Restaurants struggle as consumers eat at home

Cash-strapped consumers are getting reacquainted with cooking at home, and that's been bad news for restaurants and their stocks.

The dining-out industry is suffering through a major fire in the kitchen. Slowing business is forcing chains to shutter locations. Restaurants that remain open are seeing a drop-off in sales.

Shares of the top 26 restaurant companies have seen their stocks lose an average 49.3% of their value from their highest points over the past 52 weeks. That's been an even harsher pullback than the 46.5% decline of the Standard & Poor's 500 from its 52-week high.

There's even deeper pain suffered by individual restaurants and their investors. Ruth's Hospitality ruth, operator of the Ruth's Chris Steak Houses; DineEquity din, which runs IHOP and Appleby's; and Ruby Tuesday rt have all seen their stocks fall nearly 90%.

Meanwhile, 20 members of the retail and restaurants industry classification are dangerously close to having trouble keeping up with the interest payments on their corporate debt, S&P says. That makes it the third-most-pressured industry group among the 21 that S&P considers the weakest. Meanwhile, nine of the top 26 publicly traded companies have posted losses in their most recent quarters.

"Everyone is pulling back," says Lynne Collier, restaurant analyst at KeyBanc. "The economy is playing into it."

While the economy is prompting some families to closely review their budgets, taking a hard look at their dining-out costs, the stock market is especially punishing restaurants that:

•Cater to the high-end diner. As consumers look to cut back expenses, restaurants with the highest tabs are the first to see business slide, says Jeff Farmer, analyst at Jefferies. Consumers might forgo brunches at Cheesecake Factory if they're worried about their jobs, he says.

Many of the higher-end restaurants are also hurt by the fact that companies are trimming their expense account spending, says Ronald Shaich, CEO of Panera Bread pnra.

Diners are migrating to the lower-price menus such as Buffalo Wild Wings bwld, where customers can enjoy beer, chicken wings and televised sports. While its shares are down 31% from their 52-week high, they have risen 22% this year even as the S&P 500 has fallen 15%.

The company's sales at stores open at least a year grew 4.5% in the fourth quarter, and earnings rose 28.7% to $7.7 million.

Similarly, with its relatively low-price menu, McDonald's mcd has been an industry bright spot. While other restaurants are seeing business slow, sales rose 5.4% in January at McDonald's locations open at least a year. The industry leader's shares are beating the broader market this year, down 12%.

•Have considerable debt loads. Many of the larger players in the industry were borrowing heavily when business was booming three years ago, Collier says. The use of debt allowed the companies to boost their shareholder returns, she says. Many restaurants also used borrowed money to buy back shares of their stock.

The industry's debt burden has become onerous. As a group, restaurants have borrowed 83 cents for every $1 in shareholders' equity, Thomson Reuters says. That's already relatively high, considering that companies in the S&P 500 on average have borrowed 76 cents for every $1 in shareholders' equity.

But several restaurants have debt loads that are almost twice the industry's lofty level.

These heavy debt loads have come back to burn many of the restaurant companies. And investors, already worried about the difficultly companies may have in refinancing their debt, have sold the stocks. "These companies didn't need to be leveraged up," Collier says. "The timing was very unfortunate."

•Rely on dinner. Restaurants that get a big slice of their business and profit in the evenings are feeling the downturn most, Shaich says. That's been a big reason behind troubles at many of the large casual-dining chains, he says.

At Panera, for instance, breakfast traffic has been the least affected, followed by lunch. Workers are still paying to take themselves out to lunch. "Not buying a Lexus is one thing, but to brown bag it, that's a lower savings," Shaich says.

When will things improve?

The question is, when will the restaurants do better and the stocks turn around?

With little clarity of when the economy will heal, restaurant stocks by and large continue to sink, Collier says.

Despite the bruising the stocks have taken, valuations as a group aren't cheap compared with the market. The restaurant industry is trading for 16 times its earnings over the past 12 months excluding restructuring charges, Thomson Reuters says.

That's down from its high valuation mark of 38 times earnings but still above the S&P 500's 13.2 P-E, or price-earnings ratio, measured on a similar basis.

Collier doesn't expect the restaurant industry's turnaround to come for at least 12 months and possibly up to 24 months.

Still, as soon as consumers feel more confident that they'll hang onto their jobs, they will quickly resume dining out, Collier says.

Shares of several restaurant stocks have been faring much better in 2009.

Shares of O'Charley's chux, Steak n Shake sns and BJ's Restaurants bjri are up 50%, 6% and 11%, respectively, largely because of the fact they had already been beaten down.

"It's hard to go back and cook at home every night," Collier says. "People want to go out and reward themselves. That will happen eventually."