The credit outlook for the U.S. restaurant industry remains stable for 2013, as restaurants adjust operating and financial strategies to manage challenging revenue and cost environments, 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 be challenges for the industry, according to Fitch.

Fitch expects average annualized same-store sales growth of 1-3 percent in the U.S. during 2013, flat to slightly weaker than the projected average for 2012. Sales volatility is anticipated throughout the year with the fast casual and quick-service segments outperforming casual and family dining. Category leaders, including McDonald's Corp. and Darden Restaurants Inc., may be challenged by improving competitors such as Burger King Worldwide Inc. and Bloomin' Brands Inc.

Global economic weakness is also expected to dampen food-away-from-home spending and SSS growth across Europe and Asia in 2013. Fitch is forecasting negative 0.1 percent GDP in the Eurozone, and growth of about 8 percent, supported by monetary and public investment, is projected for China. Fitch projects 2.3 percent GDP growth in the U.S., even if the fiscal cliff is avoided.

Casual dining chains with mainly domestic operations are most vulnerable to weakness in the U.S. Europe poses 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. Lastly, further slowdown in China is viewed as a considerable threat to YUM! Brands as the country represented 44 percent of revenue and 42 percent of operating income before corporate expenses in 2011.

Even though 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. Nonetheless, restaurant-level profitability and the cash flow of franchisees which pay royalties to these chains could be pressured. Modest margin contraction is a risk for restaurant firms which are primarily company-operated in 2013.

Greater emphasis on value promotions, selective pricing and cost management will be a focus for the industry globally. While not anticipated, 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.

The full report "2013 Outlook: U.S. Restaurants" is available at www.fitchratings.com.

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