Restaurant Earnings Fundamentals: Six Standouts

In  watching the Q2 2012 restaurant space earnings, six brands interested us by exhibiting what we define as outstanding operating tempo (OPTEMPO). Not only significant EPS beats of $.02 or more (meets or a penny over doesn’t excite us much), but also positive traffic and positive early peek Q3 trends—that early Q3 trend prerelease info that some companies give. This quarter’s entire group has performed well recently.

• Brinker (EAT)
• Texas Roadhouse (TXRH)
• Ruth Chris (RUTH)
• Popeye’s (AFCE)
• Panera (PNRA)
• Papa John’s (PZZA)

Common Denominators: Two casual dining operators, one fine dine operator, one bakery/café, one QSR pizza, one Chicken QSR operator. Two of the six are steak centric (RUTH, TXRH), with one other making inroads into higher steak menu mix (EAT).  No big restaurant conglomerates (ala’ DRI) involved, but of the two with two brands under the HOLDCO, one brand greatly predominates over the other (EAT: Chill’s v. Maggiano’s) and RUTH (Ruth Chris v. Mitchell’s).

• Steak   centric: we noted in 2011 that      steak centric operators did well, no doubt by the improving travel/expense      account traffic. RUTH’s peer, DelFrisco (DFRG) via its first call since      IPO noted +SSS of 5.1% and traffic of +2.2% at the flagship Double Eagle units.  
• 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).
• 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.
• 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.

Four of the six chains (RUTH, AFCE, PNRA, PZZA) had positive free cash flow increases from quarter to quarter. EAT and TXRH free cash flow was off from prior year but 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…