Consumer Discretionary ETFs: US restaurant industry starts to simmer

Mar 27th, 2012 | By | Category: Equities

The American restaurant industry is starting to simmer. Consumers are spending more on meals and foot traffic at establishments is improving, albeit from a diminished base, according to the Chain Restaurant Industry Review, released at this week’s Restaurant Leadership Conference by GE Capital.

Consumer Discretionary ETFs - US restaurant industry starts to simmer

US consumers are spending more on meals and foot traffic at establishments is improving, according to the latest Chain Restaurant Industry Review.

As sales trends recover, operators are translating those positive feelings into a greater willingness to invest in their businesses. And with increasingly accessible credit, they’re able to commit to higher capital expenditures.

Agustin Carcoba, president and CEO of GE Capital Franchise Finance, said: “The restaurant industry has come through the upheaval of the past several years by listening closely to the consumer and adapting to their changing tastes – and they’ve done it well.

“Depending on their segment, brand and focus, operators have emphasised food quality, service quality, menu options and other factors that will lead to renewed growth this year and in the years ahead. Even better, operators did it all while managing operational costs.”

Consumers spent $406.6 billion at restaurants in 2011. For 21 consecutive months, they spent more at restaurants than grocery stores, and that trend is expected to continue. Last year, quick-service restaurants (QSR) accounted for 48.0% of that figure, while full-service restaurants (FSR) counted for 48.1%. The QSR category includes limited service, fast casual, take-out locations and snack and non-alcoholic beverage bars, while FSR includes family, casual, high-end casual and fine dining establishments.

FEATURED PRODUCT

PowerShares Dynamic Leisure and
Entertainment ETF
(NYSE: PEJ)

– Diversified exposure to 30 leisure and
entertainment companies

– Includes 15 major US restaurant groups
responsible for over 19 individual restaurant
and fast-food brands (50% of fund)

– Physical replication with full transparency
to underlying holdings

– Listed on NYSE Arca, eligible for SIPPs

– TER of 0.63%, reasonable for such a highly
targeted, factor-based ETF

Operators’ improved expectations can be partially attributed to positive results that were sustained throughout last year. QSR same-store sales grew 3.2% last year – ahead of the FSR rate of 2.4%. QSR benefitted from eight consecutive periods of growth due to more consistent traffic, while FSR relied more on menu price increases and higher average checks.

“Restaurateurs are no longer in survival mode; now they’re planning for the future,” said Trey Brown, commercial leader of GE Capital Franchise Finance. “To capture that growth and maintain a competitive advantage, they’re investing in their businesses by building new stores, remodelling existing ones or investing in new equipment.”

The level of liquidity available in the restaurant space continues to improve. Merger and acquisition activity – an indicator of the popularity of the restaurant industry among investors – increased last year. Total syndicated volume in the restaurant space increased more than 26% to almost $12 billion in 2011. Strategic buyers returned, such as American Blue Ribbon Holdings LLC, Darden Restaurants and Landry’s Inc. Private equity firms were also active; for example, Golden Gate Capital acquired California Pizza Kitchen.

“We expect restaurants to continue to be appealing acquisition targets because of the ongoing increases in food dollars spent away from home, as well as the scalability of this business model,” Brown added.

For investors looking to play this theme arguably the best fund is the PowerShares Dynamic Leisure and Entertainment ETF (see below), which has exposure to over 15 US restaurant groups. An alternative would be the PowerShares Dynamic Food & Beverage ETF (see below), or a conventional consumer discretionary sector ETF such as the Consumer Discretionary Select Sector SPDR ETF (XLY).

PowerShares Dynamic Leisure and Entertainment ETF (NYSE: PEJ)
The PowerShares Dynamic Leisure and Entertainment ETF is based on the Dynamic Leisure and Entertainment Intellidex Index. The index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. The index is composed of stocks of 30 US leisure and entertainment companies. These companies are engaged in the design, production or distribution of goods or services in the leisure and entertainment industries.

PEJ’s restaurant-related holdings include Starbucks, Chipotle Mexican Grill, Yum! Brands (KFC, Pizza Hut and Taco Bell), McDonald’s, Domino’s Pizza, Buffalo Wild Wings, Panera Bread, Brinker International (Chilli’s, Maggiano’s Little Italy, Romano’s Macaroni Grill), CEC Entertainment (Chuck E. Cheese’s), Dunkin’ Brands, Bravo Brio Restaurant Group, Papa John’s International, AFC Enterprises, Bob Evans Farms, Cracker Barrel Old Country Store. TER 0.63%

PowerShares Dynamic Food & Beverage ETF (NYSE: PBJ)
The PowerShares Dynamic Food & Beverage ETF is based on the Dynamic Food & Beverage Intellidex Index. The index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors. The index is composed of stocks of 30 US food and beverage companies which are engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies.

PBJ’s restaurant-related holdings include Yum! Brands (KFC, Pizza Hut and Taco Bell), McDonald’s, Papa John’s International, and AFC Enterprises (Popeye’s Louisiana Kitchen). TER 0.63%

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