Every year, it seems, I read expert opinion that there are too many restaurants, and the industry is greatly overcapacity for the number of consumers it serves. Then more restaurants open, filling every highway interchange and shopping-centre development.
Were there already too many publicly traded restaurant companies? Fear not, investors, you now have even more of those to choose from. No fewer than five have gone public on U.S. exchanges just since May, with a sixth bagging its IPO at the last minute.
We've previously shared our distaste for Burger King Worldwide, which debuted in June. Most of the others, all less famous, are similarly difficult to digest.
The market winner so far as been Chuy's Holdings Inc., an Austin, Tex.-based operator of 36 full-service Mexican restaurants in eight states. Sold at $13 (U.S.) a share in the last week of June, the stock rose more than 50 per cent, but has pulled back in recent days to about $17.50.
The chain says it has "an upbeat, funky, eclectic, somewhat irreverent atmosphere," with shrines to Elvis and framed pictures of customers' dogs.
It also has multiples that demand it be the next huge growth story in the industry: A trailing price-to-earnings ratio of about 140 and an enterprise value (market capitalization plus net debt) that's more than 20 times its or earnings before interest, taxes depreciation and amortization (EBITDA). For perspective, the median EV/EBITDA multiple among 50 U.S. restaurant companies is 8.5, according to Standard & Poor's Capital IQ.
The best-performing restaurant IPO of the summer would have been Ignite Restaurant Group Inc., the holding company for the chains Joe's Crab Shack and Brick House Tavern+Tap, if it had been able to hold its 52-week high of $19.87, more than 40 per cent above its May offering price.
Unfortunately, before it could even release its first set of quarterly earnings, the company announced it had to restate more than six years' worth of financial statements. It failed to file its first quarterly report with U.S. regulators, and it is already out of compliance with its brand-new Nasdaq listing.
Investor dissatisfaction has brought the shares down to $15.40, about 10 per cent above the IPO price. Which, if you're willing to overlook the company's accounting fiasco, may make it intriguing: Its forward P/E is just under 20, making it relatively cheap for a growth restaurant.
Bloomin' Brands Inc. isn't named for one of its chains, but for a menu item at one of them: The Bloomin' Onion, at Outback Steakhouse. It already operates more than 1,400 restaurants across five brands (others include Carrabba's Italian Grill and Bonefish Grill).
At its size, it has less room to grow than the other concepts, and its multiples are accordingly smaller. But it shares something else in common with both Chuy's and Ignite, as well as fast-food company CKE Restaurants, which pulled its IPO last week: Gigantic debt loads.
All four have debt-to-capital ratios of 80 per cent or more, with Chuy's and Bloomin' Brands at 95 per cent. Bloomin' Brands, Chuy's and CKE all have debt loads at about five times their EBITDA or more. (Among the group of 50 restaurant companies, the median debt-to-capital ratio is 45 per cent, while the median debt-to-EBITDA ratio is about 2 times.)
The problem is that all were backed, to some extent, by private-equity firms or other owners who used debt to finance their purchases. And all failed to use IPO proceeds to retire most of the debt, leaving the public shareholders with the burden of paying it off.
Odd, then, that the worst-performing restaurant IPO of the summer has the best balance sheet. Del Frisco's Restaurant Group LLC, the operator of 32 steakhouses and grills, has shed about 6 per cent of its value since its late-July offering. At about $12 a share, its P/E is just below 20.
Its debt levels are only slightly worse than average for the restaurant group, and a combination of new openings and same-store sales growth allowed Del Frisco's to post revenue gains of nearly 22 per cent in 2011. It also has above-average margins.
The fear, it seems, is that another economic slowdown will curtail sales at high-end chains such as Del Frisco's, where the average cheque runs from $100 at its steakhouses down to $45 at its grills.
Fair enough; but I suspect Del Frisco's may provide both the most satisfying meal and the most robust long-term return. A tasty combination.
David Milstead