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Casual-Dining Rally Built On Fragile, Hopeful Ground

By Paul Ziobro Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- A rally in shares of casual-dining-restaurant operators could provide a bout of indigestion should signs of improving sales wane. Some analysts say the latest run-up is built on fragile ground, hinging on comments from industry bellwether Darden Restaurants Inc. (DRI), which said early Friday it "may be seeing early signs" of sustainable improvement in sales trends in December. Darden's comments proved to be a "rallying cry" for investors to gobble up shares, but Barclays Capital restaurant analyst Jeffrey Bernstein says that any guarded comments from other chains are "likely to derail the cautious optimism expressed by a select few." Among the companies benefiting from the cautious optimism are Brinker International Inc. (EAT), operator of Chili's Grill & Bar, whose shares are up 6.6% since Thursday's close, and DineEquity Inc. (DIN), which owns Applebee's and IHOP, up 12.3%. Darden, which operates Olive Garden, Red Lobster and other brands, has rallied 9.4% over the same period, while smaller chains like California Pizza Kitchen Inc. (CPKI), Ruby Tuesday Inc. (RT) and Red Robin Gourmet Burgers Inc. (RRGB) are also up significantly. That same-store sales would improve sequentially into December was hardly in jeopardy. Last year, same-store sales fell 9.5% in December, according to industry tracker Knapp-Track, among the worst months ever recorded, providing an easy hurdle to top this month. Darden executives admitted that easier comparisons contributed to improving same-store sales in December, calling into question the veracity of the consumer-spending rebound. The company, however, noted that jitters over job losses and security also appear to be waning, leading to some optimism. The view could sustain a rally for several weeks, says Raymond James analyst Bryan Elliott, but he doesn't think that "we are at a true inflection point where a sustained recovery to positive industry [same-store sales] is likely." Shares of casual-dining companies have made several runs at sustained rallies over a multi-year slump, with investors hanging their hats on either budding signs of improving spending or of margins improving from lower costs. With costs trimmed over the past year, casual-dining companies are under increased pressure to grow sales. As the consumer recovery unfolds choppily, "the sales recovery in casual-dining is still tenuous," Morgan Stanley analyst John Glass says. -By Paul Ziobro, Dow Jones Newswires; 212-416-2194; [email protected]

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