By Meat&Poultry Staff

CHICAGO – Looking to 2013, the credit outlook for the US restaurant industry is expected to remain stable as restaurants adjust operating and financial strategies to manage through a challenging revenue and cost environment, according to Fitch Ratings. Fragile economic growth, intensifying competition, food inflation and costs to comply with elements of the Patient Protection and Affordable Healthcare Act that become effective Jan. 1, 2014, will all challenge the industry.

Average annualized same-store sales (SSS) growth of 1 percent to 3 percent is expected in the US during 2013, which is flat to slightly weaker than the projected average for 2012. Throughout the year, sales volatility is anticipated, with the fast-casual and quick-service segments expected to outperform casual and family dining.

Fitch relays category leaders, such as McDonald's Corp. (McDonald's; 'A'/stable outlook) and Darden Restaurants, Inc. (Darden; 'BBB'/negative outlook), may be challenged by improving competitors like Burger King Worldwide Inc. (BKW; 'B'/positive outlook) and Bloomin' Brands, Inc. (not rated).

Food-away-from-home spending and SSS growth across Europe and Asia in 2013 is also expected to dampen due to global economic weakness. Fitch is forecasting negative 0.1 percent GDP in the Eurozone; growth of about 8 percent, supported by monetary and public investment, is projected for China; and a 2.3 percent GDP growth is projected in the US, even if going over the fiscal cliff is prevented.

Casual dining chains; such as Darden and DineEquity Inc. (DIN; 'B'/stable outlook), with mainly domestic operations, are the most vulnerable to weakness in the US. Europe may pose the biggest risk to McDonald's, as the region represented 40 percent of the firm's sales and 38 percent of its operating income before corporate expenses in 2011. A further slowdown in China is a viewed as a considerable threat to Yum! Brands (Yum; 'BBB'/stable outlook) as the country represented 44 percent of revenue and 42 percent of operating income before corporate expenses in 2011.

Although lackluster SSS trends affect the entire industry, operating earnings and cash flow of restaurant chains with a high percentage of franchised units are mostly insulated from rising food and labor costs. However, restaurant-level profitability and the cash flow of franchisees, which pay royalties to these chains, could be pressured. A risk for restaurant firms is modest margin contraction, which will be primarily company-operated in 2013.

Industry globally will focus a greater emphasis on value promotions, selective pricing and cost management. Although not expected, an increase in the rate of dividend increases and share repurchases concurrent with SSS weakness and broadening cost pressures would negatively affect Fitch's outlook for the industry.