Zacks Equity Research this week took a look at the Restaurant Industry.

A recent survey by the National Restaurant Association revealed that the Restaurant Performance Index (RPI), measuring the health and outlook on the U.S. restaurant industry, was 100.7 in February, up 0.4% from January. The RPI gain in February connotes improvements in same-store sales and customer traffic.

The Current Situation Index, which measures comparable-store sales, traffic counts, labor costs and capital expenditures in the restaurant industry, was 99.4 in February, up 0.9% sequentially. The Expectations Index, which measures restaurant operators’ six-month outlook on the above indicators, stood at 101.9, up slightly from 101.8 in the prior month. Restaurant operators’ capital spending plans rose to the highest level in 40 months reaffirming their optimistic outlook on the industry.

According to Zacks: “Looking ahead, we see solid top-line trends. International travel to the U.S. also continues to grow. We believe well-positioned companies will drive above-average traffic trends and enjoy pricing power, leading to same-store sales increases in 2011. The economy is continuing to improve, albeit at a modestly lower rate, but a sluggish labor market, over-supply of restaurants in the industry, higher gasoline prices and food cost inflation may weigh on industry profitability.

Restaurants have been trying to win back cash-conscious guests by revamping promotions, offering discounts and focusing on value-for-meal menus. However, the tendency to offer discounts has been moderating. Zacks says it remains cautiously optimistic over the near-to-medium term, with consumers continuing to look for value, distinct dining experiences, as well as convenience and enhanced menu deals in a gradually improving economic backdrop.

In the midst of what is considered to be a moderate recovery, there are three potential drivers of net income growth for the restaurant industry: unit expansion, same-store sales, cost-containment efforts and marketing tools.

Unit Expansion:In response to an economy that lacks luster, most of the companies have slowed their pace of restaurant openings. However, with the expected resurgence of consumer confidence, companies are turning back slowly to unit expansion, though not aggressively.

BJ’s Restaurants Inc. plans to open 12 to 13 restaurants in fiscal 2011 compared with 10 restaurants in fiscal 2010. In the long run, there still exists room to open at least 300 outlets. Chipotle Mexican Grill Inc. plans to open 135 to 145 new restaurants in 2011, maintaining a growth rate of 13%.In fact, the companies are set to explore international markets. While Chipotle is primarily concentrating on European countries including the U.K., Germany and France, Buffalo Wild Wings Inc. will expand its overseas footprint by opening more than 50 company-owned and franchised restaurants in Canada over the next fives years. P.F. Chang’s China Bistro Inc. has also eyed the Canadian market.

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