Restaurants take big hit after rise in payroll taxes

Restaurants are reeling from their worst three months since 2010, as American diners spooked by higher payroll taxes cut back on eating out.

Sales at casual-dining establishments fell 5.4 percent last month, after declining 0.6 percent in January and 1.6 percent in December, according to the Knapp-Track Index of monthly restaurant sales. This was the first three months of consecutive declines in almost three years, with consumers caught in a "very emotional moment," said Malcolm Knapp, a New York-based consultant who created the index and has monitored the industry since 1970.

"February was pretty ugly" for many chains-and probably will be the worst month of the year - after January delivered an "initial blow" while Americans grappled with increased payroll taxes and health-care premiums, rising gasoline prices and budget debates in Washington, Knapp said. "It's important to keep in mind that companies also are facing unusually tough comparable sales because of favorable weather in 2012," so the result is an industry that's been "a lot softer so far this year."

Even as consumers open their wallets for bigger-ticket purchases including cars and furniture, weakness has surfaced at full-service companies such as Brinker International and Darden Restaurants, as well as limited-service chains including McDonald's and Yum Brands.

U.S. paychecks have shrunk this year after Congress and President Obama let the tax that funds Social Security benefits revert to 6.2 percent from 4.2 percent. Meanwhile, the average price of a gallon of regular unleaded has risen about 12 percent since Dec. 31, to $3.69, including a one-week jump of 17 cents between Jan. 27 and Feb. 3, based on data from Heathrow, Fla.-based AAA, the largest U.S. motoring organization.

"That one-week spike was a killer; it destroyed sales in the first week of February," Knapp said.

All this has "put meaningful pressure on the discretionary purchasing power" of Darden's customers, causing the company to pre-announce a decline in same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse in the three months ended Feb. 24 compared with a year earlier. The Orlando- based company is scheduled to report fiscal third quarter earnings on March 22.

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