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Casual dining takes economic hit

With business lagging, consumer stocks could follow

– Restaurant stocks are underperforming the U.S. market, a signal that shares of retail companies also may be poised to lag behind.

Income growth, one of the primary drivers of discretionary spending, remains lackluster, as does the labor market, said Tom Porcelli, chief U.S. economist at RBC Capital Markets Corp. in New York. Even with unemployment falling below 9 percent in November for the first time since March, consumers still “lack the ammunition to drive spending at this point,” he said.

Real disposable personal income, or the money left over after taxes and adjusted for inflation, is down 0.4 percent since December 2010, according to data from the Bureau of Economic Analysis. Meanwhile, the Bloomberg Consumer Comfort Index has rebounded only about 4 points to minus 49.9 in the week ended Dec. 11, from the record low reached during the midst of the 18-month recession.

With both income growth and confidence weak, restaurants are a “canary in the coal mine,” because dining out is “one of the first things households cut during tough times,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto.

Darden Restaurants, operator of more than 1,900 eateries, reduced its annual sales-growth forecast Dec. 6, causing the shares to tumble 12 percent that day to $41.82, the biggest drop since August 2008. Same-restaurant sales at its Olive Garden chain fell 5.7 percent in November, the seventh consecutive month of declines, the company said Dec. 16 when it reported second-quarter earnings.

One retailer that’s already feeling the effect of value-conscious consumers is Best Buy Co., the largest U.S. electronics chain. Net income fell 29 percent to $154 million in the quarter ended Nov. 26, the company said Dec. 13, after it increased promotions, including discounts on flat-panel televisions, to spur sales the day after Thanksgiving. Its shares fell 15 percent on the income news – the most since August 2002 – to $23.73.

“Signs of consumer retrenchment are showing up first in casual dining and may be spreading to other discretionary categories like retail” – a cautionary signal to investors overweight in this category, said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott. He is “underweight” consumer-discretionary stocks.

The Bloomberg U.S. Full Service Restaurant Index – which includes casual-dining chains such as Darden and Brinker International Inc. – has dropped 17 percent since July 13, while the Standard & Poor’s 500 Index has fallen 9 percent. Meanwhile, the S&P Retail Select Industry Index – including Best Buy and Macy’s – is down 7 percent.