Restaurants serve up higher sales

Full-service restaurants faced higher food costs and shaky consumer demand as they opened their doors in 2012, but many closed out 2011 with increased sales and improved profitability.

Privately owned restaurants generated a roughly 3 percent increase in sales during 2011, an improvement from a 2 percent gain in 2010, according to a financial statement analysis by Sageworks.

The average net profit margin among these full-service restaurants jumped from 1.93 percent to 5.01 percent, the highest level since before 2002, said Sageworks analyst Brad Schaefer.

“This may be the result of restaurant operators being able to tightly control expenses, which could be even more critical to maintaining or growing net profit margins over 2012 as food prices will likely continue to rise and demand is expected to remain relatively weak, according to experts in this field,” Schaefer said.

Sageworks’ analysis of financial statements uses an adjusted net profit margin, which excludes taxes and owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private company financials in order to provide a more accurate picture of the companies’ operational performance.

Last year was a mixed bag for the restaurant industry, said Chris Kiyohara, founder of Kiyohara & Takahashi, a Commerce, Calif., certified public accounting firm that specializes in franchise restaurant operations.

“After 2008, 2009 and 2010, where sales pretty much went down everywhere, sales actually started going up in 2011,” he said.

Market research firm NPD Group said in December that high unemployment and low consumer confidence kept visits to U.S. restaurants flat in the first three quarters of the year.  NPD is forecasting restaurant dollars to increase by 1.5 percent in 2011 and 2.1 percent in 2012, with traffic ticking up 0.7 percent.

With high unemployment across the country, restaurant owners and operators last year were able to keep labor rates pretty static and control overtime expenses, which has helped profitability, Kiyohara said. Indeed, Sageworks’ data shows that direct labor costs for the private full-service restaurants fell to 27.02 percent of sales from 28.15 percent.

Around April, however, commodity prices, especially for such restaurant staples as beef, began jumping. “Food costs normally range from 28 to 33 percent of sales, depending on the concept,” Kiyohara said. But as longer-term contracts of the big buying cooperatives have expired and been renewed, restaurant owners have seen higher prices kick in, he said.

The private full-service restaurants analyzed by Sageworks saw food costs increase to 36.9 percent of food sales, compared with 33.8 percent in 2010.

Restaurant owners and operators this year expect commodity prices to level off somewhat, Kiyohara said. “They’re hoping that sales continue to go up – maybe not double digits but single digits,” he said. Part of that increase will reflect higher menu prices as owners and operators have started to pass along their higher costs, he added.

Restaurants had been reluctant to raise prices so long as demand was sketchy.

Kiyohara expects that controlling labor costs will get a lot of attention in 2012. In California, employers will see workers’ compensation rates as much as double from 2011, he said. And costs associated with health care reforms could result in restaurants trying to hire more part-time help, rather than full-time workers.

Eight states on Jan. 1 boosted their minimum-wage rates, with Washington state becoming the first state to break through the $9 mark, according to trade publication Nation’s Restaurant News. San Francisco’s minimum wage rate is scheduled to reach $10.24 this year, it reported. Even so, a recent survey of restaurant operators by the newspaper found 58 percent of respondents expect higher profits in 2012, and nearly two-thirds expect increased sales.

Dozens of publicly traded companies, including Cracker Barrel (NASDAQ: CBRL) and Ruth’s Hospitality (NASDAQ: RUTH), this week are offering business updates at the annual ICR Xchange conference, which runs through Thursday. And several public firms have already said they, too, saw a strong sales finish to 2011 or are planning for improved sales this year.

On Tuesday, BJ’s Restaurants Inc. (NASDAQ: BJRI), a Huntington Beach, Calif., casual-dining company, preannounced preliminary fourth-quarter results that showed comparable-restaurant sales accelerated to nearly 7 percent growth, excluding an extra week in the fiscal 2011 calendar.

And Darden Restaurants Inc. (NYSE: DRI) said less than a month ago that it continues to expect its chains, which include the Red Lobster, Olive Garden and LongHorn Steakhouse, to generate total sales growth of 6% to 7% this year. It also expects cost pressures to ease in the second half, the company said in its press release.