$1 Fast-Food Deals Will Persist -- Until the Economy Rebounds

Value menus offering double-cheese burgers, fries or a milk shake for a buck aren't going away, at least not anytime soon. With several fast-food companies reporting quarterly sales declines, the chains will continue to rely on these deals to keep customers coming in the doors.

But once the unemployment rate begins to improve, the bargains will slowly disappear. "You are going to see those deals diminish," says Tony Brenner, senior research analyst with Roth Capital Partners. "Everyone knows that fast-food restaurants may be generating traffic with the deals, but they are money losers."

On Mar. 24, CKE Restaurants (CKR), operator of the Carl's Jr. and Hardees chains, reported that same-store sales (sales at restaurants open for at least a year) decreased 6% in the fourth quarter and slipped about 4% for the year. Andrew F. Puzder, CKE's chief executive officer, attributed the quarterly decline to poor weather, weakness in the economy and high unemployment. Plus, CKE has higher prices than some of the larger chains.

CKE is having a particularly rough ride because the vast majority of its restaurants are in hard-hit California. Its stock fell slightly on the earnings report and finished at $11.25 a share.

Why McDonald's Stands Alone

Earlier this week, fast-food drive-in chain Sonic (SONC) reported that same-store sales declined 13% for its second quarter ended Feb. 28. The most recent earnings for Burger King Holdings (BKC) and Jack in the Box (JACK) also showed struggling sales.

The introduction of specialty coffees might be the savior helping McDonalds (MCD) maintain steady sales. Plus, the world's largest hamburger chain is unique because it has figured out how to at least avoid losing money on its value deals.

Analyst Conrad Lyon of Global Hunter Securities isn't ready to write off the value deals quite yet. While the economy has had some positive news for consumers, the hard truth is that unemployment haven't really improved, particularly for the demographic that frequents fast-food restaurants.

"Everybody is going to continue to try to undercut everybody, and as long as we have high unemployment, we are going to see these deals," says Lyon, adding that McDonald's will likely be the last chain to limit the value deals.

Which Sector Will Rebound First?

The U.S. may be experiencing a brief increase in consumer confidence, Lyon says, but that's probably due to stimulus dollars reaching the fast-food demographic. And once that disappears, those consumers will stop going out again because they'll have to keep paying their other bills.

Brenner says a rebound in casual-dining chains will likely come first. For example, Darden Restaurants (DRI) reported earlier this week that same-store sales for its Olive Garden, Red Lobster and LongHorn Steakhouse chains increased 1.3% for its quarter ended Feb. 28.

"The whole restaurant sector is poised for a rebound, but it will take longer for the burger chains," Brenner says. "At some point, people will crawl out of their caves in terms of spending discretionary income."
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