Chipotle Mexican Grill, Inc. (CMG), Denny’s Corporation (DENN): Coming Storm in the Restaurant Sector?

You may be inclined to think that fast casual chains are setting unit goals too high. Yet these chains are growing more popular and they have strong balance sheets coupled with high amounts of free cash flow. With the efficiency of these companies, it becomes difficult to foresee anything that would keep them from hitting their goals.

As fast casual restaurants hit growth targets, full service will likely experience comp-sales pressure. Darden Restaurants, Inc. (NYSE:DRI) is well aware of the threat these newer chains pose, but a diverse portfolio works in its favor. By being in steak, Italian, seafood, and even beer with the acquisition of Yard House, the company seems to have a large enough moat to weather the storm. Although Darden’s earnings per share was down 12.3% for 2012, it still increased its dividend payout by 10%.

Conclusion
Fast casual is taking the restaurant sector by storm. Many segments are already feeling the heat, and will only continue to be pressured as fast casual chains grow at breakneck speed. Some traditional chains, like Darden Restaurants, Inc. (NYSE:DRI), will continue to thrive. For others, like Ruby Tuesday, the outlook looks bleak.

Both Noodles & Co (NASDAQ:NDLS) and Chipotle Mexican Grill, Inc. (NYSE:CMG) are among the best managed in the fast casual segment, but I’m eagerly awaiting Potbelly’s IPO. After reading its prospectus, I’m convinced it’s a rare opportunity. I intend to buy on the first day if its valuation is reasonable.

The article Coming Storm in the Restaurant Sector? originally appeared on Fool.com and is written by Jon Quast.

Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill (NYSE:CMG). The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants (NYSE:DRI). 

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