Valuation Update for the Restaurant Industry

July 31, 2010
Industry Outlook Softened in June: Restaurant Performance Index Declined for a Third Consecutive Month
Coming off of a strengthening start of the first quarter with an improved optimism among restaurant operators, the Restaurant Performance Index (RPI) has recently lost its momentum. It stood at 99.5 in June, down 0.3 percent from May. This represents the third straight decline in the index and the second consecutive month it has stood below 100. Despite a lack of noticeable improvement in the RPI, restaurant operators generally sustained their optimism on an improving business environment despite a dip in growth outlooks in recent months.¹

The RPI is a monthly index that tracks the health and outlook for the U.S. restaurant industry. It is comprised of the Current Situation Index: a measure of current industry sales, customer traffic, labor, and capital expenditures trends, and the Expectations Index: a measure of future sales, staffing, business conditions, and capital expenditures trends. The index is measured in relation to a steady state of 100 with measurements above 100 representing periods of expansion and subsequently measurements below 100 representing contraction within the industry.¹

The June Current Situation Index remained relatively flat at 98.8, up 0.1 percent from May; however, it is the 34th consecutive month the index is below 100. The main drivers of the June current index were the same-store sales and capital expenditures indices of 99.5 and 98.5, a slight gain of 0.7 percent and slight decrease of 0.5 percent compared to May, respectively. Restaurant operators reported a six-month low in capital spending for equipment, expansion, and remodeling in June. Moreover, the Expectations Index stood at 100.2 in June, down 0.6 percent from May. This is the lowest index level in five months; however, it represents the sixth consecutive month the index is above 100, indicating an expected expansion for the outlook of the restaurant industry. The main determinants of the June Expectations Index were the business conditions and capital expenditures indices of 100.7 and 98.3, down 1 percent and 0.8 percent from May, respectively. Restaurant operators continue to remain optimistic about sales improvements and business conditions in the coming six months, but that optimism is vastly contingent on the recovery in the overall economy.¹

Transaction Activity
There were a total of five transactions that closed in the U.S. restaurant industry this July. Six transactions closed this past June, and 11 closed in July 2009, representing a decrease of 16 percent and 55 percent, respectively. Thirty transactions closed in the global restaurant industry this July, compared to 31 this past June and 31 in July 2009, both representing a decrease of 3 percent.²

On July 29, 2010, Carlson Restaurants Worldwide, Inc., a U.S.-based owner and operator of restaurants, acquired T.G.I. Friday's UK Ltd., an owner and operator of the T.G.I. Friday's restaurants throughout the United Kingdom. Carlson acquired the remaining 60 percent of T.G.I. Friday's UK Ltd. from AAC Capital Partners, a Dutch private equity firm for US$50 million. The transaction valued the entire entity with an Implied Enterprise Value of US$83 million.²

¹ www.restaurant.org, July 31, 2010.
² Capital IQ, July 31, 2010.