Grill & Bar, but it failed to compete effectively against Dardens Olive Garden chain. Same-store sales were flat or lower for every month in the companys fiscal year ended June 2007. Like Darden, Brinker hopes to maintain a range of casual dining brands and has said that it may look to purchase another concept to replace the Macaroni Grill if the opportunity arises. In addition to Chilis, it also runs Maggianos Little Italy and On the Border Mexican Grill & Cantina.
Operating costs on the rise

As some of these deals highlight, both quick-service restaurants and casual dining chains face ongoing challenges related to rising costs. Food prices and labor costs, in addition to rent and utility costs, have been rising throughout 2007, which has put pressure on the industrys operating margins. Although many restaurant chains are able to use forward pricing to lock in their food bills for an extended period of time, commodity prices continue to rise. According to the US Bureau of Labor Statistics, a division of the US Department of Labor, wholesale food prices rose 6.2% in the 12 months through July 2007. Chicken prices were up 17.7% in the period, while dairy prices rose 29.8%. Beef and veal prices slipped 2.6%, while pork prices rose a slight 0.5%. The increase in chicken prices can be partly attributed to a rise in the price of corn, which is used as a feed. Corn prices have been rising due to increased production of the biofuel ethanol, which utilizes corn as a feedstock. Higher corn prices also have led to higher prices for corn syrup, which is used as a sweetener in soda. The popularity of chicken items for both casual dining and quick-service firms, and the inability of many firms to increase prices significantly, mean
Other chains shed underperforming units

Some restaurant chains have been selling off noncore assets in order to address flagging sales in certain brands and boost the profitability of the overall firms. McDonalds has sold off its noncore restaurant brands, while Brinker International Inc. and Darden Restaurants Inc. also have divested underperforming units. In the third quarter of 2007, McDonalds completed the sale of its struggling Boston Market chain to Sun Capital Partners. The sale follows McDonalds spinoff in 2006 of Mexican chain Chipotle Mexican Grill. McDonalds will now focus exclusively on expanding its core McDonalds brand globally. In May 2007, casual dining-chain operator Darden announced plans to sell its Smokey Bones Barbecue & Grill due to slow sales in the broader casual dining market. The chains menu also did not cater to a wide enough clientele to make it successful. Despite the difficult operating environment for casual dining chains in general, Darden wasted little time in replacing the brand. The company announced in August 2007 that it was acquiring RARE Hospitality Internation-
PORK AND POULTRY PRICES CLIMB

(Index, 1982=100)
170 160 150 140 130 120 110 100 90 80 70 1997 98 99 00 01 02 03 04 05 06 2007
Beef & veal Chicken Pork
Source: US Bureau of Labor Statistics.
that many restaurant chains are likely to absorb much of the increase in chicken prices. Rising dairy and cheese costs are squeezing margins at pizza chains. This has forced some chains, such as Dominos Pizza Inc., to cut back on their promotions and may ultimately force the industry to raise pizza prices in order to cope with the higher cheese costs. Labor costs are climbing for the restaurant industry, following the passage of new legislation raising the federal minimum wage. In July 2007, the minimum wage for non-tip employees rose $0.70 to $5.85 an hour, and it will rise $0.70 more in both 2008 and 2009, bringing the minimum wage to $7.25 an hour. Since most chains compete for these same unskilled minimum-wage employees with many other employers, the increase in the minimum wage has put upward pressure on wages. Hourly wages in the leisure and hospitality industry rose 7.0% in the 12 months through August 2007, according to the Bureau of Labor Statistics. This change will affect some chains more than others. Thirty states already have a minimum wage rate in excess of the new federal minimum wage, which may limit the impact to those chains operating in states where the federal rate prevails. Additionally, some larger national chains, such as McDonalds, already offer wages in excess of the mandated minimums. Some chains, such as Texas Roadhouse Inc., operate in regions where the average income is somewhat lower than the national average; these companies are likely to see labor costs rise more in line with the increase in the federal minimum wage. A number of companies have reported that these higher commodity and labor costs
are eating into profitability. Wendys saw margins come under pressure from higher food costs in the first half of 2007, while Brinker Internationals margins were pressured by various state minimum wage increases during its fiscal year ended June 2007. Dominos Pizza reported that higher commodity, labor, and utility costs have been squeezing its margins in 2007. Some firms have been able to overcome these challenges with higher pricing. According to the National Restaurant Association, an industry trade group, average menu prices increased 3.1% in 2006, the same rate of increase as in 2005, continuing a trend in which menu prices have risen at their highest rate since 1991. The industry group forecasts that menu prices will rise by 2.9% in 2007. However, we note that a growing number of chains were attempting to put through additional price increases in late summer, suggesting to us that there is a bias toward even higher price increases in the industry. Chipotle Mexican Grill was able to offset higher food costs with menu price increases, while Burger Kings rapid sales growth minimized cost concerns. Still, these commodity price trends are likely to continue to plague the restaurant industry into 2008.
Casual dining sales under pressure

In addition to higher costs, casual dining chains are suffering from decreased customer traffic. Consumers are spending less money on dining out as gasoline prices remain high and take up a more significant portion of the household budget. Those consumers that continue to eat at casual dining chains may be forgoing appetizers and pricey beverages as a way to cut down on their expenses. Additionally, the slowdown in the housing market and tighter borrowing conditions are likely to continue pressuring consumer spending and may result in weaker sales for some casual dining chains during the remainder of 2007 and into 2008. Competition has been fierce, and many companies have had a hard time distinguishing themselves in the market place. The slowdown at Applebees and the inability of the Macaroni Grill to gain traction against the Olive Garden chain are examples of the more challenging competitive environment. In addition, many of these chains expanded too
rapidly, at a time when diners were beginning to cut back on casual-dining outings. Overall, the National Restaurant Association is forecasting a 5.1% increase in sales at full-service restaurants in 2007, after a 4.7% increase in 2006. On an inflation-adjusted basis, sales are expected to rise 2.1% after a gain of 1.4% in the prior year. Much of this increase is likely to be attributed to higher menu prices and not to any increase in customer traffic. Darden Restaurants. Darden has fared somewhat better than its competitors so far in 2007. The countrys largest casual dining chain (based on sales) reported that its overall sales rose 4% in the fiscal year ended May 2007, helped along by increased samestore sales at its Olive Garden and Red Lobster chains. Net earnings from continuing operations were up 8% in the fiscal year. The companys current fiscal year is off to a relatively strong start. In the first quarter of fiscal 2008, same-store sales at its Red Lobster chain rose 7.0%, reflecting both an increase of 3% in guest traffic and an increase of 4% in check average. The increase in check average was a result of higher prices and changes to the menu. In the first quarter of fiscal 2007, Red Lobster saw a 2.1% decline in same-store sales. To combat any slowdown in sales, the chain has launched a new marketing campaign and has introduced a daily rotating menu of fresh fish options. At the Olive Garden chain, same-store sales climbed 4.8%, reflecting increases of about 3.5% in check average and 1% to 1.5% in guest traffic. Most of the higher check averages at the Olive Garden stemmed from higher prices. Darden is looking for same-store sales growth of 2% to 4% for its Red Lobster and Olive Garden chains in fiscal 2008. Net earnings per share growth is expected to be 10% to 12%. Much of this growth will come from an increase in the number of Olive Garden restaurants that the company plans to open in fiscal 2008. Brinker International. Brinker International reported declining same-store sales for its fiscal year ended June 2007. The operator of Chilis said that same-store sales fell 2.7% in the period, after rising 1.5% in fiscal 2006. These declines came despite an
increase in pricing, which had a positive 1.6% impact on same-store sales. Much of the weakness was at Brinkers Macaroni Grill chain, which saw a decline of 3.2% in same-store sales. As discussed previously, the company plans to sell off this underperforming chain. The companys same-store sales were somewhat more mixed in July 2007. Overall same-store sales were down only 0.1% in the month, compared with a 2.7% decline in July 2006. Same-store sales were down 1.9% in June 2007. Higher menu prices, and not increased traffic, were primarily behind the improvement in same-store sales in July. Applebees. The casual dining chain said that its systemwide domestic sales dropped 2.5% during the first half of its fiscal year ended July 1, 2007, compared with a 0.4% decline in the first half of its fiscal 2006. The decline was attributed to an ongoing slump in customer traffic, which more than offset a higher average check level. Applebees, like many of its competitors, has increased menu prices to make up for declining customer traffic.
Value and convenience bolster quick service restaurants

Quick-service restaurants have fared somewhat better than their casual-dining counterparts in 2007, as consumers look for value and as fast-food chains introduce innovative menu items and longer hours to attract more customers. Still, the fast-food industry takes the risk that customers will trade down from premium menu items toward the value menu items, which would put more pressure on sales. The National Restaurant Association is forecasting an increase in fast food restaurant sales in 2007 of 5.0% (2.1% on an inflation-adjusted basis). Growth has been relatively steady, with sales rising 5.1% in 2006 and 5.0% in 2005.
The battle for breakfast

Fast-food chains have been focusing on the underserved breakfast market to increase customer traffic and sales in 2007, and to challenge the dominance of McDonalds in the segment. During the year, Burger King launched a breakfast value menu nationally
that includes 10 menu items priced at about $1.00. The breakfast offering was a followup to the companys 2006 value menu, which featured 10 items, including the Whopper Jr., priced between $1.00 and $1.39. Wendys International wants to introduce breakfast at 20% to 30% of its locations (including both franchises and store-owned restaurants) in 2007, and have breakfast in more than half of its stores in 2008. In late August 2007, the firm said that it was offering its breakfast menu in 500 restaurants and that it was on track to expand into 750 restaurants by the end of the third quarter. The company has said that breakfast sales at existing units could add $160,000 per year to average sales per restaurant in a few years time. Even Starbucks Corp., the coffee titan, is serving hot breakfast sandwiches at a limited number of outlets across the country. Yum! Brands plans to introduce breakfast items at its Taco Bell chains, and Subway (operated by Doctors Associates Inc.) plans a breakfast menu as well. Jack in the Box Inc. also continues to introduce new breakfast items, including a Sirloin Steak and Egg Burrito. McDonalds has vowed to fight its competitors. The chain plans to introduce its own $1 morning menu items and is pushing to get all its US restaurants open by 5 a.m. New coffee flavors, iced coffee, and cinnamon rolls also have been introduced to extend the chains lead in the breakfast market.
growth in its overseas markets. Net income, excluding the impact of the sale of 1,600 company-owned restaurants in Latin America to a franchisee, also climbed 12%. The strength has continued into July, with samestore sales rising 6.5% overall. US same-store sales climbed 4.3%, while European samestore sales rose 7.7%. Its Asian operations reported same-store sales growth of 9.9%. In addition to selling its noncore brands, McDonalds has sold certain companyowned restaurants in foreign markets, namely Latin America, to licensees, thus reducing future capital requirements and raising cash. This will enhance its ability to meet its goal of deploying $15 billion to $17 billion over the 2007 to 2009 period on dividends and stock buybacks. In September 2007, it raised its annual dividend by 50% to $1.50. Yum Brands. Yum Brands has been benefiting from strong international growth, which is offsetting sluggish sales in the US market. In the first half of 2007, same-store sales systemwide fell 2%, after rising 3% in the year-earlier period, due primarily to weak sales at its Taco Bell unit following more than 70 cases of E. coli poisoning at some New York City metro area restaurants. Operating profits were also weak in the United States, due to higher commodity and labor costs. Although growth was weak in the US market, Yum Brands has aggressively expanded overseas, which has helped offset the slump in US sales. Its international operations reported a 5% increase in same-store sales in the second quarter of 2007, spurred on by 7% growth in China. Burger King. No. 2 hamburger chain operator Burger King Holdings reported that its sales for the fiscal year ended June 2007 rose 9% to $2.2 billion, as same-store sales climbed 3.4%. The chain attributed the strong growth to breakfast and late-night sales, as well as to new menu promotions such as the Western Whopper. Strong growth in Europe also helped results in the period, as the company opened 107 new restaurants in the region. The chains restaurant margin as a percentage of sales decreased 0.2 percentage points in the year, due to promotion costs and higher food and packaging costs. The company was able to offset some of the higher costs in the US with reduced labor expenses.
Sales results vary by chain

While the trends have been generally more favorable for quick-service chains than for casual-dining restaurants, as consumers look to stretch their dining dollars, there remains some variation among individual company results due to their strategy and execution. International sales also are helping a number of the larger chains. McDonalds. Since 2003, McDonalds has been one of the strongest performing quick-service restaurant chains. Having shed its Chipotle Mexican Grill and Boston Market units, the firm is now focused exclusively on growing its core hamburger chain. During the first half 2007, the companys revenues increased 12% (8%, excluding currency benefits), helped along by its focus on the breakfast market, menu innovation, and
Wendys. As highlighted previously, Wendys International has been struggling with its strategy in the US market. Like McDonalds, it has shed noncore restaurant brands in order to focus on the core hamburger business. Still, Wendys has had trouble competing. In June, the company cut its 2007 earnings forecast due to weaker-than-anticipated same-store sales and quickly rising commodity costs. The company said that samestore sales climbed 3.8% in the US in the first quarter, but rose only 0.7% in the second quarter.
I NDUSTRY P ROFILE
Satisfying the consumers appetite

The US foodservice industry comprises a large and varied range of away-from-home eating facilities: everything from commercial eating and drinking places (restaurants, bars, cafeterias, and so forth) to food contractors
PROJECTED US FOODSERVICE INDUSTRY SALES
(In billions of dollars)
2006 2007
Commercial foodservice, total Commercial eating & drinking places1 Full-service restaurants Limited-service restaurants Commercial cafeterias Social caterers Ice cream, frozen custard, yogurt stands Bars/taverns Food contractors Lodging places Other commercial sales Institutional foodservice2 Military foodservice3 TOTAL US FOODSERVICE SALES
466.7 360.4 172.8 142.9 5.2 5.7 18.5 15.3 34.0 25.4 46.9 42.6 1.8 511.2
491.2 379.1 181.6 150.1 5.4 6.1 20.2 15.8 36.0 26.8 49.2 43.8 1.9 536.9
and institutional providers. The National Restaurant Association, an industry trade group, estimates that overall US foodservice industry sales were $511.2 billion in 2006, up 5.0% from 2005. Forecasts are for sales of $536.9 billion in 2007. (For additional details and industry breakdowns, see the table titled Projected US foodservice industry sales.) This Survey focuses on the restaurant sector of the foodservice industry.
Industry segments
The publicly traded companies that dominate the restaurant industry are varied. They range from fast-food operators, such as McDonalds Corp., Burger King Holdings Inc., and Wendys International Inc., to companies that run full-service chains, such as Darden Restaurants Inc. (operator of Red Lobster and Olive Garden restaurants), Brinker International Inc., and Applebees International Inc. (expected to be acquired by IHOP Corp. in the fourth quarter of 2007). High-priced fine-dining restaurants are not covered by this Survey, although they are included in the aggregate data presented earlier. Such restaurants usually are run by individuals, families, or limited partnerships, are typically located in the larger cities, and cater to a small but growing group of affluent Americans.
Note: Totals may not add due to rounding. 1Only for establishments with payroll. 2Sales by institutional organizations (including businesses) operating their own foodservice. 3Continental United States only. Source: National Restaurant Association.
RESTAURANT MARKET SHARES 2006

TOTAL: $191.6 BILLION Buffet 1.6%
Snack 2.6% Hotel 2.9% Coffee 3.1% Family 5.4%
Convenience store 1.1% Bakery caf 1.0% Other 2.5%
Fast food
Quick counter service, meals to eat in or take out, low prices, and plain dcor are features common to fast-food (or limited-service) restaurants. These outlets tend to specialize in a few menu items: hamburgers, pizza, sandwiches, and/or chicken. According to estimates by the National Restaurant Association, sales at limited-service establishments in the United States rose 5.2% in 2006, to $142.9 billion (roughly 28% of total US foodservice industry sales). The fast-food industry is less fragmented than its full-service counterpart. This is partly a result of the segments focus on quick service and price. Larger chains tend to have
Chicken 6.3%
Sandwich 40.6%
Pizza 6.5%
Contract 10.5% Casual dining 15.9%

Source: Nations Restaurant News.
LARGEST US RESTAURANT CHAINS

(Ranked by US systemwide foodservice sales)
US SALES (MIL.$) CHAIN 2005 2006 % CHG. 2005 US UNITS 2006 % CHG.
McDonald's 25,643 Burger King 8,448 Wendy's 7,780 Subway 7,170 Taco Bell 6,200 Starbucks 4,935 KFC 5,200 Pizza Hut 5,300 Applebee's 4,192 Dunkin' Donuts 3,850 Chili's Grill & Bar 3,270 Sonic Drive-In 2,995 Domino's Pizza 3,317 Arby's 2,930 Jack-in-the Box 2,700 Olive Garden 2,611 Outback Steakhouse 2,599 Red Lobster 2,502 Dairy Queen 2,400 Denny's 2,245
27,144 8,428 7,805 7,710 6,300 6,017 5,300 5,200 4,543 4,300 3,515 3,318 3,224 3,090 2,810 2,801 2,619 2,548 2,405 2,290
5.9 (0.2) 0.3 7.5 1.6 21.9 1.9 (1.9) 8.4 11.7 7.5 10.8 (2.8) 5.5 4.1 7.3 0.8 1.8 0.2 2.0
13,727 7,207 6,018 19,620 5,845 7,188 5,443 7,566 1,732 4,815 1,085 3,031 5,092 3,376 2,049 576 775 651 4,752 1,503
13,774 7,136 5,948 20,755 5,608 8,472 5,394 7,532 1,841 5,370 1,210 3,186 5,143 3,458 2,079 608 786 651 4,728 1,468
0.3 (1.0) (1.2) 5.8 (4.1) 17.9 (0.9) (0.4) 6.3 11.5 11.5 5.1 1.0 2.4 1.5 5.6 1.4 0.0 (0.5) (2.3)
sults varied widely. McDonalds was the leader, with an average of about $1.8 million in annual per-unit sales, followed by Jack in the Box Inc. ($1.34 million), Chipotle Mexican Grill Inc. ($1.3 million), Wendys ($1.3 million), and Carls Jr. (a unit of CKE Restaurants Inc.; $1.2 million). Pizza. The nations largest purveyor of pizza is Pizza Hut, a division of Yum Brands (sales of $5.2 billion in 2006), followed by Dominos Pizza Inc. ($3.2 billion). Papa Johns International Inc. ($1.9 billion) and Little Caesars (a division of Ilitch Holdings Inc.; about $830 million) also are large, nationally known pizza concepts. These four account for more than 90% of the aggregate sales in the pizza chain restaurant segment; each is significantly larger than the No. 5 chain, Chuck E. Cheeses (operated by CEC Entertainment Inc.; about $588 million). In 2006, the pizza chain industry saw a rise in customer traffic, as the economic pressures caused by higher gas prices forced consumers to pare back their casual dining visits. This was likely only an aberration from a longerterm trend, in which the growth of take-out food capabilities at full-service restaurants and the creation of more diversified menus at fastfood competitors led consumers to pursue other options. In response, competition among pizza chains has recently centered on new product offerings and pricing. Chicken. KFC Corp. (a division of Yum Brands) towers over all other chicken chains, with US systemwide sales totaling an estimated $5.2 billion in 2006. The next largest competitors are Chick-fil-A Inc. ($2.3 billion), Popeyes Chicken & Biscuits (operated by AFC Enterprises Inc.; $1.5 billion), and Churchs Chicken (operated by Cajun Operating Co.; $772 million). Revenue growth at Chick-fil-A has increased more quickly than at its competitors over the past several years, fueled by aggressive expansion and high customer satisfaction scores, especially for speed of service. The latter is a category in which the company maintains the highest scores in the fastfood industry.
Source: Nations Restaurant News.
an advantage because their economies of scale allow them to develop the operational expertise to improve efficiency and speed transactions, and to purchase supplies more cheaply. Sandwich chains. The main attraction at a sandwich chain is the hamburger. However, many chains offer a choice of main course items, such as toasted sandwiches and pita sandwiches filled with chicken or vegetarian mixtures. Tacos also fall into the sandwich category. Salads are offered at many chains as a popular and healthy alternative to sandwiches. Several large competitors with chains that are generally recognizable throughout the nation dominate the sandwich chain category. With $27.1 billion in US sales in 2006, McDonalds is the largest fast-food chain by a wide margin. However, the concept faces strong competition from Burger King (roughly $8.3 billion in sales in the fiscal year ended June 2007), Wendys (approximately $7.8 billion), Subway (operated by Doctors Associates Inc.; $7.7 billion), and Taco Bell, a division of Yum! Brands Inc. ($6.0 billion). In 2006, average per-unit annual sales for the 10 largest sandwich chains were $1.1 million, according to data from company reports and industry publication Restaurants & Institutions (R&I). However, company re-
Full service
All full-service restaurants offer sit-down service for dinner, though their price points
range from low to high. These restaurants have much higher per-unit sales volume on average than do fast-food outlets. According to estimates from the National Restaurant Association, sales at full-service restaurants totaled an estimated $172.8 billion in 2006, up 5.2% from 2005. Casual dining. Casual dining chains encompass a host of restaurant types, including seafood, Asian, and Italian. The top 10 casual dining chains posted average per-unit sales of $3.8 million in 2006, according to data from company reports and Restaurants & Institutions (R&I). Ranked by sales per unit, The Cheesecake Factory Inc. was No. 1 in 2006, with $10.1 million sales per unit; total sales were $1.1 billion. P.F. Changs China Bistro Inc. finished second ($5.3 million per unit; $675 million in total sales), followed by Olive Garden ($4.2 million; $2.5 billion in the fiscal year ended May 2007) and Red Lobster ($3.6 million; $2.5 billion). Applebees Neighborhood Grill & Bar led the segment in 2006 with $4.5 billion in total systemwide sales, followed by Chilis Grill & Bar (operated by Brinker International; $3.5 billion in the fiscal year ended June 2007) and Outback Steakhouse (operated by OSI Restaurant Partners Inc.; $2.6 billion). Family restaurants. A family restaurant aims to appeal to customers of all ages by offering a relaxed atmosphere, low prices, and menus geared to both childrens and adults palates. These restaurants are sometimes referred to as midscale. The Dennys chain (a division of Dennys Corp.) retained its leading position in 2006, with systemwide sales of $2.3 billion. International House of Pancakes (a division of IHOP; $2.0 billion) and Cracker Barrel Old Country Store (a division of CBRL Group Inc.; $1.75 billion) were in second and third place, respectively. Cracker Barrel restaurants contain gift shops that contribute more than 20% of sales. As a result, sales per unit averaged an estimated $3.8 million in fiscal 2006 (ended July 2006). This was well ahead of Bob Evans restaurants (operated by Bob Evans Farms Inc.; $1.54 million per unit; $1.07 billion total sales in the year ended April 2007), Perkins Restaurant and Bakery (a division of Perkins & Marie Callenders Inc.;
$1.24 million; $594 million), and International House of Pancakes ($303 million per unit). Grill/buffet restaurants. Grill/buffet restaurants are casual locations that specialize in grilled items such as steak and chicken. Typically, they feature self-service bars with selections of salads and desserts. Golden Corral Corp. (a division of Investors Management Corp.) and Ryans Family Steak Houses (a division of Ryans Restaurant Group Inc., itself owned by Buffets Holdings Inc.) are the largest grill buffet restaurant chains, with systemwide US sales of $1.4 billion and about $825 million, respectively, in 2006. Ponderosa Steakhouse (a division of privately owned Metromedia Co.s Metromedia Restaurant Group) held the No. 3 spot, with $406 million in sales. Golden Corral surpassed Ryans for the highest average sales per unit: $2.9 million versus $2.4 million, respectively.
Specialty
Within the restaurant industry, there are chains that do not easily fit into specific categories, due to the kind of product they sell or the way in which they serve the product. Examples include bars and taverns, caterers, and snack and beverage bars. These loose categories accounted for sales of approximately $44.7 billion in 2006, up by nearly 6% from 2005. Starbucks Corp. is perhaps the best example of a restaurant chain thriving in the specialty area of the industry. With more than 8,830 locations in the United States and around 12,440 worldwide, Starbucks reported revenues of approximately $7.8 billion in its fiscal 2006 (ended October 1, 2006). While Starbucks does sell food, the company specializes in selling coffee products. Other examples of chains specialized by product include Dunkin Donuts and Baskin-Robbins (both owned by Dunkin Brands Inc.) and Krispy Kreme Doughnuts Inc.
INDUSTRY TRENDS
The restaurant industry is highly competitive. This has forced operators to find ways to continue to boost market share, to find and retain employees, and to control costs, as they strive to maximize profits.
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Some chains undertake aggressive financial policies

Many restaurant chains have undertaken business securitizations in 2006 and 2007 that may leave them susceptible to financial distress due to tougher business conditions for the industry. Several of these restaurant operators were already struggling with strained cash flows, and the aggressive financial policies have only added to the difficulties. Companies such as Sonic Corp., Dunkin Brands Inc., Dominos Pizza Inc., and IHOP Corp. have completed or announced wholebusiness or corporate securitizations, which are structured much like traditional securitizations in the mortgage market. The company takes a revenue stream, such as franchise license fees, and securitizes it in order to use the funds to either buy back stock or raise funds to take the company private through a leveraged buyout. Securities backed by all types of assets, ranging from mortgages and auto loans to credit card receivables, have evolved over the last two decades to become standard corporate financing practice. The restaurant industry and its bankers now have extended the financing technique to franchise fees, and even the power of company brands, by issuing bonds with future licensing and royalty payments slated to help pay off the interest and principal. At the extreme, this type of transaction is essentially a securitization of most of the companys business, leaving it with limited funds for expansion and liquidity needs. In August 2006, Sonic, the regional fastfood operator with locations in the Southeast, Southwest, and Midwest, announced a $560 million share repurchase program that it intended to fund through bank loans of around $775 million, while also paying off some existing debt. Sonic ended up buying back slightly more than $405 million of its stock, but it still had significant debt from the bank loans. To repay those, the company raised $600 million in December by selling notes backed by Sonics franchising assets and real estate. The notes have an expected life of around six years. The securitization effectively allowed Sonic to extract future cash flows from the business, as interest and the amortization of principal on the notes would be serviced by the cash flows from Sonics franchising businesses.
Another example of a corporate securitization was the $1.7 billion transaction that Dunkin Brands completed in June 2006. Proceeds of the bonds were used to pay down around $1.5 billion in debt that was part of the financing for the $2.4 billion buyout of Dunkin Brands in December 2005 by the Carlyle Group, Thomas H. Lee Partners LP, and Bain Capital LLC. The five-year bonds, which pay interest only and have a final principal payment at maturity, are backed by various revenue streams from the companys franchised restaurants under the Dunkin Donuts, Baskin-Robbins, and Togos brands. Real estate payments from franchisees and licensing fees paid by outside companies (to make Baskin-Robbins ice cream) are additional collateral that back the bonds. Most of the bonds are AAA-rated because of the quality of the cash flows and an insurance guaranty provided by Ambac Assurance Corp. This allowed Dunkin Brands to save substantial debt financing costs because its corporate credit rating (B) is well below investment grade. Dominos also undertook a securitization of its franchise revenues. On March 12, 2007, the pizza chain purchased 2.242 million shares under a Dutch auction tender offer, for $30 each. To fund the share repurchase and debt repayments, Dominos took out a $1.35 billion bridge loan from banks. In a plan similar to the two-step process undertaken by Sonic, Dominos paid off the bridge loan through a $1.85 billion assetbacked securitization in April. Those bonds are backed by cash flows from the companys franchise-related agreements, product distribution agreements, and license agreements on its intellectual property. The securitized revenue streams represent substantially all of the companys existing revenue-generating assets. Dominos returned much of the $1.85 billion in proceeds to shareholders. The company also gave existing shareholders the opportunity to sell if they felt uncomfortable with the amount of leverage Dominos was assuming. The company was willing to tender up to 15 million shares at a premium to what was in the market, but only 2,242 shares were tendered. Finally, IHOP, which is planning to acquire Applebees, is considering raising $2 billion in cash for its purchase of the casual dining chain by securitizing Applebees business. Pending
11
regulatory approval, the deal is expected to close in the fourth quarter of 2007.
ing breakfast options, and many are catering to a late-night clientele by extending operating hours.
Competing for customers

Multibrand companies proliferate
To improve or simply maintain market share in the competitive restaurant industry, companies employ strategies to improve consumer choice, convenience, and value. Techniques include adding cuisine types, discounting prices to attract customers, expanding takeout service, and using technology to improve customer satisfaction. Driven by demographic changes, many restaurants have begun to diversify their menus across various cuisine types. For instance, with the Hispanic and Asian-American segments growing at a faster pace than the overall US population, many restaurants are developing new products to target those groups tastes, often attracting other customers in the process. The Hispanic market has become an increasingly important focus for the restaurant industry, reflecting this communitys rising importance in the US economy. According to the US Census Bureau, 14% of the US population (about 40 million people) descends from Spanish-speaking countries or regions. At recent growth rates, the group is expected to rise to 25% of the population by 2050. As a result, many concepts have adjusted their menu selections to cater to this group. Jack in the Box Inc. recently introduced taquitos to its predominantly western US market, where they are likely to appeal to the regions large Mexican-American population as well as to non-Hispanic diners. Yum! Brands Inc. and Jack in the Box have stepped up pursuit of the Hispanic market through their Taco Bell and Qdoba chains, respectively. Besides menu development, each of these companies has increased its sophistication with respect to marketing, hiring, and recruiting franchisees with advanced knowledge of the broad and diverse Hispanic community. Wendys is actively pursuing Hispanic customers in its marketing program through media sources that are popular with this group. Jack in the Box offers classes for English as a second language to attract Hispanic employees. Restaurants are extending their menus to draw in both value-conscious and premium customers. More fast-food chains are offerMany companies are developing portfolios of restaurants for growth and diversity. Of the top 100 restaurant companies, as measured by industry trade consultant Technomic Information Services, 17 managed three or more restaurant concepts in 2006. In 1980, about six companies in the top 100 did so. There are two main reasons for the expansion into new chains. First, adding new concepts is a strategy designed to boost long-term growth in sales and earnings. Because customer tastes are fickle, companies must come up with new ideas to stimulate demand. Second, the strategy gives a company the advantages of diversification, as success in some of its concepts can provide a buffer against the risk of poor performance in others. Full-service chains are trying to capitalize on their popularity by opening new concepts, but success has varied. Darden Restaurants Inc. opened its first Smokey Bones Barbeque & Grill in late 1999, but it put the concept up for sale in 2007 as it failed to gain traction in the marketplace. The company plans to acquire RARE Hospitality International Inc., which operates LongHorn Steakhouse, to replace Smokey Bones. Darden Restaurants also operates 23 Bahama Breeze units, a concept it first tested in 1997. Some fast-food purveyors are developing multiconcept operations in an attempt to diversify their businesses, mainly through acquisitions of quick-casual concepts. Results, however, have been mixed. In 2002, Jack in the Box took over Qdoba, a quick-casual concept specializing in Mexican-style foods. Same-store sales growth at Qdoba rose 5.9% for the year ended October 1, 2006, and by 4.2% for the nine-month period ended July 8, 2007. In contrast, Wendys acquisition in 2002 of Baja Fresh, another quick-casual Mexican concept chain, failed to produce strong sales results. Wendys, which paid about $245 million for Baja Fresh, sold the chain in 2006 to an investor consortium for only about $31 million. Yum Brands has taken the multiconcept idea a step further, seeking to multibrand individual restaurants by incorporating more
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Easier than home cooking

The home meal replacement (HMR) market is of particular interest to restaurant operators. The strong demand for takeout food, prepared and packaged for busy customers to eat at home, should continue to grow solidly over the next few years. According to Technomic, takeout sales account for about 60% of total sales at limited-service chains. Fast-food titan Wendys has been experi-
13
than one concept under a single roof. The company believes that by combining two or more of its five major concepts (Taco Bell, KFC, Pizza Hut, Long John Silvers, and A&W), it will draw customers to its locations by creating more choice. It also expects to leverage additional sales against each locations fixed costs, especially real estate. Yum Brands believes that multibranded sites achieve 20% to 30% higher sales, on average, and derive at least a 30% increase in average cash flow per site. While many restaurant companies choose to pursue a multibrand strategy, it is important to note that, in recent years, some companies have abandoned this strategy. In order to simplify operations and to improve focus on core brands, they have instead chosen to divest some chains. One example is McDonalds Corp.; several years ago, it acquired Donatos Pizza, Boston Market (formerly Boston Chicken), and Chipotle Mexican Grill, in order to augment growth prospects. Since changing management teams in 2003, however, the company has decided to focus on improving its existing McDonalds units. The company has since sold its interests in Donatos. In 2006, it completed the initial public offering (IPO) of Chipotle and subsequently spun off its remaining Chipotle interest. The company also sold its Boston Market business to private equity firm Sun Capital Partners in 2007. Similarly, in addition to the sale of Baja Fresh, Wendys sold 18% of its Tim Hortons Inc. concept in an IPO in March 2006 and spun off its remaining interest in Tim Hortons in September 2006. In the past two years, while still pursuing a multibrand strategy in casual dining, Brinker International Inc. sold its Cozymel, Big Bowl, and Corner Bakery concepts. The company will focus its energies on its remaining core brands, especially Chilis.
menting recently with a drive-through-only prototype restaurant. Although takeout food has always been a focus for quick-service restaurants, it has received similar attention from casual-dining operators only in recent years. The constant drive to increase their return on assets has led full-service chains to invest significant sums to improve pick-up access, packaging, and menu development. According to Technomic, takeout food has been growing at an annual rate of 10% over the past three years, about twice the average rate of growth of the overall restaurant industry. Leading in this category was Outback Steakhouse, which has aggressively sought takeout customers by retrofitting all of its units to serve them. Since 2004, Applebees has developed significantly improved takeout packaging and rolled out curbside delivery service at its restaurants. It also has begun to test technology that would enable it to accept credit cards for payment with handheld remote devices. In 2006, takeout sales accounted for 9.7% of Applebees systemwide sales. The buffet restaurant segment is also beginning to experiment with takeout. Golden Coral Corp. is testing takeout stations at 34 franchised locations, charging customers by the pound. Lubys Inc., where takeout accounts for about 15% of systemwide sales, rolled out a curbside-to-go prototype in one of its Texas restaurants in 2007. Buffets Holdings Inc., which owns the Ryans Grill & Buffet Bakery chain and others, is looking for ways to introduce takeout to its all-youcan-eat buffet formats. The challenge for many of these chains is to not undermine the existing concept by cannibalizing sales or disrupting the normal operating flow of the restaurant. Although an increasing number of restaurants are seeking ways to win in the growing and lucrative carryout market, success in this sector is not guaranteed, and pitfalls are manifold. Competition is everywhere from local food stands to casual restaurants to supermarkets that offer takeout and delivery. In serving the takeout market, supermarkets have some advantages: a successful formula that they have used for years, and experience in managing food spoilage and wastage to avoid hurting profitability. In contrast, restaurants are inexperienced in this business segment and are bound to have dif-
ficulty in gauging demand, average order size, and quantity of food to order and prepare. They also have the disadvantages of higher cost structures and labor costs that comprise a higher percentage of sales. The higher labor costs and food wastage can erode their profitability in the takeout sector. Standard & Poors anticipates that, over time, full-service casual dining and fastgrowing quick-casual chains will gain a larger share of this market. However, they will remain second to limited-service chains, where takeout has always been a significant part of the business. Supermarkets will remain major players in takeout food and a potent threat to restaurants, given their numerous regular customers and convenient locations.
Fast-food chains move overseas

Quick-service restaurants have been expanding rapidly overseas. Yum Brands generated 41.6% of revenues from overseas markets in 2006, with 17.1% of total sales coming from the Chinese market. McDonalds revenue base is even more diversified. In 2006, only about one-third of total revenues came from its US operations; Europe accounted for about 35%, followed by Asia (14%) and Latin America (nearly 8%). Nevertheless, success in the global markets has not been without difficulty. In Europe, for example, chains found that sales growth from 2003 through 2005 was not always robust enough to cover increases in food, labor, and utility costs. Sales growth did return in 2006 and early 2007. Local preferences and finicky consumer tastes are other hurdles that must be overcome. The markets still offer great opportunities. McDonalds planned to invest about $800 million in its European business in 2007, nearly as much as it will invest in its US operations. The fast-food chain also plans to allow individual restaurants to cater more to local tastes and plans to shift more from company-owned to franchise-owned restaurants. Companies are increasingly targeting the growing Chinese market. About half of McDonalds planned 800 store openings for 2007 will be in Asia. In China, the company is currently focusing on drive-through outlets, which it says are critical to its long-term development there. About 50 of its new restaurants in China will be drive-throughs;
10 of those are the result of the strategic alliance that McDonalds struck in 2006 with Sinopec Shanghai Petrochemical Co. Ltd., Chinas largest gas retailer. McDonalds hopes to play into the trend of rising car ownership in China. The dominant overseas player in China remains Yum Brands. (Yums China division includes mainland China, Thailand, and its KFC Taiwan business.) Brisk expansion of Yums KFC chicken and Pizza Hut brands in mainland China (with unit growth of 18% in 2006) drove a 23% increase in sales to $1.6 billion for the China division in 2006. Growth in China continued into 2007, with same-store sales growth of 7% for the second quarter of 2007. Numbers such as these have attracted other chains, including Dunkin Donuts. The company said in January 2007 that it would open its first store in Taiwan as part of an expansion that will also target mainland China. Dunkin Brands said that its Taiwan outlet would include a selection of items for local tastes, such as green apple and pineapple donuts, along with its standard fare of coffee and baked goods. Regulatory challenges in China persist. Both Yum Brands and McDonalds came under fire in 2007 for their employee pay practices due to the ambiguous labor regulations. As a result, both firms were forced to increase pay for part-time employees.
Industry focuses on health

Over the past several years, the fast-food industry has been hit with lawsuits alleging that specific corporations are responsible for obesity-related health problems faced by consumers particularly children. Plaintiffs have sought remedies such as menu changes, nutritional labeling, advertising restrictions, and monetary damages. These lawsuits reflect an American culture that has become significantly more healthconscious and litigious over the last several decades. This is a result of rising obesity rates, skyrocketing healthcare costs, and growing concerns about the impact of obesity on overall health. Customers who might have paid lip service to healthy diets in the past are now beginning to practice what they preach. An important driver in the new healthconscious trend has been the popularity of low-
14
carbohydrate diets, such as the Atkins Diet and the less intense South Beach Diet. In response to strong customer demand, and perhaps to help insulate themselves from potential liabilities, many restaurant chains have made significant changes to their menu offerings. In the casual dining industry, for instance, Brinker International announced a new menu at its Chilis unit that includes significant low-fat and low-carbohydrate options. Ruby Tuesday Inc. dedicates a section of its menu to Smart Eating foods. Some restaurant companies have sought to distinguish themselves by combining with brands associated with the new trends. For instance, Applebees International now dedicates a segment of its menu to items that were developed with, and approved by, Weight Watchers International Inc. The fast-food industry has seen even more dramatic changes, perhaps because it has the most to lose from consumer perceptions about the healthfulness of its food offerings and from potential lawsuits. For instance, Wendys has promoted four meal combinations (which were already on its menu) with less than 10 grams of fat, added fruit and more salad offerings to its menu, and changed its combo meal offering to allow customers to substitute (in place of French fries) chili, a baked potato, or a side salad at no additional cost. The company also has promoted its corporate Web site as a source of nutritional information about its menu items. McDonalds has developed a wide range of Healthy Lifestyle programs, including the addition of menu offerings that the company believes will attract health-conscious consumers. The company has put its marketing muscle behind its salad offering and developed new Happy Meals that include yogurt, milk, vegetables, or fruit, depending on the location of the end market. It also decided to discontinue the supersize French fries and soda offerings that had once been a strong focus of its marketing. McDonalds has sought to promote nutritional education and awareness among its customers. In 2003, the company formed its Global Advisory Council on Healthy Lifestyles, which includes experts in fitness, nutrition, and active lifestyles; some of these experts are prominent doctors, educators, and athletes. The group will help to guide the company on activities to promote bal-
anced, healthy lifestyles among its customers. In March 2005, the company announced a new marketing campaign focused on promoting a balanced lifestyle and nutritional health. McDonalds has collaborated with the World Health Organization and the US Department of Health and Human Services to educate consumers on the importance of nutrition and fitness. Finally, the company has moved to educate consumers by printing brochures that direct them to nutritional information on its corporate Web site. In the latest health initiative, fast-food chains are now scrambling to comply with rules that are being considered in various cities across the United States to ban trans fats from the food they serve. In December 2006, the New York City Board of Health passed a regulation requiring restaurants in the city to remove most trans fats by July 2008. The measure is being phased in, beginning with frying oil; restaurants had to switch to oils that allow food to have less than one-half gram of trans fat for each serving by July 2007. Companies such as Burger King and Wendys International have begun testing new oils or have already reduced the amount of trans fat in the oils they use for frying and cooking. A notable hold-out has been McDonalds, which is searching for an oil blend that will not compromise the taste of its popular French fries, though the company has reduced trans fat in other menu items.
Food safety concerns hurt industry

Over the past few years, concerns over food safety have affected the restaurant industry, driving up food prices in the United States, and cutting customer traffic abroad. Mad cow disease (bovine spongiform encephalopathy) has been of particular concern. The human form of this disease, which can be contracted by eating certain parts of an infected animal, can be lethal. While the disease is not contagious among animals, it is usually contracted through animal feed; this leads to the concern that, when one animal is infected, there are generally more. In late 2003, a cow infected with the disease was found in Canada. Many foreign governments immediately shut their borders to Canadian beef. The interrupted flow of the beef supply created a ripple effect on
15
food prices throughout the restaurant industry, as demand surged for substitute products such as pork and chicken. Chicken prices have been affected by outbreaks of avian influenza, or bird flu. The disease has been spreading for three years; it began in Southeast Asia and then spread to affect countries throughout the Eastern hemisphere. Cases of the bird flu were found in the mid-Atlantic states in 2004, sending a scare throughout the market. The industry notes that, in its current form, the avian flu cannot be spread if poultry is thoroughly cooked, but an increasing incidence of the disease is likely to have a negative impact on consumer attitudes. An outbreak of E. coli at Yum Brands Taco Bell stores in December 2006 hurt the companys sales and added to expenses. In February 2007, Yum Brands was hit with another health incident when an infestation of rats at a Greenwich Village (New York City) location prompted negative publicity. A New Jerseybased franchisee also closed at least 20 Taco Bell, KFC, and Pizza Hut outlets in New York City until health inspections could be made. Yum said in early March 2007 that it had hired a pest control expert to review the standards that the company sets for its franchise operators in New York City. Lingering food safety fears may continue to contribute to relatively high food costs over the next few years. Additionally, any new outbreak or health-related concern could result in reduced customer traffic at an affected chain.
than the federal or state minimum, and it does not permit employers to credit tips toward minimum wage compliance. Additionally, several states and some local jurisdictions have contemplated legislation that would add health insurance mandates, which would add to compensation costs. On the federal level, new legislation went into effect in July 2007 that raised the minimum wage from $5.15 per hour to $5.85 per hour. The minimum wage will rise in increments of $0.70 each year until 2009, when the minimum wage will be $7.25 an hour. Although the federal minimum wage will rise, many states currently have minimum wage rates in excess of the federal minimum, which may blunt some of the impact on the restaurant industry. As of July 2007, 30 states had minimum wage rates higher than the federal rate of $5.85 an hour, according to the US Department of Labor, meaning that many restaurant chains have already been dealing with higher labor costs. These and other legislative actions are indicative of trends that add to the cost of doing business, either nationwide or in particular areas of the country. Any potential new legislation and regulation could add to the cost of running a restaurant in the United States and may undermine profitability and corporate expansion plans.
Americans love to eat out

The restaurant industry is benefiting from a long-term trend toward eating out. According to the US Department of Agriculture, consumption of food away from the home accounted for 48.5% of total food expenditures in 2005 (latest availCONSUMER PRICE INDEX FOR FOOD AWAY FROM HOME
(Year-to-year percent change)
Industry susceptible to new federal, state, and local regulations

Over the past several years, several state and local governments have set new regulations that threaten to hurt the restaurant industry. For instance, 22 states have banned smoking in bars, restaurants, and workplaces. Some restaurant owners believe that these laws dampen traffic and hold down sales of items such as after-dinner drinks, as guests may choose to leave an establishment to light up a cigar or cigarette. Another concern for restaurant operators involves emerging laws regulating employment compensation. For instance, San Francisco passed a living wage law that requires employers to pay a significantly higher wage
5 4 3 2 1 0 1986 88 90 92 94 96 98 00 02 04 2006
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US FOOD SALES GROWTH

(In billions of dollars) 600
All food stores

500 400
Eating & drinking places

300 200 100 0
1978
80
82
84
86
88
90 * 92
94
96
98
00
02
04
2006
*Change in data compilation from SIC categories to NAICS categories. Source: US Department of Commerce.
able), up from 44.9% in 1990 and 26.3% in 1960. This trend has been propelled by factors that should continue to support demand in the future. One of the linchpins in the trend toward eating out is steady growth in disposable income: Americans can more readily afford to eat out. According to the US Department of Commerce, chain-weighted US disposable personal income per capita increased at a compound annual growth rate (CAGR) of 1.2% between 2000 and 2006. (Nominal disposable personal income per household grew at a CAGR of 3.2%.) With the aging of the baby boom generation, demographic trends point to an older and wealthier population, which should support restaurant traffic growth for many years. (Baby boomers are the approximately 77 million Americans born between 1946 and 1964.) The increases in personal income have far outpaced price increases in the restaurant industry and for food in general. From 1985 to
PURCHASED MEALS & BEVERAGES AS % OF DISPOSABLE INCOME
10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1986 88 90 92 94 96 98 00 02 04 2006 Purchased meals & beverages as % of disposable income (right scale) 4.30 Disposable income (bil. $, left scale) 4.25 4.20 4.15 4.10 4.05 4.00 3.95 3.90
2005, total food expenditures fell from 11.7% of disposable personal income to 9.9%. Food away from home rose to 48.5% of total food expenditures, from 41.3%, during this 20-year period. Further boosting the dining-out trend is the decline in free time. More than 50% of US families were dual-earner households in 2006, according to the Bureau of Labor Statistics, an agency of the US Department of Labor. In many families, both parents hold full-time jobs, which leaves less time to prepare meals at home. With the rise of dualincome and single-parent families, and with numerous moderately priced restaurants to choose from, dining out is often the most convenient choice. The National Restaurant Association, a trade group, estimates that total annual sales in the restaurant industry will exceed $577 billion by 2010. At that time, consumers may spend 53% of every food dollar on meals, snacks, and beverages prepared away from home (including food eaten in restaurants and taken out).
HOW THE INDUSTRY OPERATES

Over the last half century, eating out has gradually become a way of life for many Americans. As a percentage of total food expenditures in the United States, meals eaten away from home rose to an estimated 49% in 2005 (latest available) from 26% in 1960, according to the US Department of Agriculture. According to the National Restaurant Association, a trade group, the industrys direct sales account for 4% of the US gross domestic product. With an estimated 12.8 million employees, the industry is the nations largest private-sector employer. Contributing heavily to this trend has been the rise of fast-food dining beginning in the 1950s with industry trendsetters Jack in the Box Inc. and McDonalds Corp. offering drive-through service and revolutionizing work flow processes that significantly improved customer satisfaction while lowering wait times. The establishment of large chains, in both the fast-food and casual dining categories, has helped to further streamline operations and lower costs. Economic trends have played an important role in the popularity of eating out.
Source: Economic Research Service.
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With the rise in single-parent and dualincome households, domestic life has become more time-pressured. Restaurants provide a quick option for feeding the family. In addition, median household income has continued to increase. Rising household income boosts the propensity to eat out. The convenience of eating out and the large number of reasonably priced options mean that restaurant meals will likely remain an integral part of daily life in America.
ing is often disposable, and the average check price is usually less than $7. Take-out orders account for a large portion of this business. In recent years, another concept, aptly named quick casual, has emerged to bridge the two categories. Quick-casual restaurants have a higher average check price than fast-food concepts, generally $7 to $10, presumably in exchange for higher quality food and service.
Low entry barriers, high risk/return Restaurants: from take-out to full-service

Foodservice businesses are a highly diverse group, ranging from corner pubs and fast-food franchises to such deluxe restaurants as New Yorks famed Four Seasons. The industry is divided into three general categories: commercial, institutional, and military. (A more detailed breakdown of the various categories and some recent sales data are listed in the table entitled Projected US foodservice industry sales in the Industry Profile section of this Survey.) Commercial restaurant service, which comprises everything from restaurants and cafeterias to ice cream parlors, bars, and cafes, is by far the largest category; its sales in 2006 were an estimated $446.7 billion, according to the National Restaurant Association, up 5.2% from 2005. Sales are forecast to total $491.2 billion in 2007. Institutional foodservice, consisting of sales by institutional organizations and businesses operating their own foodservice, totaled about $42.6 billion, and military foodservice was worth an estimated $1.8 billion. For 2007, institutional foodservice sales are expected to be $43.8 billion, while military sales are expected to come in at $1.9 billion. (Institutional and military foodservice are not covered by this Survey.) In the commercial foodservice business, the largest segments are full-service and limitedservice restaurants. Full-service restaurants usually feature moderate to high prices and sit-down service. Average check prices generally exceed $10. Meals are served with flatware and china, and alcoholic beverages are often available. Limited-service (also called fast-food or quick-service) restaurants typically offer rapid food preparation and low prices, with or without seating. Food packagSmall operators run more than 70% of all restaurants, according to the National Restaurant Association. The restaurant businesss low barriers to entry are partly responsible for its popularity among small-scale entrepreneurs. Some of these ventures succeed, but as a result of the industrys intense competition and high fixed costs, many fail. For restaurants that do succeed, however, the payback on investment can be considerable. Once sales reach the break-even point, a relatively high percentage of incremental revenues can become profit. In recent years, casual dining chain concepts have taken market share from independent operators through geographical expansion. Fast-food chains have long used proliferation to their advantage: McDonalds now has more than 13,750 units in the United States and more than 31,700 worldwide. Now, however, casual dining chains, such as Applebees Neighborhood Grill & Bar (expected to be acquired by IHOP Corp. in the fourth quarter of 2007) and Outback Steakhouse (operated by OSI Restaurant Partners Inc.), have come to dominate the mid-price segment. Large restaurant chains have been able to realize economies of scale that have made competition extremely difficult for small operators. Advantages include purchasing power in negotiating food and packaging supply contracts, as well as increased sophistication in real estate purchasing, location selection, menu development, and marketing.
Franchising: a quick way to grow

Many restaurant chains choose to grow their concepts by franchising. Franchising permits restaurant companies to expand their brand-name recognition rapidly, without bear-
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ing the full cost of acquiring land, buildings, and equipment. In a typical franchise relationship, such costs are borne by the franchisee, which also pays a royalty to the parent company for the right to be part of its chain. The practice of franchising involves a business contract between two companies: a franchisor (or parent company) and a franchisee (or individual business operator). It gives the franchisee the right to construct and operate a restaurant on a site accepted by the franchisor and to use the franchisors operating and management systems. Under these arrangements, the franchisor charges the franchisee a one-time fee, which may include, for instance, an initial nonrefundable fee of about $5,000 and other technical assistance fees of about $25,000 to $40,000. Most also require franchisees to contribute 2% to 5% of sales to cover both local and national advertising. In addition, the franchisee makes royalty payments based on gross receipts from restaurant operations, with specified minimum payments. In the United States, royalty payments are generally 4% or 5% of total receipts. Franchise contracts vary in length but may be for periods of 10 to 20 years. Franchising is a widespread phenomenon around the world, but it is especially prevalent in the restaurant industry. According to a 2004 Price Waterhouse study commissioned by the International Franchise Association, an independent trade group, franchisees operated more than 183,300 restaurant locations in the United States in 2001, with a combined payroll of $39.1 billion for their nearly 3.7 million employees. Franchisees operated more than 56% of all quick-service units in the United States and more than 13% of all full-service units. Still, many entrepreneurs prefer to own and operate restaurants themselves to reap store-level profits, which can be substantial. The percentage of franchised versus company-operated units varies widely among individual chains. For example, at the end of 2006, fast-food giants Wendys International Inc., McDonalds, and Yum! Brands Inc. each franchised between 70% and 80% of their units, versus only 29% at Jack in the Box. At McDonalds, franchised restaurants accounted for nearly 72% of systemwide sales and 25.5% of the companys total revenues in 2006.
Why franchise?
Many restaurant chains opt to franchise their businesses to enjoy superior returns. Franchising eliminates the need to focus on the day-to-day concerns of operating units, while generating a steady stream of royalty fees. Furthermore, since franchise royalties are based on a percentage of sales, rather than profits, they can ensure a steady stream of revenue even in a difficult operating environment. In return, the franchisee enjoys the benefits of brand-name recognition and, often, training and marketing support from the parent company. The franchisee also can participate in cooperative purchasing, enabling it to sell food at a lower price than an independent operator can. While franchisors avoid some of the hazards of expansion, they face other risks. Licensing and franchising involve some loss of control of the business. With the day-to-day operating decisions made by franchisees, one poorly run franchised unit can reflect badly on the whole chain. Individual franchisees depend on the overall success of the entire chain to maintain their own standing. Strong and vital franchisees are essential to the continued success of many restaurant chains, particularly in the fast-food segment. Companies that employ the franchise business model rely on maintaining successful franchisees and attracting new, entrepreneurialminded franchisees to assure long-term success and safety. A company that tries to profit at the expense of its franchisees for example, by charging high prices for supplies can damage the trust needed to have a good working relationship between franchisor and franchisee.
Successful refranchising
Some companies, such as Yum Brands and IHOP, regularly buy and sell restaurants as a means of strengthening their operations, a practice known as refranchising. Acquired restaurants, which may be underperforming, can be improved and then operated profitably by the company or sold to another franchisee. In other cases, restaurants may be acquired due to geographic or operational benefits to existing company-operated units. Selling restaurants generates cash that can then be used to fund new development, acquisition, and remodeling programs. The gains can be substantial.
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Refranchising frees up invested capital and generates franchise fees. While this tactic can improve overall returns, its ultimate success depends on a companys ability to find qualified franchisees to purchase its restaurants. Nonetheless, in an industry that requires relatively high capital expenditures, the popularity of these cash-generating programs is easy to understand.
Restaurant management and training

There is a strong correlation between the quality of restaurant management and the long-term success of a concept. Restaurant management structure varies by concept and sales volume. Every restaurant typically employs a general manager, an associate manager, and one to five assistant managers. General managers are primarily responsible for the day-to-day operations in one restaurant, overseeing customer relations, foodservice, cost controls, restaurant maintenance, personnel management, implementation of company policies, and the restaurants profitability. Associate and assistant managers support the general managers duties and fill in when needed. For chain restaurants, general managers report to district managers, who in turn report to regional managers. The regional management is responsible to the corporate executive management. Training takes a variety of forms. For employees who have development or supervisory responsibilities, extensive restaurant operations training courses are standard at most companies. CBRL Group Inc., which operates Cracker Barrel Old Country Stores, sends new managers through an 11-week training program, consisting of eight weeks of in-store training and three weeks at corporate headquarters. In addition, training is conducted for all restaurant employees. Brinker International Inc.s training program includes a four- to five-month period for managers and supervisors. Training teams also instruct employees on opening a new restaurant, remaining on location for two to three weeks to ensure a smooth transition to operating personnel. Franchisers such as Applebees International Inc., McDonalds, and Wendys operate extensive training programs in a classroom setting. These companies also give peri-
odic training to their restaurant employees. McDonalds dubs its school Hamburger University. Since 2004, several companies have identified higher staffing levels as a key to improving service. In a competitive environment, customer satisfaction levels can be an important determinant in improving sales volumes. If a company can utilize its increased manpower to speed service times, fast-food restaurants may serve more customers at the register over a period of time, while casual diners may increase the speed in which tables turn. During this time, Applebees, Tim Hortons Inc., and Papa Johns International Inc., generally considered service leaders in their industry segments, increased their staffing levels with great success. While labor costs rose in real terms, the expenditure was more than offset by higher volumes of traffic, according to the companies.
Cost structure
The costs of owning and operating a restaurant vary by format. Obviously, larger units cost more than smaller ones, as do upscale formats with a greater investment in interior design and higher spending on costly food items. To justify the expense, large units are typically located in areas with greater population density or that have a larger geographic draw than smaller units do. They generally see greater revenues than smaller units, though this is not always the case. In any event, if a units volume does not reach the companys revenue projections, its profitability also will be below plan, and it is liable to be shut down. Food and beverages, labor, and real estate constitute the restaurant owners largest cost categories. (The table entitled The restaurant industry dollar breaks out these and other costs as a percentage of sales for different industry sectors.)
Food and beverages

Not surprisingly, the cost of food and beverages is one of a restaurants largest expense categories. Companies negotiate directly with national and regional suppliers to ensure consistent quality, freshness, and competitive prices. The larger the customer, the greater the bargaining power that it has over suppliers.
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THE RESTAURANT INDUSTRY DOLLAR 2005*

(As a percentage of total)
FULLLIMITEDSERVICE SERVICE RESTAURANTS RESTAURANTS
Cost of food and beverages Wages & benefits Restaurant occupancy costs Other Income before income tax
33 33 6 24 4
31 30 7 25 7
*Latest available. Source: National Restaurant Association.
Many companies engage in forward pricing to stabilize food costs. Forward pricing is a hedging strategy whereby a company negotiates with a supplier to purchase a certain amount of a product at a given price. Some supply contracts signed by larger chains can lock in less volatile food products, such as beef, at stable prices for an entire year. Some of the products subject to the greatest price variability, especially dairy products, can be locked in only for shorter periods.
Labor
Labor is the restaurant industrys second largest expense, though the proportion of total cost varies by restaurant type. We estimate that, at full-service restaurants (average meal prices of $15.00 to $24.99), salaries, wages, and employee benefits represented about one-third of sales; at major fast-food restaurant chains, these factors accounted for less than 30% of sales. Restaurant sales and profits can be greatly influenced by the efforts of general managers and area managers. In recent years, companies have placed a premium on retaining their best operators. In many cases, managers pay relies on incentives and often is tied to restaurant-level profit performance. Stock option grants are awarded to personnel from the highest levels of management down to the restaurant-level manager. Starbucks Corp., Brinker International, and the CBRL Group all issue significant amounts of options to compensate management.
Real estate
A restaurant owner can purchase or lease an existing space, or build a new one. Many chain operators choose to build their own units, so that individual restaurants all conform to the same design concept. The land on
The bottom line

After food, labor, occupancy, and other expenses are subtracted, what is left is operating profit. Profitability, however, varies widely among the various industry segments
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which a restaurant is built can be purchased or leased. Both options have pros and cons. When a company purchases real estate, it must cover the purchase price. To finance such a purchase, the company must have good financial resources, with cash on its balance sheet and borrowing power. Once real estate is purchased, the company can benefit from appreciation. If real estate values decline, however, so does the value of the companys investments. Brinker International estimates that the average cost for land, or the value of the lease for the land when capitalized (valued as an asset on the balance sheet), is $817,000 for a Chilis unit and $3.4 million for its upscale Maggianos Little Italy chain. Purchases are either financed with loans or paid out of current funds. Leasing requires less capital and offers greater flexibility than do outright purchases. Leases are finite in duration and eventually expire; thus, they give restaurant operators the option of relocating or closing units, if site selection is poor and the units are not drawing enough volume. On the other hand, leasing leaves operators vulnerable to rising rents or the loss of a lucrative location. Whether owned or leased, site selection is critical to the success of a new restaurant. Companies devote significant time and resources to analyzing each prospective site. The main criteria are customer traffic levels and convenience. Proximity to sites that draw large crowds, such as retail centers, office complexes, and hotel and entertainment centers, is desirable. Some chains, such as Subway (operated by privately held Doctors Associates Inc.), choose to locate units in strip malls or malls to increase visibility. Other chains, such as McDonalds, prefer freestanding locations in high-traffic areas, so as to better control their costs. Accessibility concerns, such as the availability of parking and ease of entry, are also important. In addition, a company will review potential competition in a trade area, local market demographics, and site visibility.
and even among individual units in a chain; the level of sales at a given establishment is a key determinant. Expense structures also vary from company to company. Some businesses are simply better than others at reining in costs.
Its a cash business

Because virtually all sales in the restaurant industry are transacted in cash or equivalents (such as credit cards), many restaurant companies operate with negative working capital. (Working capital equals current assets minus current liabilities. It is sometimes referred to as net working capital, as current assets can be considered working capital needed to support the business.) A working capital deficiency occurs when current liabilities exceed current assets. Inventory, financed from normal trade credit, turns rapidly in the restaurant business. This is also one reason why debt levels are relatively low compared with other industries, especially those that must support high levels of slow-moving inventory, such as retailers.
Creating and testing new foods

In recent years, competition has fostered innovation as restaurants have sought to boost volume. In the process, they have made new product introductions an important part of the equation. Although customers may not be aware of it, most fast-food and restaurant chains spend a great deal of time researching and developing new products. Menu offerings evolve along with consumer taste. To develop prototype products, restaurant chains conduct consumer research and keep up on the latest trends in food. When a new product is introduced, three key elements determine its success. The product must meet consumer expectations and thus generate incremental sales. Its day-to-day preparation should be compatible with company standards and operations. Finally, it should deliver financial benefits. The type of new product introduced sandwich, salad, main course, dessert, and so forth must fit clearly into the chains menu and meet its customers expectations. Thus, while a chain such as Wendys would be unlikely to unveil a new pizza topping, it could be expected to create a new sandwich item.
In the highly competitive fast-food category, new menu items can be crucial to driving sales as they can help to raise traffic without the margin pressure of price discounting. Price wars are common throughout the industry and favor well-financed behemoths McDonalds and Burger King Corp. Smaller regional companies, such as Jack in the Box, focus on new product development to differentiate themselves from competitors, thereby reducing the potential impact of large-scale industry discounting. Over the past several years, McDonalds has had great success in driving sales through new product introductions. Items such as the McGriddle and Premium Chicken sandwiches have helped both to drive customer traffic and to raise the average check. The companys product development process is driven predominantly by customer feedback. Approximately every six weeks, the company gathers 80 to 100 customers at a selected McDonalds unit to get input on new ideas, as well as existing menu items. New menu item ideas are categorized by food category, price sensitivity, and health concerns. Armed with an increased understanding of customer trends, the company can experiment with various food ideas at McDonalds Hamburger University campus in Oak Brook, Illinois. Products are chosen for tests to be run in select markets, and then select regions, and often can last for six months to ensure marketability. Testing often is supported by advertising, which can take anywhere from several weeks to three months to arrange. Before an item can be rolled out across the McDonalds restaurant system, the company must arrange for a supply of ingredients. In some cases, this may take several months due to the vastness of the companys needs. For instance, when the company decided to promote its Apple Dippers product in 2005, the company became the largest single user of apples in the country. A full growing season was actually needed to create a supply equal to the demand. Given the rigors of the McDonalds testing process, and the operational and procurement efforts needed to support a rollout over the companys 15,000 North American restaurants, the companys new product introduction process generally takes from six months to two years to complete.
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KEY INDUSTRY RATIOS AND STATISTICS

Restaurant sales are driven by consumer spending, which in turn is influenced by the health of the overall economy. To gain knowledge of the economys current and anticipated state of health, and its potential impact on the restaurant industry, analysts consult the following indicators. Real growth in gross domestic product (GDP). Reported quarterly by the Bureau of Economic Analysis, part of the US Department of Commerce, inflation-adjusted (or real) GDP growth is a measure of the health of the overall US economy. The Bureau of Economic Analysis also issues advance and preliminary estimates of GDP before reporting the final GDP figure for the quarter. Most major economies are cyclical, advancing and contracting with the business cycle. The business cycle dating committee of the National Bureau of Economic Research establishes the official beginning and end of recessions. Real GDP grew 2.9% in 2006, down from 3.2% in 2005. As of September 2007, Standard & Poors was forecasting real GDP growth to cool moderately in 2007, to 2.0%, reflecting the slowdown in the housing sector and some softening in consumer spending. Disposable personal income. Reported each month by the Bureau of Economic Analysis, disposable personal income is a measure of aggregate consumer income, minus taxes and adjusted for inflation. Changes in this measure are important, because they influence the level of consumer spending that can be expected. When personal income is growing, consumers are more willing to loosen their purse strings. Conversely, when it is stagnant or weak, consumers are less willing to spend. They may shift to eating at less-expensive restaurants or at quick-service chains or to cooking at home. Disposable income growth has accelerated since 2005, with real disposable income climbing 3.1% in 2006 after growth of only 1.7% in 2005, due to higher oil prices and tepid wage growth. Standard & Poors expects real disposable personal income to increase 3.5% in 2007.
Consumer confidence. This index is compiled monthly by the Conference Board, a private research organization, which polls 5,000 representative US households to gauge consumer sentiment. Its two components the present situation index and the expectations index reflect consumers views of current and future business and economic conditions, and consumers expectations about how they will be affected. This qualitative measure of consumer attitudes is expressed as an index, with 1985 used as a base year (1985=100). According to the Conference Board, any reading above 90 is considered a strongly positive outlook on the economy. Factors that influence the index include perceptions of employment availability and current and projected income levels. When consumer confidence is high or rising, it is usually accompanied by increased spending and borrowing. Conversely, consumers who are uncertain about the future are likely to pare or postpone their expenditures. The Conference Boards consumer confidence index hit its lowest point in 2006 during August, declining to 99.6, from 107.0 in July the lowest monthly level since Hurricane Katrina in 2005. It has recovered since then and stood at 112.6 in July 2007, compared with 105.3 in June. The consumer price index (CPI). The CPI is released monthly by the Bureau of Labor Statistics (BLS), an agency within the US Department of Labor. The index, which serves as an inflation indicator, measures changes in the price of commodities, fuel oil, electricity, utilities, telephone services, food, and energy. The core CPI smoothes out the index by removing the volatile food and energy categories. Restaurants, like most companies, try to pass on increased costs for supplies and labor to customers. Given the highly competitive environment, though, restaurant chains are generally reluctant to raise menu prices. Driven by significantly higher prices for oil and gasoline, the overall CPI increased at an average rate of 3.4% in 2005. With energy and transportation costs down significantly in the final six months of 2006 compared with spikes throughout 2005, the overall CPI increased by a more moderate 3.2% in 2006. The increase in core CPI was 2.2% in 2005
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US UNEMPLOYMENT RATE
(In percent)
6.5 6.0 5.5 5.0 4.5 4.0 3.5 2001 2002 2003 2004 2005 2006 2007
and 2.5% in 2006. Standard & Poors currently forecasts that easing energy prices will limit the CPI rise to 2.6% in 2007, with the core CPI rising 2.3%. Commodity costs. Food commodity costs are one of the largest input costs of a restaurant company; they can significantly affect profitability. Rising costs can erode profit margins if the company cannot pass the added expense on to the customer in the form of a price increase. Unemployment rate. Wages are often the largest single expense at restaurants. Restaurants rely heavily on the availability of a dependable work force at the low end of the national pay scale. Employee turnover rates are relatively high, especially at quickservice restaurants, where annual turnover often exceeds 200% for nonmanagement positions. A steady stream of acceptable replacements is needed. When unemployment rates are relatively low, restaurants often have to raise pay levels to attract and retain workers. Released monthly by the BLS, the unemployment rate tracks the number of workingage people currently searching for employment as a percentage of those employed or looking for work. After reaching an eightyear high of 6.4% in June 2003, the unemployment rate has since dropped steadily. In July 2007, the rate stood at 4.6%. As of September 2007, Standard & Poors was forecasting the unemployment rate to average 4.6% for the year. Industry expansion rates. The growth rate of overall restaurant locations should be
in line with increases in demand to ensure a healthy overall business. In the early 1990s, restaurant industry expansion caused supply to significantly outpace demand. This situation led to store closings and concept failures. Recent industry expansion, while robust, has been sustainable, given the growing demand for eating out. According to Technomic Information Services, a market research firm, unit growth for the top 500 chain companies in 2006 averaged 5.8% for limitedservice chains and 6.0% for full-service chains. Given a somewhat more difficult operating environment, higher real estate and construction costs, and the increasing maturation of large restaurant chains, we expect unit growth to cool somewhat in 2007. Interest rates. Many growth companies are unable to finance expansion strategies wholly from current cash flow; they must therefore access capital markets. If a company chooses debt financing, prevailing interest rates may affect corporate profitability. Tenyear Treasury notes often are seen as the most reliable indicator of long-term interest rate trends. These Treasuries are traded daily on secondary bond market exchanges. Reflecting Federal Reserve policy, shortterm rates have been increasing, with the federal funds rate steadily rising from 1.0% in early 2004 to 5.25% in June 2006. The Federal Reserve cut rates by 50 basis points on September 18, 2007. Volatility in the credit markets sparked by concerns about subprime mortgage defaults have pushed down 10-year Treasury yields in recent months. After jumping to a recent peak of 5.25% in June 2007, the rate on the 10-year Treasury note fell to 4.65% as of September 24, 2007, following the Federal Reserves interest rate cut.
HOW TO ANALYZE A RESTAURANT COMPANY

After surveying the big picture, the analyst can consider how individual companies fit into it. A range of factors, both quantitative and qualitative, should be evaluated. Important financial metrics include trends in sales, profitability, and cash flow. Although absolute numbers are critical to the assessment of any company, compara-
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tive analysis is needed to measure the relative success of a company under given industry conditions. If a restaurants same-store sales are declining while the rest of the industry is showing gains, clearly there is cause for concern and further investigation. But if the rest of the industry is doing badly, the company may not be any worse off than its competitors. Conversely, if a companys sales increases are stellar versus its peers, the analyst should question whether the growth is sustainable.
Quantitative issues
Aspects of a restaurants business that can be quantitatively measured include samestore sales, systemwide sales, operating margin, return on assets, and cash flow. These hard numbers are the basis for analyzing company trends over time, in order to determine whether the business is achieving improvements in its performance. In addition, comparing the companys results with those of its peers is useful in determining relative performance.
Same-store sales
The most closely watched quantitative indicator is same-store sales, defined as yearto-year sales changes for units open at least 18 months. A company is losing market share if it experiences declining same-store sales while the rest of the industry posts strong revenue gains. The reasons for its loss of share need to be closely examined. It is important to note that some chains compare same-store sales for units open only 13 months a less reliable indicator of sales strength than the 18-month period. Stores often take several months, if not years, to reach the maturity necessary to make meaningful comparisons. Gains in same-store sales can be achieved through increases in prices or customer count, or through changes in product mix. Price increases are often necessary to offset wage and commodity cost inflation. From 2001 through the first half of 2004, many operators raised prices only modestly (1% to 2% annually), due to benign wage inflation and relatively low food costs. However, in the second half of 2004 and throughout 2005, significantly higher costs for food, especially beef, and utilities led many restau-
rant chains to raise menu prices 3% to 4% per year. Although food cost inflation was less than 1% in 2006, menu prices rose by an average of 3.1%. We expect price increases to continue at a moderate pace through 2008, with possible cost hikes foreseen in certain key commodities like corn and wheat, which could push through to higher chicken, beef, and dairy prices. Changes in product mix can reflect menu changes, advertising and promotions, or shifts in customer preferences any factors that affect the size of the average check, other than price increases. Restaurants can raise the amount of the average check by adding higher-priced items to the menu, such as an increased assortment of appetizers and alcoholic beverages, or lower it by featuring value products in an advertising campaign designed to spur traffic. Consumer choices also can alter product mix. In difficult economic times, for example, customers tend to avoid ordering desserts and after-dinner drinks. Traffic gains often reflect customer satisfaction. Diners are the ultimate judges of whether a restaurants food, price, and service meet their needs. If a chain fails to please customers and to report sufficient sales gains, its long-term growth, and even its survival, can be in doubt. A company that is expanding rapidly by adding new units can boost overall sales growth, but it is important to monitor sales trends at existing units to be sure the concept is doing well. The same-store sales trends of a company should be considered within the context of the demographic and geographic markets it serves. A key issue facing the industry heading into 2008 is how to respond to the negative effect of declining home prices and rising foreclosures. The circumstances of the current difficulty in housing are unusual, in that restaurant sales have begun to weaken in states where the economy remains healthy except for housing. These states include Arizona, California, Florida, and Nevada. In other regions, such as the Midwest, weak overall economic conditions are having a negative impact on the sales trends of restaurants located in those areas. Other nonrecurring factors can influence same-store sales comparisons. These may include the inclusion of an extra 14th week in a quarter or 53rd week in a year. Often these
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extra weeks are at the end of the year, and the week between Christmas and New Years Day is one of the strongest sales weeks throughout the year. Whether this weeks falls into the fourth quarter of the current fiscal year or the first quarter of the next can skew comparisons.
Average weekly sales

Some chains report the average weekly sales of their restaurants. For companies that are expanding rapidly, average weekly sales may be preferable to same-unit sales as an indicator of sales trends. Units that have been in operation for at least 18 months may not comprise a large enough percentage of the store base to give a true indication of the state of the business. Also, if average weekly sales growth is significantly lower (or higher) than same-store sales growth, it may indicate that new locations are opening to lower (higher) volumes than existing stores.
Systemwide sales
This measures the total revenues from restaurants operated by the company, its franchisees, and, in some cases, its licensees and affiliates. Sales from franchisees, and from affiliates that are less than 50% companyowned, are not recorded in a companys revenues, although fees charged by the company to the franchisees are often incorporated. Systemwide sales growth is an important factor in projecting the top-line growth potential of a company. It can occur through expansion of sales capacity or through samestore sales growth. Many restaurant companies rely more on expansion than same-store sales growth to achieve earnings growth. For instance, The Cheesecake Factory Inc. is an operator that has experienced consistently stellar restaurant traffic, but because it almost always increases prices only in response to cost inflation, rather than to boost margins, the same-store sales growth at its restaurants tends to be fairly moderate. However, Cheesecake Factory has been able to consistently outperform the industry in terms of sales of unit and has generally reported higher same-store sales than its peers.
Operating margin
Operating margin is arguably the most important profitability measure in assessing a restaurant company; it indicates how adept a
company is at making a profit on its sales dollar. To arrive at this figure, the analyst must first calculate the companys total cost of restaurant sales, including such line items on the income statement as food, beverage, labor, and direct operating costs (such as uniforms, linen, china, utensils, menus, and decoration), plus occupancy, and allocated general and administrative expenses. The total cost figure is subtracted from restaurant sales; the result is operating profit, which can then be divided by sales to give the operating margin. Operating margin can be affected by a number of variables, including food and beverage costs, product mix, sales volumes, and competitive pricing pressures. Labor costs also affect margins. A lack of qualified workers can put upward pressure on salaries and benefits. Conversely, an ample supply of people in the 16-to-24 age category, the traditional source of labor for restaurants, can keep wage costs from escalating. When analyzing operating margins, a companys policy with respect to stock option grants also should be reviewed. Restaurantlevel managers are regarded as vital employees who can greatly influence earnings results, and their compensation packages are generally tailored to reward strong performance. Stock options often are used to create incentives in the compensation structure. Prior to 2006, most companies in the restaurant industry did not expense stock options. Yet exercised stock option grants could potentially dilute a companys future earnings perhaps significantly. Therefore, a review of a companys profitability before 2006 would be incomplete without a review of the companys stock option grants. Companies often incentivize managers with short-term cash bonuses, which vary from year to year depending on how performance measures up against various internally set sales and profitability targets. However, many companies do not regularly report on the details of this expense, making periodic comparisons more difficult. Margin analysis should always be considered within the context of the segment of the restaurant industry that the company serves. For example, operating expenses may be higher in the casual dining segment than for the fast-food chains because of higher real estate costs, as sit-down dining requires more
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space both in the restaurant and for parking than high-volume fast-food chains. More recently, chains have sought to improve margins by rotating menu selections to take advantage of the food products that can be acquired cheaply. For instance, at a time of declining seafood prices, Applebees International Inc. (expected to be acquired by IHOP Corp. in the fourth quarter of 2007) and Red Lobster (operated by Darden Restaurants Inc.) may seek to run promotions for fish or shrimp dishes at discounted prices to drive traffic without eroding margins.
Return on assets
A companys decision on whether to purchase or rent its locations can affect its reported operating margins. Chains that own their restaurants tend to have higher profit margins, as the depreciation expense is often less than what they would pay for rent. However, a company that purchases property must invest more capital in its stores. When comparing the financial results of companies that have different ownership profiles, return on assets (ROA) is a useful tool in analyzing relative performance. Reviewing a companys ROA over a multiyear period can reveal trends regarding the success of recent investments and may be a valuable guide in estimating prospects for future growth. A company is more likely to reinvest in its current business if its ROA is either high or trending upward, whereas a company with declining or low returns might reevaluate how it invests its capital.
shareholders and debtholders; it also may be a measure of a companys maturity. If a company believes that its concepts have significant growth potential and high returns on investment, it is more likely to use its cash from operations to fund capital expenditures. However, as a companys concepts mature, its return on new investments tends to slow, making the company more likely to return cash to its stakeholders. Capital expenditures should be analyzed, to separate funds being used to expand a companys business from investments required simply to maintain existing business. While funds for expansion are intended to increase future funds available for shareholders, amounts required to renovate, remodel, and maintain existing structures can be recurring, and should be seen as a consistent drain on cash from operations. Companies such as CEC Entertainment Inc. (operator of Chuck E. Cheeses restaurants) have consistently large remodeling requirements that should be factored into the overall analysis.
Qualitative issues
The key qualitative issues affecting a restaurant business are managements expertise and its design and execution of the business strategy. Although these factors do not lend themselves to numerical analysis, they are nonetheless crucial to success. In evaluating a restaurant companys management team, an analyst should first ask whether its strategy makes sense in light of current and long-term industry trends. If the strategy is a good one, is the current management capable of executing it? What is managements record for working together as a team? The quality of management often spells the difference between success and failure. We look for seasoned management teams that have performed well in both good times and bad. A companys expansion strategy is key to its long-term profitability potential. Companies may choose to grow via internal unit expansion or via acquisitions. In addition, many chains are hedging their bets on the success of one format and developing or acquiring other restaurant formats. For example, Brinker International Inc., with about $4.0 billion in revenue, owns Chilis Grill & Bar as its largest chain, but it also operates
Cash flow
A corporations financial flexibility reveals much about its health. Projected cash flow net income, plus noncash items such as depreciation and amortization can be compared with expected cash needs. Capital resources are needed primarily to undertake the construction, acquisition, maintenance, and refurbishing of restaurants. Some companies are self-financing, with the ability to fund their capital expenditure programs from internally generated funds. Many more, however, require external sources. For the large publicly held chains, capital is generally provided via public stock offerings and debt financing. Free cash flow (cash flow from operations less capital expenditures) can measure a companys present ability to return funds to its
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Italian- and Mexican-themed restaurants. Similarly, OSI Restaurant Partners Inc.s Carrabbas Italian Grill chain gives that company another long-term growth business besides its core Outback Steakhouse restaurants. The company also has several other concepts at earlier stages of development, including Flemings Prime Steakhouse, Bonefish Grill (specializing in seafood), and Cheeseburger in Paradise. Managements selection of an industry segment for expansion is a key strategic decision. Certain segments may have lower levels of competition or higher levels of potential growth. For instance, several fast-food chains have purchased concepts in the fast-casual segment to augment growth. In addition, the likelihood for success in the quick growing bar-and-grill and seafood segments may lead to more favorable results than in other areas of casual dining. Rather than diversify, some companies prefer to focus on one concept or several similar concepts. These strategies allow a company to develop expertise it might not gain from a split focus. In recent years, McDonalds Corp., Wendys International Inc., and Darden Restaurants are among companies that have either divested or closed down chains that were not part of their core business or key to their future growth strategy. If the chain was once touted as key to the companys future growth, but the company later determines that this is no longer the case, it may signal that there are financial or managerial weaknesses at the company. Finally, an examination of a companys financial performance in the context of the industry environment and the competition is important. Every management team portrays its operations in the best possible light; comparing its rhetoric with the companys actual results is helpful in predicting the firms future prospects.
G LOSSARY
Fast-food restaurants Also called limited-service or quick-service restaurants, these outlets specialize in rapid food preparation and low prices (the average check is generally $5 to $7), with or without seating. Table service is generally not available. Franchise agreement A business contract between two companies: a franchisor (or parent company) and a franchisee (or individual business operator). It gives the franchisee the right to construct and operate a restaurant on a site accepted by the franchisor, and to use the franchisors operating and management systems. The franchisee pays the franchisor a one-time franchise fee, and then makes royalty payments based on gross receipts from restaurant operations, with specified minimum payments. In the United States, royalty payments are generally 4% or 5% of total receipts. Franchise contracts vary in length, but may be for periods of 10 to 20 years. Full-service restaurants Restaurants that generally feature moderate to high prices (the average check is generally at least $10). Meals are often served with flatware and china, and alcoholic beverages may be available. License A contract similar to a franchise agreement, except that the contractual period is shorter, the rights are not as broad, and an initial fee may not be required. This contract gives the licensee the right to use the licensers name for a fee. Licensing is often used for nontraditional points of distribution, such as airports and gas stations. Quick casual Limited-service or self-service restaurants that serve upscale or specialty foods, including gourmet soups, salads, and sandwiches. The average check generally falls between $7 and $10. Refranchising gains Gains arising to a company from the purchase and resale of franchised units. Same-store sales Year-to-year sales changes at units open for a specified period, often at least 18 months. Satellite restaurants Small, low-volume units of a restaurant chain whose menu is an abbreviated version of the chains full menu. Satellite restaurants are often located in unique retail settings, like airports or within large retail stores. Systemwide sales A figure comprising sales by restaurants operated by the company, franchisees, and affiliates operating under joint venture agreements.
Total revenues A comprehensive figure consisting of sales by company-operated restaurants and fees from restaurants operated by franchisees and affiliates.
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I NDUSTRY R EFERENCES
PERIODICALS
Nations Restaurant News Lebhar-Friedman Inc. 425 Park Ave., New York, NY 10022 (212) 756-5000 Web site: http://www.lf.com Weekly; contains articles on a variety of restaurant industry topics. QSR Journalistic Inc. 4905 Pine Cove Dr., Ste. 2, Durham, NC 27707 (919) 489-1916 Web site: http://www.qsrmagazine.com Published 10 times annually; covers the quick-service sector of the restaurant industry. Restaurant Business Ideal Media LLC 90 Broad St., Ste. 402, New York, NY 10004 (646) 708-7300 Web site: http://www.restaurantbiz.com Published 18 times a year; spotlights various industry segments. Restaurants & Institutions (R&I) Reed Business Information Inc. 2000 Clearwater Dr., Oakbrook, IL 60523 (630) 288-8242 Web site: http://www.rimag.com Published 18 times a year; focuses on trends and issues of importance to the restaurant industry. Restaurants USA National Restaurant Association 1200 17th St. NW, Washington, DC 20036 (202) 331-5900 Web site: http://www.restaurant.org Published 11 times a year; focuses on trends and issues of importance to the restaurant industry. Technomic Top 500 Technomic Information Services 300 South Riverside Plaza, Ste. 1200, Chicago, IL 60606 (312) 876-0004 Web site: http://www.technomic.com Annual publication; detailed study of restaurant trends, and segmented look at industry market shares.
TRADE ASSOCIATIONS
National Restaurant Association 1200 17th St. NW, Washington, DC 20036 (202) 331-5900 Web site: http://www.restaurant.org Trade organization that works to promote the foodservice industry, and to protect and educate its members. Publishes industry data and research, including the Restaurant Industry Operations Report (annual; copublished with Deloitte & Touche) and an annual Restaurant Industry Forecast.
MARKET RESEARCH FIRMS
NPDFoodworld: CREST The NPD Group Inc. 900 West Shore Rd., Port Washington, NY 11050 (516) 625-0700 Web site: http://www.npd.com A market research firm that tracks chain and independent restaurants, and consumer behavior and attitudes at commercial restaurants. Technomic Inc. 300 South Riverside Plaza, Ste. 1200, Chicago, IL 60606 (312) 876-0004 Web site: http://www.technomic.com A market research firm concerned with the restaurant industry.
GOVERNMENT AGENCIES
Economic Research Service US Department of Agriculture 1800 M St. NW, Washington, DC 20036 (202) 694-5050 Web site: http://www.ers.usda.gov Source of annual US statistics regarding food consumption, production, and trends. US Census Bureau US Department of Commerce 1401 Constitution Ave. NW, Washington, DC 20230 (202) 482-4883 Web site: http://www.census.gov Source of annual and monthly retail and foodservice sales.
International Franchise Association 1501 K St. NW, Ste. 350, Washington, DC 20005 (202) 628-8000 Web site: http://www.franchise.org A membership organization of franchisors, franchisees, and suppliers. It provides information, products, and services to members.
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D EFINITIONS
FOR
C OMPARATIVE C OMPANY A NALYSIS TABLES
Operating revenues Net sales and other operating revenues. Excludes interest income if such income is nonoperating. Includes franchised/leased department income for retailers and royalties for publishers and oil and mining companies. Excludes excise taxes for tobacco, liquor, and oil companies. Net income Profits derived from all sources, after deductions of expenses, taxes, and fixed charges, but before any discontinued operations, extraordinary items, and dividend payments (preferred and common). Return on revenues Net income divided by operating revenues.
Price/earnings ratio The ratio of market price to earnings, obtained by dividing the stocks high and low market price for the year by earnings per share (before extraordinary items). It essentially indicates the value investors place on a companys earnings. Dividend payout ratio This is the percentage of earnings paid out in dividends. It is calculated by dividing the annual dividend by the earnings. Dividends are generally total cash payments per share over a 12-month period. Although payments are usually calculated from the ex-dividend dates, they may also be reported on a declared basis where this has been established to be a companys payout policy. Dividend yield
Return on assets Net income divided by average total assets. Used in industry analysis and as a measure of asset-use efficiency. Return on equity Net income, less preferred dividend requirements, divided by average common shareholders equity. Generally used to measure performance and to make industry comparisons. Current ratio Current assets divided by current liabilities. It is a measure of liquidity. Current assets are those assets expected to be realized in cash or used up in the production of revenue within one year. Current liabilities generally include all debts/obligations falling due within one year. Debt/capital ratio
The total cash dividend payments divided by the years high and low market prices for the stock. Earnings per share The amount a company reports as having been earned for the year (based on generally accepted accounting standards), divided by the number of shares outstanding. Amounts reported in Industry Surveys exclude extraordinary items. Tangible book value per share This measure indicates the theoretical dollar amount per common share one might expect to receive should liquidation take place. Generally, book value is determined by adding the stated (or par) value of the common stock, paid-in capital, and retained earnings, then subtracting intangible assets, preferred stock at liquidating value, and unamortized debt discount. This amount is divided by the number of outstanding shares to get book value per common share. Share price
Long-term debt (excluding current portion) divided by total invested capital. It indicates how highly leveraged a company might be. Long-term debt includes those debts/obligations due after one year, including bonds, notes payable, mortgages, lease obligations, and industrial revenue bonds. Other long-term debt, when reported as a separate account, is excluded; this account generally includes pension and retirement benefits. Total invested capital is the sum of stockholders equity, longterm debt, capital lease obligations, deferred income taxes, investment credits, and minority interest. Debt as a percent of net working capital Long-term debt (excluding current portion) divided by the difference between current assets and current liabilities. It is an indicator of a companys liquidity.
This shows the calendar-year high and low of a stocks market price. In addition to the footnotes that appear at the bottom of each page, you will notice some or all of the following: NANot available. NMNot meaningful. NRNot reported. AFAnnual figure. Data are presented on an annual basis. CFCombined figure. In this case, data are not available because one or more components are combined with other items.
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C OMPARATIVE C OMPANY A NALYSIS R ESTAURANTS

Operating Revenues
Million $ Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP DEC DEC DEC DEC 2006 1,337.9 1,654.5 4,151.3 D 554.6 2,643.0 774.1 1,315.3 1,588.4 5,567.1 D 349.6 2,765.6 NA 21,586.4 D 989.5 937.6 829.0 1,001.6 210.5 986.9 D 618.7 A 1,410.2 271.5 D 693.3 7,786.9 638.8 597.1 A 1,243.3 D 2,439.3 D 9,561.0 C 2005 1,216.7 1,584.8 3,912.9 479.6 2,567.5 726.1 1,182.1 1,518.3 5,720.6 348.0 2,507.2 1,254.8 A 20,460.2 930.2 C 809.2 640.3 968.8 D 175.2 839.3 D 486.0 1,306.2 214.5 D 623.1 6,369.3 606.9 458.8 727.3 A 3,766.7 9,349.0 209.7 117.2 1,511.6 322.2 D 458.8 2004 1,111.6 1,460.2 A 3,707.5 422.5 2,380.9 728.0 969.2 1,519.9 5,278.1 359.0 2,322.4 1,167.5 19,064.7 871.4 706.9 C 479.1 942.4 145.7 812.6 409.1 1,110.3 192.2 D 536.4 5,294.2 553.7 363.0 A 328.6 A 3,635.4 9,011.0 171.0 110.6 1,446.5 308.8 D 363.0 A 2003 990.1 1,198.0 3,285.4 359.9 2,198.2 654.5 773.8 1,413.4 D 5,003.4 404.8 2002 826.8 1,091.3 2,887.1 306.3 2,066.9 601.8 652.0 1,363.4 D 4,655.0 365.9 F 2001 744.3 1,061.8 C 2,473.7 A 249.3 1,963.7 562.0 539.1 1,438.1 4,368.7 324.4 F 1996 413.1 822.2 1,163.0 NA 943.3 292.9 160.3 614.1 A 3,171.8 181.6 Compound Growth Rate (%) 10-Yr. 12.5 7.2 13.6 NA 10.9 10.2 23.4 10.0 5.8 6.8 10.0 NA 7.3 19.7 NA 13.3 10.8 NA 16.4 NA 8.0 NA 16.5 27.3 10.9 NA 2.3 2.5 (0.7) NA NA NA (3.2) NA 5-Yr. 12.4 9.3 10.9 17.3 6.1 6.6 19.5 2.0 5.0 1.5 8.6 NA 7.7 17.3 24.1 32.7 0.6 17.4 13.1 22.5 11.1 NA 16.0 24.1 7.5 NA 68.2 0.4 6.6 30.1 12.6 NA (7.0) NA 1-Yr. 10.0 4.4 6.1 15.6 2.9 6.6 11.3 4.6 (2.7) 0.4 10.3 NA 5.5 6.4 15.9 29.5 3.4 20.1 17.6 27.3 8.0 26.5 11.3 22.3 5.3 30.2 70.9 (35.2) 2.3 32.7 8.3 (4.9) 0.8 30.2 2006 324 201 357 ** 280 264 821 259 176 192 260 NA 202 601 ** 350 278 ** 457 ** 215 ** 459 1,118 282 ** 126 129 93 ** ** ** 72 ** Index Basis (1996 = 100) 2005 294 193 336 ** 272 248 737 247 180 192 236 531 191 565 ** 270 269 ** 389 ** 200 ** 412 914 267 ** 74 199 91 ** ** ** 72 ** 2004 269 178 319 ** 252 249 605 248 166 198 219 494 178 530 ** 202 262 ** 377 ** 170 ** 355 760 244 ** 33 192 88 ** ** ** 69 ** 2003 240 146 283 ** 233 223 483 230 158 223 194 468 160 461 ** 150 255 ** 316 ** 159 ** 296 585 220 ** 30 166 82 ** ** ** 71 ** 2002 200 133 248 NA 219 205 407 222 147 201 185 379 144 304 NA 117 263 NA 271 NA 140 NA 265 472 202 NA 10 144 76 NA NA NA 89 NA
RESTAURANTS APPB APPLEBEES INTL INC BOBE BOB EVANS FARMS EAT BRINKER INTL INC CPKI CALIFORNIA PIZZA KITCHEN INC CBRL CBRL GROUP INC CEC CAKE CKR DRI IHP JBX LNY MCD CHUX PFCB PNRA PZZA PEET RARE RRGB RT RUTH SONC SBUX SNS TXRH TRY.B WEN YUM * * * * * CEC ENTERTAINMENT INC CHEESECAKE FACTORY INC CKE RESTAURANTS INC DARDEN RESTAURANTS INC IHOP CORP JACK IN THE BOX INC LANDRYS RESTAURANTS INC MCDONALD'S CORP O'CHARLEY'S INC P F CHANGS CHINA BISTRO INC PANERA BREAD CO PAPA JOHNS INTERNATIONAL INC PEET'S COFFEE & TEA INC RARE HOSPITALITY INTL INC RED ROBIN GOURMET BURGERS RUBY TUESDAY INC RUTHS CHRIS STEAK HOUSE SONIC CORP STARBUCKS CORP STEAK N SHAKE CO TEXAS ROADHOUSE INC TRIARC COS INC WENDY'S INTERNATIONAL INC YUM BRANDS INC
2,058.3 A,F 1,966.4 1,105.8 894.8 17,140.5 15,405.7 759.0 A 499.9 559.2 422.1 355.9 917.4 C 119.8 680.8 328.6 1,041.4 NA 446.6 4,075.5 499.1 286.5 293.6 D 3,148.9 A 8,380.0 126.5 107.3 1,333.3 318.5 D 286.5 277.8 946.2 A 104.1 584.5 C 274.4 A 913.8 NA 400.2 3,288.9 459.0 232.8 97.8 2,730.3 A 7,757.0 A 96.1 84.4 1,275.0 399.1 232.8
1,833.6 C,F 1,062.8 F 746.6 236.1 B 14,870.0 10,686.5 444.9 164.5 A 318.8 NA 201.1 971.2 A 94.4 533.2 224.5 833.2 NA 330.6 2,649.0 445.2 NA 92.3 2,391.2 6,953.0 74.6 70.2 NA 467.2 NA 236.9 360.1 NA 215.7 A NA 654.5 NA 151.1 696.5 226.9 NA 989.2 A 1,897.1 10,232.0 NA NA NA 450.1 NA
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC 278.2 COSI COSI INC DEC 126.9 DPZ DOMINO'S PIZZA INC DEC 1,437.3 LUB LUBYS INC AUG 324.6 D TXRH TEXAS ROADHOUSE INC DEC 597.1 A
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
Net Income
Million $ Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP DEC DEC DEC DEC 2006 80.9 60.5 213.9 21.0 116.3 68.3 81.3 50.2 377.1 44.6 109.1 NA 2,873.0 18.9 33.3 58.8 63.0 7.8 50.0 29.4 91.7 23.7 78.7 581.5 28.0 34.0 (11.2) 37.0 824.0 2005 102.0 54.8 160.2 19.5 126.6 74.7 87.9 194.6 338.2 43.9 91.5 44.8 2,602.2 12.0 37.8 52.2 44.3 10.7 52.4 27.4 101.0 10.6 75.4 494.5 30.2 30.3 (58.9) 224.1 762.0 8.9 (13.1) 108.3 8.6 30.3 2004 110.9 37.0 150.9 17.8 111.9 82.5 66.5 18.7 290.6 33.4 74.7 66.5 2,278.5 23.3 26.1 38.6 23.2 8.8 47.5 23.4 102.3 6.4 63.0 390.6 27.6 21.7 1.5 52.0 740.0 7.2 (18.4) 62.3 1.9 21.7 2003 93.6 72.0 168.6 8.0 106.5 67.4 57.8 (50.4) 227.2 36.8 73.6 45.9 1,508.2 21.3 25.4 30.6 34.0 5.2 42.3 15.7 109.8 NA 52.3 268.3 20.9 23.1 (13.1) 236.0 618.0 3.6 (26.6) 39.0 (2.5) 23.1 2002 83.0 75.1 152.7 15.3 91.8 69.5 49.1 25.8 232.3 40.8 83.0 41.5 992.1 26.8 20.9 21.8 46.8 4.7 33.4 8.3 88.5 NA 47.7 215.1 23.1 17.0 (9.8) 218.8 583.0 3.1 (20.9) 60.5 (9.7) 17.0 2001 65.7 67.7 145.1 13.2 49.2 64.2 39.3 (84.0) 237.8 40.3 84.1 26.9 1,636.6 17.6 15.6 13.2 47.2 1.2 26.2 7.7 58.3 NA 39.0 181.2 21.8 NA 9.0 193.6 492.0 2.7 (35.4) NA (31.9) NA 1996 38.0 36.1 34.4 NA 63.5 13.2 5.9 22.3 (91.0) 18.6 20.1 1.5 1,572.6 (1.1) NA (4.4) 18.6 NA 5.2 NA 25.0 NA 11.2 42.1 13.0 NA (8.5) 155.9 (53.0) NA NA NA 39.2 NA Compound Growth Rate (%) 10-Yr. 7.8 5.3 20.1 NA 6.2 17.8 30.0 8.4 NM 9.1 18.5 NA 6.2 NM NA NM 13.0 NA 25.3 NA 13.9 NA 21.5 30.0 8.0 NA NM (13.4) NM NA NA NA (6.0) NA 5-Yr. 4.3 (2.2) 8.1 9.7 18.8 1.2 15.6 NM 9.7 2.0 5.3 NA 11.9 1.5 16.3 34.9 5.9 46.6 13.8 30.6 9.5 NA 15.1 26.3 5.1 NA NM (28.2) 10.9 43.2 NM NA NM NA 1-Yr. (20.7) 10.5 33.5 7.7 (8.2) (8.6) (7.6) (74.2) 11.5 1.4 19.2 NA 10.4 57.0 (12.0) 12.8 42.3 (26.9) (4.5) 7.2 (9.2) 122.9 4.4 17.6 (7.3) 12.2 NM (83.5) 8.1 83.3 NM (1.9) 145.9 12.2 2006 213 168 622 ** 183 516 1,375 225 NM 239 544 ** 183 NM ** NM 338 ** 954 ** 366 ** 700 1,380 215 ** NM 24 NM ** ** ** 54 ** Index Basis (1996 = 100) 2005 268 152 466 ** 199 565 1,488 872 NM 236 457 2,976 165 NM ** NM 238 ** 999 ** 403 ** 670 1,174 232 ** NM 144 NM ** ** ** 22 ** 2004 292 102 439 ** 176 624 1,125 84 NM 180 372 4,417 145 NM ** NM 125 ** 907 ** 408 ** 560 927 212 ** NM 33 NM ** ** ** 5 ** 2003 246 200 490 ** 168 510 978 (226) NM 198 367 3,048 96 NM ** NM 183 ** 806 ** 439 ** 465 637 161 ** NM 151 NM ** ** ** (6) ** 2002 218 208 444 NA 145 526 830 116 NM 220 414 2,757 63 NM NA NM 251 NA 638 NA 353 NA 424 511 177 NA NM 140 NM NA NA NA (25) NA
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC 16.3 COSI COSI INC DEC (12.3) DPZ DOMINO'S PIZZA INC DEC 106.2 LUB LUBYS INC AUG 21.1 TXRH TEXAS ROADHOUSE INC DEC 34.0
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. ** Not calculated; data for base year or end year not available.
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Return on Revenues (%)

Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP DEC DEC DEC DEC 2006 6.0 3.7 5.2 3.8 4.4 8.8 6.2 3.2 6.8 12.7 3.9 NA 13.3 1.9 3.5 7.1 6.3 3.7 5.1 4.7 6.5 8.7 11.4 7.5 4.4 5.7 NM 1.5 8.6 5.8 NM 7.4 6.5 5.7 2005 8.4 3.5 4.1 4.1 4.9 10.3 7.4 12.8 5.9 12.6 3.7 3.6 12.7 1.3 4.7 8.2 4.6 6.1 6.2 5.6 7.7 5.0 12.1 7.8 5.0 6.6 NM 5.9 8.2 4.2 NM 7.2 2.7 6.6 2004 10.0 2.5 4.1 4.2 4.7 11.3 6.9 1.2 5.5 9.3 3.2 5.7 12.0 2.7 3.7 8.1 2.5 6.0 5.8 5.7 9.2 3.3 11.7 7.4 5.0 6.0 0.4 1.4 8.2 4.2 NM 4.3 0.6 6.0 2003 9.4 6.0 5.1 2.2 4.8 10.3 7.5 NM 4.5 9.1 3.6 4.2 8.8 2.8 4.5 8.6 3.7 4.3 6.2 4.8 10.5 NA 11.7 6.6 4.2 8.1 NM 7.5 7.4 2.8 NM 2.9 NM 8.1 2002 10.0 6.9 5.3 5.0 4.4 11.6 7.5 1.9 5.0 11.2 4.2 4.6 6.4 5.4 4.9 7.8 4.9 4.5 5.7 3.0 9.7 NA 11.9 6.5 5.0 7.3 NM 8.0 7.5 3.2 NM 4.7 NM 7.3 2006 8.9 5.0 9.8 7.2 7.2 10.1 8.3 6.3 12.8 5.8 7.6 NA 9.7 2.7 6.8 12.0 17.3 5.2 7.7 7.5 7.6 13.8 13.1 14.6 5.5 8.9 NM 1.3 13.7 11.1 NM 25.3 10.2 8.9
Return on Assets (%)

2005 12.5 4.6 7.3 7.6 8.5 11.8 10.4 26.4 11.4 5.5 7.0 3.0 9.0 1.8 8.9 13.7 12.2 7.8 9.0 9.1 9.0 5.6 13.9 14.3 6.6 10.3 NM 6.8 13.4 7.0 NM 23.8 3.9 10.3 2004 15.9 3.6 7.3 8.3 8.1 13.8 9.9 2.7 10.2 4.0 6.1 5.4 8.5 3.7 7.9 13.5 6.4 7.4 9.2 9.9 10.2 NA 12.5 12.8 6.5 10.2 0.1 1.6 13.1 6.5 NM 13.9 0.7 10.2 2003 15.5 8.7 9.1 4.5 8.2 12.0 11.0 NM 8.3 4.4 6.6 4.5 6.1 4.1 10.3 14.1 9.5 5.0 9.9 8.3 12.6 NA 11.7 10.7 5.2 16.7 NM 8.1 11.2 2.8 NM NM NM 16.7 2002 15.6 10.0 9.5 9.8 7.4 13.9 12.0 2.9 8.9 5.6 7.9 5.1 4.3 6.6 10.7 13.1 12.4 6.8 9.0 5.1 13.4 NA 12.5 10.4 7.2 NA NM 9.2 11.9 3.5 NM NA NM NA 2006 18.0 8.6 19.7 10.4 19.8 19.7 12.0 14.3 32.4 15.3 17.1 NA 18.8 5.2 11.4 16.5 41.0 6.2 12.8 13.1 19.0 43.8 20.3 26.9 10.4 12.4 NM 2.4 57.1 15.3 NM NA 13.6 12.4
Return on Equity (%)

2005 22.4 8.1 15.2 10.7 14.5 21.5 14.8 88.0 27.0 13.9 16.4 8.0 17.7 3.5 14.0 18.7 29.5 9.1 12.6 14.9 18.5 NA 21.0 21.7 12.8 15.0 NM 11.9 50.1 9.7 NM NA 6.2 15.0 2004 23.2 5.8 14.0 11.4 13.4 22.8 13.3 16.8 23.7 9.3 14.6 11.0 17.4 7.4 11.6 17.6 15.6 8.6 12.6 15.8 18.9 NA 21.0 17.1 13.5 20.6 0.5 3.0 54.5 9.0 NM NA 1.4 20.6 2003 22.0 12.1 15.9 5.7 13.5 17.9 13.8 NM 19.2 9.9 15.8 7.8 13.5 8.0 13.3 17.5 24.2 5.9 13.0 13.5 23.6 NA 21.1 14.1 11.8 71.3 NM 14.7 72.1 5.1 NM NA NM 71.3 2002 23.1 13.9 16.3 12.4 11.3 19.2 14.7 11.3 20.0 12.1 18.9 8.6 10.0 12.3 13.4 15.9 29.5 8.5 12.0 11.3 23.6 NA 22.1 13.9 13.9 NA NM 17.7 167.0 20.9 NA NA NM NA
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC COSI COSI INC DEC DPZ DOMINO'S PIZZA INC DEC LUB LUBYS INC AUG TXRH TEXAS ROADHOUSE INC DEC
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year.
Current Ratio
Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP DEC DEC DEC DEC 2006 0.6 0.5 0.5 0.6 0.9 0.9 1.2 0.8 0.5 1.2 1.2 NA 1.2 0.7 0.6 1.2 0.8 2.7 0.9 0.4 0.8 0.4 0.5 0.8 0.4 0.7 1.7 1.7 0.5 2.9 1.8 1.1 0.5 0.7 2005 0.5 0.5 0.6 1.0 0.6 0.8 1.3 0.8 0.4 1.1 1.0 0.7 1.4 0.8 1.1 1.2 0.9 4.5 1.1 0.4 0.7 0.7 0.5 1.0 0.4 0.9 1.2 1.3 0.5 3.0 3.0 1.0 0.3 0.9 2004 0.7 0.3 1.1 1.2 0.8 0.3 1.0 0.6 0.4 2.1 0.9 2.2 0.8 0.7 1.3 1.0 0.8 2.0 0.9 0.5 0.6 0.5 0.7 1.8 0.8 0.8 3.3 0.7 0.5 3.1 1.1 1.0 0.2 0.8 2003 0.6 0.3 0.5 1.3 0.7 0.7 1.4 0.8 0.5 2.8 0.6 0.8 0.8 0.6 1.1 1.6 0.8 4.1 1.1 0.5 0.6 NA 0.9 1.5 0.6 0.5 4.8 0.9 0.6 3.6 0.7 1.0 0.2 0.5 2002 0.6 0.3 0.5 1.2 0.7 1.0 1.2 0.6 0.5 3.0 0.3 0.6 0.7 0.7 1.5 1.8 0.8 2.7 1.0 0.5 0.6 NA 0.7 1.6 0.4 0.5 4.2 0.9 0.5 0.9 1.0 0.9 0.2 0.5 2006 25.5 18.1 31.6 0.0 69.1 32.8 4.8 31.1 30.5 42.0 24.5 NA 33.7 27.5 4.8 0.0 38.6 0.0 31.5 31.6 51.8 50.0 27.4 0.2 35.7 9.7 58.3 34.8 57.5 0.0 0.2 422.4 0.0 9.7
Debt / Capital Ratio (%)

2005 28.6 20.4 26.0 0.0 17.9 29.1 3.5 43.7 27.3 44.7 31.7 60.2 35.7 32.9 2.4 0.0 22.6 0.0 8.3 21.4 39.4 48.9 18.7 0.2 37.3 2.8 66.6 22.4 53.2 0.0 0.2 367.0 8.3 2.8 2004 6.3 21.9 37.1 0.0 16.0 2.9 2.8 71.2 20.2 43.2 33.3 47.7 35.8 34.5 0.2 0.0 35.0 0.0 8.1 21.6 28.7 174.4 25.1 0.1 41.0 7.0 57.2 24.5 52.0 0.0 1.0 367.5 28.5 7.0 2003 4.3 3.4 22.8 0.0 17.6 15.9 0.0 78.9 33.3 41.1 36.6 32.3 41.8 39.2 0.1 0.0 26.1 0.0 7.1 21.3 23.0 NA 37.5 0.2 45.7 56.7 59.0 26.8 64.7 0.0 0.9 421.7 0.0 56.7 2002 11.7 4.5 30.0 0.0 19.1 12.8 0.0 66.5 32.8 42.2 22.6 24.7 46.2 34.3 0.8 0.0 52.9 0.5 6.9 27.8 31.7 NA 33.7 0.3 50.1 64.7 47.3 30.4 79.5 19.0 0.6 267.7 3.5 64.7
Debt as a % of Net Working Capital

2006 NM NM NM NM NM NM 99.2 NM NM NM 395.9 NA NM NM NM 0.0 NM 0.0 NM NM NM NM NM NM NM NM 435.4 212.2 NM 0.0 0.7 NM NM NM 2005 NM NM NM NM NM NM 66.2 NM NM NM NM NM 492.9 NM 65.7 0.0 NM 0.0 622.6 NM NM NM NM NM NM NM 301.8 355.5 NM 0.0 0.4 NM NM NM 2004 NM NM NM 0.0 NM NM 362.2 NM NM 546.9 NM 346.4 NM NM 2.6 0.0 NM 0.0 NM NM NM NM NM 0.6 NM NM 96.2 NM NM 0.0 36.2 NM NM NM 2003 NM NM NM 0.0 NM NM 0.0 NM NM 388.3 NM NM NM NM 3.1 0.0 NM 0.0 349.9 NM NM NA NM 1.4 NM NM 79.2 NM NM 0.0 NM NM NM NM 2002 NM NM NM 0.0 NM NM 0.0 NM NM 300.3 NM NM NM NM 8.6 0.0 NM 1.9 856.2 NM NM NA NM 1.6 NM NM 69.1 NM NM NM 32.6 NM NM NM
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC COSI COSI INC DEC DPZ DOMINO'S PIZZA INC DEC LUB LUBYS INC AUG TXRH TEXAS ROADHOUSE INC DEC
35
36
Price / Earnings Ratio (High-Low)

Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP DEC DEC DEC DEC 2006 24-16 21-14 19-13 32-23 18-12 20-13 38-21 25-17 17-13 22-18 21-11 NA-NA 19-14 28-18 43-22 40-25 19-15 57-43 23-17 30-18 21-13 24-17 27-20 53-38 21-13 37-20 NM-NM NM-96 21-15 2005 22-15 17-13 23-18 34-22 17-12 20-14 34-26 5-3 17-11 22-17 16-11 16-13 17-13 43-24 45-30 43-23 23-12 48-30 21-16 37-24 16-12 77-54 29-21 52-35 20-15 43-29 NM-NM 29-19 20-17 40-24 NM-NM 16-10 39-15 43-29 2004 21-16 33-21 25-18 27-18 19-13 19-13 39-29 46-20 15-10 27-20 19-10 14-10 18-14 20-14 58-39 35-25 27-21 42-24 23-17 37-17 21-14 NA-NA 29-19 66-34 22-16 35-24 NM-NM 93-69 19-13 43-26 NM-NM 16-11 NM-41 35-24 2003 24-14 16-10 21-15 63-39 19-12 21-9 39-24 NM-NM 17-12 23-12 12-7 16-9 23-10 24-14 55-30 46-24 18-12 57-31 22-13 32-11 18-9 NA-NA 24-15 48-28 24-11 NA-NA NM-NM 20-12 17-10 40-31 NM-NM NA-NA NM-NM NA-NA 2002 19-13 16-10 23-15 34-22 20-12 20-10 44-25 29-7 22-13 19-11 16-7 18-11 39-19 18-11 47-28 51-32 15-10 44-25 19-13 22-14 20-10 NA-NA 28-16 46-33 19-12 NA-NA NM-NM 21-13 17-10 NA-NA NM-NM NA-NA NM-NM NA-NA 2006 20 32 12 0 19 0 0 20 17 41 0 NA 43 0 0 0 0 0 0 0 31 0 0 0 0 0 NM 180 18 0 NM 29 0 0
Dividend Payout Ratio (%)

2005 15 31 0 0 22 0 0 5 18 44 0 10 33 0 0 0 0 0 0 0 3 0 0 0 0 0 NM 29 16 0 NM 25 0 0 2004 4 46 0 0 14 0 0 0 4 62 0 7 30 0 0 0 0 0 0 0 3 NA 0 0 0 0 NM 104 8 0 NM 6 0 0 2003 4 23 0 0 1 0 0 NM 6 44 0 6 34 0 0 0 0 0 0 0 3 NA 0 0 0 NA NM 12 0 0 NM NA NM NA 2002 4 20 0 0 1 0 0 0 6 0 0 6 30 0 0 0 0 0 0 0 3 NA 0 0 0 NA NM 12 0 NA NM NA NM NA 2006
Dividend Yield (High-Low, %)

2005 1.0-0.7 2.4-1.8 0.0-0.0 0.0-0.0 1.8-1.3 0.0-0.0 0.0-0.0 1.4-0.9 1.6-1.0 2.6-2.0 0.0-0.0 0.8-0.6 2.4-1.9 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.2-0.2 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 2.8-2.1 1.6-1.0 1.0-0.8 0.0-0.0 0.0-0.0 2.4-1.5 0.0-0.0 0.0-0.0 2004 0.3-0.2 2.1-1.4 0.0-0.0 0.0-0.0 1.1-0.8 0.0-0.0 0.0-0.0 0.0-0.0 0.4-0.3 3.1-2.3 0.0-0.0 0.7-0.5 2.2-1.7 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.2-0.1 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 3.1-2.3 1.5-1.1 0.6-0.4 0.0-0.0 0.0-0.0 0.5-0.3 0.0-0.0 0.0-0.0 2003 0.3-0.2 2.2-1.4 0.0-0.0 0.0-0.0 0.1-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.5-0.3 3.6-1.9 0.0-0.0 0.7-0.4 3.3-1.5 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.3-0.2 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 1.5-0.5 1.0-0.6 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 NA-NA 2002 0.3-0.2 2.0-1.3 0.0-0.0 0.0-0.0 0.1-0.1 0.0-0.0 0.0-0.0 0.0-0.0 0.4-0.3 0.0-0.0 0.0-0.0 0.6-0.3 1.5-0.8 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.3-0.2 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.9-0.6 0.0-0.0 NA-NA 0.0-0.0 NA-NA 0.0-0.0 NA-NA
1.3-0.8 2.4-1.5 1.0-0.6 0.0-0.0 1.6-1.1 0.0-0.0 0.0-0.0 1.2-0.8 1.4-1.0 2.3-1.8 0.0-0.0 0.8-0.6 3.2-2.2 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 2.4-1.5 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 6.3-3.9 1.9-0.9 1.2-0.8 0.0-0.0 0.0-0.0 2.3-1.7 0.0-0.0 0.0-0.0
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC 31-16 COSI COSI INC DEC NM-NM DPZ DOMINO'S PIZZA INC DEC 17-13 LUB LUBYS INC AUG 20-10 TXRH TEXAS ROADHOUSE INC DEC 37-20
Earnings per Share ($)

Ticker Company Yr. End DEC # APR JUN DEC JUL DEC DEC # JAN # MAY DEC SEP DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAY DEC AUG SEP SEP 2006 1.09 1.68 1.66 0.72 2.71 2.09 1.04 0.79 2.63 2.46 3.12 NA 2.33 0.81 1.28 1.88 1.95 0.57 1.50 1.78 1.60 1.02 0.91 0.76 1.01 2005 1.30 1.53 1.21 0.67 2.65 2.13 1.12 3.29 2.26 2.26 2.57 2.01 2.06 0.53 1.44 1.69 1.32 0.77 1.55 1.68 1.67 0.30 0.84 0.63 1.10 0.44 (0.84) 1.95 1.33 2004 1.36 1.05 1.05 0.62 2.29 2.22 0.86 0.32 1.85 1.62 2.06 2.46 1.81 1.05 1.01 1.28 0.68 0.66 1.41 1.46 1.59 0.05 0.71 0.49 1.01 0.42 0.02 0.46 1.27 0.44 (0.62) 1.17 0.08 0.42 2003 1.13 2.07 1.16 0.28 2.16 1.70 0.77 (0.88) 1.39 1.72 2.02 1.66 1.19 0.98 1.00 1.03 0.94 0.41 1.27 1.04 1.68 NA 0.60 0.34 0.78 0.47 (0.22) 2.07 1.05 0.33 (1.54) (0.11) (0.11) 0.47 2002 0.99 2.13 1.04 0.55 1.69 1.67 0.67 0.45 1.36 1.95 2.11 1.60 0.78 1.44 0.85 0.75 1.16 0.43 1.03 0.67 1.38 NA 0.53 0.28 0.83 0.37 (0.48) 1.96 0.99 0.32 (5.04) 1.18 (0.43) 0.37
Tangible Book Value per Share ($)

2006 4.51 16.84 7.42 7.00 6.74 11.13 9.05 5.07 7.57 15.58 16.71 NA 11.01 11.06 10.64 10.52 2.57 9.40 11.17 10.69 7.88 0.01 3.32 2.68 9.60 3.06 (1.20) 9.64 0.81 6.56 1.26 (9.39) 6.35 3.06 2005 3.50 16.38 7.21 6.49 16.65 9.92 8.17 4.73 8.20 15.38 12.66 21.61 10.45 10.03 10.47 8.49 3.61 9.02 12.10 10.43 8.77 0.41 3.26 2.56 8.73 2.56 (2.67) 16.03 1.04 5.58 1.45 (7.93) 5.56 2.56 2004 4.51 15.20 6.27 5.79 J 15.99 9.92 6.94 1.34 8.09 16.49 12.00 22.74 9.74 9.29 9.08 6.76 2.63 8.04 11.27 7.95 8.57 (6.71) 2.70 2.99 7.92 1.82 2.42 13.41 1.20 5.02 0.91 (8.34) 5.92 1.82 2003 2002 2006 26.47-17.29 34.91-22.72 32.02-20.99 23.00-16.70 47.95-32.04 41.14-27.69 39.28-21.65 20.00-13.17 44.43-32.91 54.59-43.94 64.60-33.15 36.30-26.11 44.68-31.73 22.31-14.98 54.93-28.09 75.88-46.25 37.96-28.76 32.76-24.29 34.85-24.98 52.81-32.42 32.98-21.03 24.61-16.90 24.75-18.14 40.01-28.72 21.10-13.25 17.24-9.16 20.56-12.86 67.19-31.75 31.84-22.10 29.17-14.80 11.21-4.20 28.90-21.01 16.09-8.18 17.24-9.16
Share Price (High-Low, $)

2005 29.19-19.73 26.45-19.91 28.27-22.13 22.87-14.63 44.60-33.11 43.14-29.32 38.49-29.29 17.15-11.51 39.53-25.78 50.50-37.97 41.95-27.35 33.00-25.39 35.69-27.36 22.90-12.70 65.12-42.92 72.65-39.00 30.13-15.67 37.28-23.05 32.84-24.81 62.91-40.34 26.80-20.48 23.06-16.30 24.03-17.77 32.46-22.29 21.95-16.41 19.13-12.65 16.00-11.60 56.40-36.73 26.90-22.37 20.85-12.58 10.39-4.40 25.91-16.41 14.80-5.75 19.13-12.65 2004 28.55-22.26 34.37-22.49 26.53-19.28 16.97-11.19 43.14-30.00 42.25-28.93 33.50-25.01 14.77-6.28 28.54-18.48 43.40-32.78 39.00-21.09 33.74-24.75 32.96-24.54 20.89-14.29 58.18-38.99 45.14-32.35 18.50-13.88 27.42-16.10 32.59-23.56 54.75-24.27 33.00-22.63 NA-NA 20.71-13.36 32.13-16.45 21.90-16.22 14.79-10.19 12.90-9.62 42.75-31.74 23.74-16.07 18.80-11.39 7.40-2.51 19.01-12.40 8.08-3.26 14.79-10.19 2003 26.79-15.39 33.25-21.18 24.81-17.55 17.71-10.83 42.07-24.86 35.24-15.66 30.00-18.18 7.95-3.05 23.01-16.50 39.40-20.98 23.60-15.01 26.78-15.05 27.01-12.12 23.65-13.66 54.59-30.25 47.79-24.55 17.00-10.93 23.50-12.61 27.95-16.89 32.86-11.22 29.98-15.90 NA-NA 14.21-8.85 16.72-9.81 18.40-8.75 NA-NA 32.58-10.10 41.55-23.97 17.70-10.77 13.06-10.30 6.08-0.95 NA-NA 3.94-0.95 NA-NA 2002 18.44-12.69 33.30-21.65 24.00-16.05 18.69-11.90 34.10-19.54 33.30-15.93 29.03-16.60 12.85-3.01 29.77-18.00 36.46-21.08 34.20-14.25 29.10-17.55 30.72-15.17 26.00-15.60 40.22-23.95 37.95-23.64 17.59-11.69 19.10-10.62 19.83-13.83 14.49-9.09 27.15-14.24 NA-NA 14.64-8.71 12.85-9.22 15.90-9.70 NA-NA 28.73-21.98 41.60-26.15 16.58-10.18 NA-NA 10.93-5.47 NA-NA 7.33-2.85 NA-NA
4.21 3.59 17.84 16.21 6.51 5.36 5.14 J 4.77 J 14.66 13.73 9.48 5.95 1.03 7.28 17.37 10.05 21.59 8.18 8.28 7.79 5.43 3.06 7.27 9.86 6.25 7.76 NA 2.04 2.53 6.92 1.08 3.68 12.15 0.41 4.64 0.92 (20.41) 5.87 1.08 9.41 5.04 2.04 7.12 16.62 10.31 20.33 6.88 12.20 6.50 4.59 2.03 6.57 8.52 4.30 6.34 NA 1.98 2.20 6.14 0.78 11.47 9.84 (0.43) 1.48 2.29 (13.67) 7.29 0.78
DEC 0.46 DEC (0.13) DEC 0.33 DEC 1.51
OTHER COMPANIES WITH SIGNIFICANT RESTAURANT OPERATIONS BWLD BUFFALO WILD WINGS INC DEC 0.95 0.52 COSI COSI INC DEC (0.32) (0.38) DPZ DOMINO'S PIZZA INC DEC 1.68 1.62 LUB LUBYS INC AUG 0.81 0.38 TXRH TEXAS ROADHOUSE INC DEC 0.46 0.44
Note: Data as originally reported. S&P 1500 Index group. * Company included in the S&P 500. Company included in the S&P MidCap. Company included in the S&P SmallCap. # Of the following calendar year. J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by Standard & Poors Equity Research Services and are prepared separately from any other analytic activity of Standard & Poors. In this regard, Standard & Poors Equity Research Services has no access to nonpublic information received by other units of Standard & Poors. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
37
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Restaurants - Standard and Poor&#39;s 2007

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Restaurants - Standard and Poor&#39;s 2007

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Industry Surveys

October 18, 2007

Mark Basham Restaurants Analyst Justin Menza Financial Writer

CURRENT ENVIRONMENT..................................................................1 Challenges persist

INDUSTRY PROFILE...............................................................................8 Satisfying the consumers appetite

INDUSTRY TRENDS ...............................................................................10

GLOSSARY .............................................................................................29 INDUSTRY REFERENCES.....................................................................30 COMPARATIVE COMPANY ANALYSIS .............................................32

Standard & Poors Industry Surveys

Mergers and sales across the industry

IHOP to buy Applebees

FISCAL YR. END

Source: Nation's Restaurant News.

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Shareholders pressure Wendys

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Outback Steakhouse operator taken private

Operating costs on the rise

Other chains shed underperforming units

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

PORK AND POULTRY PRICES CLIMB

Beef & veal Chicken Pork

Source: US Bureau of Labor Statistics.

Casual dining sales under pressure

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Value and convenience bolster quick service restaurants

The battle for breakfast

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Sales results vary by chain

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Satisfying the consumers appetite

RESTAURANT MARKET SHARES 2006

Snack 2.6% Hotel 2.9% Coffee 3.1% Family 5.4%

Convenience store 1.1% Bakery caf 1.0% Other 2.5%

Contract 10.5% Casual dining 15.9%

LARGEST US RESTAURANT CHAINS

Source: Nations Restaurant News.

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Some chains undertake aggressive financial policies

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Competing for customers

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Easier than home cooking

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Fast-food chains move overseas

Industry focuses on health

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Food safety concerns hurt industry

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Americans love to eat out

Industry susceptible to new federal, state, and local regulations

Source: US Bureau of Labor Statistics.

US FOOD SALES GROWTH

All food stores

Eating & drinking places

HOW THE INDUSTRY OPERATES

Source: Economic Research Service.

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Low entry barriers, high risk/return Restaurants: from take-out to full-service

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Franchising: a quick way to grow

Restaurant management and training

OCTOBER 18, 2007 / RESTAURANTS INDUSTRY SURVEY

Restaurants - Standard and Poor's 2007

Restaurants - Standard and Poor's 2007