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December-Quarter Earnings Season Is Underway

A number of restaurant operators have already reported results for the fourth quarter, and more announcements should start trickling in over the course of the next few weeks. Industry heavyweight McDonald’s (MCD- Free McDonald's Stock Report) recently set the tone with a mediocre showing, and signs appear to be pointing to a somewhat disappointing season.

McDonald’s reported a 2% top-line gain in the December quarter compared with a year ago, which was slightly below expectations. Moreover, global same-store sales dipped a touch, as higher average checks were offset by reduced guest traffic. Share earnings crept up 2%, too, which was also lower than anticipated. Moreover, costs were up as a percentage of revenues, which hurt margins, and the restaurant operator had to rely on a lower tax rate and stock buybacks to boost the bottom line.

Elsewhere in the restaurant space, preliminary fourth-quarter results have been mostly mixed.

Following in McDonald’s footsteps, Cracker Barrel Old Country Store (CBRL) reported that comparable-restaurant traffic dipped in November and in December, though increased average checks helped mitigate the declines. On the brighter side, Popeyes Louisiana Kitchen Inc.(PLKI) formerly known as AFC Enterprises, owner and operator of Popeyes, announced global same-store sales rose 1% in the fourth quarter; however, December-period share earnings are expected to decline slightly compared with a year ago.

As far as the coffee shops go, Starbucks (SBUX) was the only company to report December-period results, and investors had a lot to smile about. Global same-store sales were up 5% in the interim, with growth in China and the Asia/Pacific region leading the charge. Total revenues rose an astounding 12%, thanks to the better comparable-store results and new Starbucks openings. Margins were better, due mostly to lower commodity costs, so share earnings surged 25%.

CEC Is Going Private

CEC Entertainment (CEC), owner and operator of Chuck E. Cheese’s family-oriented pizza restaurants, recently announced a deal to be acquired by an affiliate of private-equity firm Apollo Global Management. The total transaction, including the assumption of debt, is valued at $1.3 billion, and CEC holders are set to receive $54 a share. This is a 25% premium to the stock’s closing price on January 7th, when reports first surfaced that the company was looking to sell. It does not appear that a better offer is forthcoming, so current investors should probably look to sell at the takeout price and invest elsewhere.

Darden Is Breaking Up

Darden Restaurants (DRI), owner and operator of Olive Garden, Red Lobster, and LongHorn Steakhouse, among others, reported disappointing fiscal second-quarter results, missing on both the top and bottom lines. Management mostly blamed the competitive environment and weak operating conditions for the company’s shortfall, but also mentioned that Red Lobster has been continually falling behind, further highlighting that the seafood chain is no longer a good fit. Consequently, Darden has put a preliminary plan in place to separate Red Lobster, which should unlock some shareholder value and allow the company to focus on reducing costs and increasing traffic at its other brands. The move was thought to be the result of pressure from activist investor group Barrington Capital, but the investment firm announced that it was not entirely pleased with the proposed transaction. DRI stock, meanwhile, has traded sharply lower since the announcements were made in mid-December.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.