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Tickers in this Article: DRI, EAT, PFCB, RRGB
A recent report from a trade group in the restaurant industry indicates that tough times are still continuing as Americans are still reluctant to open their wallets and indulge in a night out on the town. The National Restaurant Association distributes the Restaurant Industry Tracking Survey, which is sent out to restaurant owners across the U.S. There are two parts to the survey, each with several sub components:

  1. Current Situation Index: This is a real-time composite that measures same store sales, customer traffic, labor and capital expenditures in the month being surveyed compared to the same month one year ago.
  2. Expectations Index: This is a forward-looking composite that incorporates a restaurant owner's outlook on same store sales, staffing, capital expenditures and business conditions.
These two indexes are combined into the Restaurant Performance Index (RPI). When the RPI is above 100, this indicates that the industry is in a period of expansion, while a value below 100 means a contraction is under way.

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Restaurants Are in Contraction Mode
The May report shows a value of 98.3 RPI and represents the 19th straight month that the index has been below 100. The Current Situation Index came in at 96.9, while the Expectations Index came in at 99.6.

One disturbing part of the Current Situation Index was that same store sales were negative for the 12th straight month, and customer traffic fell for the 21st straight month. One would have thought that the recent rebound in consumer confidence would send Americans out to celebrate, but so far there is little evidence of that.

The stocks, of course, don't ever seem to care too much about fundamentals and have already discounted an eventual recovery. They have bounced way off the lows they reached at the end of 2008.

Darden Restaurants (NYSE:DRI) reported a strong quarter, but was cautious in its guidance, disappointing investors and analysts who expected this large cap name to lead a recovery. Brinker International (NYSE:EAT), which owns the Macaroni Grill and Chili's chains, has quadrupled off of its 52-week low.

Other investors are still betting on a sell off for the group. PF Chang's China Bistro (Nasdaq:PFCB) had more than 8 million shares of its stock sold short as of June 15, 2009. This is more than 34% of its outstanding shares.

Red Robin Gourmet Burgers (Nasdaq:RRGB) is another stock that is a favorite of the shorts, with 4 million shares sold short out of 15.5 million total shares outstanding.

Check Please!
Fundamentals in the restaurant industry don't seem to be getting much better, although certainly the investor panic regarding liquidity and debt issues is long past. However, in order for the industry - and stocks - to make a complete recovery, Americans must start spending again. (For more, read Sinking Your Teeth Into Restaurant Stocks.)

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