Restaurant Momentum: Six Standouts

September 6th, 2012

The business press and Wall Street are focusing on signals of quarter to quarter sales momentum. There is no doubt that restaurant sales momentum cooled off from late 2011 and 2012, but its far from a disaster. We have settled into a new normality that is actually closer to 2010-2011 levels.


In watching the Q2 2012 restaurant space earnings, six brands are of interest in that they exhibit what we define as good momentum from both a sales and profits standpoint. Six standouts. 

The firms below not only had significant earnings per share (EPS) beats of $.02 or more (meets or a penny over doesn’t excite us much) but also have positive traffic and a positive early peek Q3 trend. That is the early Q3 trend prerelease info that some companies give. This quarter’s entire group has recently performed well.
<ul>
<li>
Brinker (EAT)</li>
<li>
Texas Roadhouse (TXRH)</li>
<li>
Ruth Chris (RUTH)</li>
<li>
Popeye’s (AFCE)</li>
<li>
Panera (PNRA)</li>
<li>
Papa John’s (PZZA)</li>
</ul>

Common Denominators: There are two casual dining operators, one fine dine operator, one bakery/café, one QSR pizza, and one Chicken QSR operator. Two of the six are steak centric (RUTH, TXRH), with one other making inroads into higher steak menu mix (EAT). Four of six companies had single brands and of the  two with two brands under the holding company listing one brand greatly predominates over the other (EAT: Chill’s versus Maggiano’s) and RUTH (Ruth Chris versus Mitchell’s).
<ul>
<li>
Steak centric: we noted in 2011 that steak centric operators did well, no doubt by the improving travel/expense account traffic. RUTH’s peer, Del Frisco (DFRG) via its first call since IPO noted positive same store sales (SSS ) of 5.1% and traffic of +2.2% at the flagship Double Eagle units.  </li>
<li>
Positive traffic and early peek looks:  All had positive traffic—RUTH greatest at +3.9%; AFCE and PZZA don’t reveal traffic/check but one can so deduce it was positive).</li>
<li>
All had consensus earnings move up $.02 or more over the last 90 days—PNRA highest at +$.11, PZZA +$.09, EAT +$.07. Three of the six had 5 analysts or less providing estimates, with PNRA, TXRH and EAT well in double digit analyst coverage territory.</li>
<li>
None of these chains had eyeball high debt. Interestingly, none of the chains was actively refranchising, all were growing company units, with even franchisee heavy AFCE planning a significant slug of new company units.</li>
</ul>

Four of the six chains (RUTH, AFCE, PNRA, PZZA) had positive free cash flow increases from quarter to quarter. The free cash flow of EAT and TXRH was off from the prior year. But it should be noted that EAT is doing heavy duty remodels (and is still a huge cash generator) and TXRH is building new units.

Price/earnings ratios: only RUTH cheap but…

The price/earnings ratio is a key measure of the stock price multiple of earnings. Higher means more expensive and more pressure on the brand. Restaurants historically trade in the 10-20 times (X) range. See below how relatively inexpensive RUTH is, but how the others are clustered higher. 
<table border="1" cellpadding="0" cellspacing="0">
<tbody>
<tr>
<td style="width: 91px;">

Company
</td>
<td style="width: 91px;">

EAT
</td>
<td style="width: 91px;">

TXRH
</td>
<td style="width: 91px;">

RUTH
</td>
<td style="width: 91px;">

AFCE
</td>
<td style="width: 91px;">

PNRA
</td>
<td style="width: 91px;">

PZZA
</td>
</tr>
<tr>
<td style="width: 91px;">

TTM PE
</td>
<td style="width: 91px;">

18.6 X
</td>
<td style="width: 91px;">

18.6 X
</td>
<td style="width: 91px;">

10.8 X
</td>
<td style="width: 91px;">

22.5 X
</td>
<td style="width: 91px;">

30.4 X
</td>
<td style="width: 91px;">

21.8X
</td>
</tr>
</tbody>
</table>

Restaurant Momentum: Six Standouts

john a. gordon