Report: Restaurant chains to benefit from improving California economy

The economic picture in California is improving rapidly, and public restaurant chains with a large presence in the Golden State are expected to outperform for the rest of the year, according to an analyst report released this week.

Having a number of locations in California was once considered a liability for a restaurant chain. The state was hit particularly hard by the recession, and several restaurant chains have blamed lingering unemployment over the past few years for slowing same-store sales recovery.

However, a report issued Monday by a group of Wall Street analysts at Piper Jaffray outlines several key indicators that paint a rosier economic picture for California, where a number of public companies have heavy exposure — good news for all restaurant operators across the state. Among the restaurant stocks cited by the report as best positioned to benefit are Starbucks, BJ’s Restaurants, The Cheesecake Factory and Chipotle Mexican Grill.

“We believe retailers with high exposure to California are poised for strong sales growth over the next several months/quarters as the state benefits from employment growth ahead of the national average and a rebound in housing,” the report concluded.

Among the indicators noted by the report:

• Employment trends are improving. In August, California had 306,000 more people employed than a year ago, rising 2.2 percent increase and exceeding the national average by 81 basis points. Private payrolls indicate a 2.8-percent increase.

• Construction jobs have increased for 12 months after 59 months of decline. No industry in California was hit harder during the recession, the report said, with construction jobs falling 36 percent from the end of 2005.

• Total non-farm, year-over-year payroll in California has outpaced the national average for the past four months. It rose 2.19 percent in August, the third highest growth rate since April 2001.

• Home prices in California increased 4.1 percent year-over-year in the second quarter, marking the fastest growth since 2006. Improvement in the housing sector will also likely result in more construction jobs and bodes well for consumer confidence, consumer balance sheets and, eventually, consumer spending, according to Piper Jaffray.

“We note that housing accounts for about 14 percent of California GDP versus 10 percent nationally, so we think a turn in home prices will help the economy more than other sectors,” the report said.

John Gordon, principal of Pacific Management Consulting Group in San Diego, said improving trends are also apparent for other California-heavy restaurant chains, though the news is somewhat mixed.

Carl’s Jr., for example, with most locations on the West Coast, last week reported a second-quarter same-store-sales increase of 4 percent at company-owned units, while sister brand Hardee’s, with a greater presence across the South and Midwest, saw same-store sales climb a more modest 1.6 percent. The two chains, however, are owned by privately held CKE Restaurants Inc., based in Carpinteria, Calif., which postponed a planned initial public offering earlier this year, blaming “market conditions.”

Jack in the Box Inc., a public company based in San Diego that Piper Jaffray doesn’t follow, also has a heavy presence in California with both company and franchise-owned stores. The company reported same-store sales increases of 2.8 percent for Jack in the Box and 2.1 percent for Qdoba Mexican Grill for the third quarter ended in July. Company officials said same-store sales continued to improve into the fourth quarter.

The Irvine, Calif.-based Yard House chain, recently acquired by Darden Restaurants Inc., posted a 2.2-percent same-store sales increase in the August-ended first quarter. The majority of the 40-unit chain’s locations are in California.

Among the four restaurant chains highlighted in the Piper Jaffray report this week, both Starbucks and Chipotle warned of the fragile economic picture nationally after reporting strong quarterly results in July. Starbucks recorded a same-store sales increase of 7 percent during its July-ended third quarter for the Americas region, including 12,653 locations in the U.S., Canada and Latin America. Chipotle, with about 1,300 units in the U.S., reported a same-store sales increase of 8 percent.

Piper Jaffray’s account of California’s imminent recovery was countered by other economists in recent weeks.

Last week, the UCLA Anderson Forecast concluded that the state’s economy will recover more slowly than expected over the next two years, with a boost expected in 2014.

The state’s unemployment rate is expected to remain around 10.7 percent through this year and average 9.8 percent through 2013. By 2014, however, California’s unemployment rate is expected to drop to 8.5 percent, just slightly above the current national rate.

Contact Lisa Jennings at [email protected].
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