It's a Non-Stop Fiesta Owning This Company
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One thing that I really like about the restaurant business is that with good food and a great concept, the growth potential is enormous. Investors need to be on the lookout for the next compelling concept and look to find the next Chipotle Mexican Grill (NYSE: CMG). One such company that comes to mind is Fiesta Restaurant (NASDAQ: FRGI), the owner of Pollo Tropical and Taco Cabana. I'm personally a huge fan of its Pollo Tropical restaurants and I prefer investing in companies where I enjoy their products.
It's been a party to own Fiesta shares
Fiesta's concept is the operation of fast-casual, ethnic restaurants that offer distinct flavors with a broad appeal at a compelling value. The company has approximately 309 restaurants in the Southern United States, the Caribbean, Central America, South America and North India. The restaurants feature made-from-scratch cooking, fresh salsa bars, table service, free Wifi, drive-through service and catering. Most of its restaurants are company owned and the rest are franchised. So far this year, shares are up 120%.
In the first quarter of this year, revenues increased 5.9% to $133.6 million. Comparable-restaurant sales increased 3.8% at Pollo Tropical and 2% at Taco Cabana. This marked 14 consecutive quarters of positive comparable sales for Pollo Tropical and 11 consecutive quarters for Taco Cabana. The company opened four new restaurants and swung to a net profit from a net loss in the same quarter last year. Net income in the first quarter was $4.8 million, or $0.20 per share.
Fiesta plans to open a total of 14 to 17 new company-owned restaurants this year. Internationally, the company plans to franchise 10 more locations. The plan is to cluster the store locations and achieve economies of scale. For Pollo Tropical, the plan is to move west and Taco Cabana plans to expand east. By doing so, the locations will overlap and the company can use media more efficiently and supply each restaurant easier. Currently, Pollo Tropical's primary locations are in Florida and Taco Cabana's are in Texas. Taco Cabana has no presence in Florida and Pollo Tropical has no presence in Texas.
Comparable menu to Chipotle
If there's one restaurant that you want to be favorably compared to, it would be Chipotle. This is especially true for investors since Chipotle is up over 500% in the past five years. Fiesta's Taco Cabana restaurants offer a very similar menu to Chipotle. Taco Cabana offers burrito bowls, tacos, nachos, quesadillas, breakfast, and it even sells margaritas and ice-cold beer. Fiesta's restaurants offer the fast-casual, freshly-made food that customers love and that has made Chipotle a national chain.
Chipotle shows no signs of slowing down, especially after a blowout second- quarter earnings report last week. The stock jumped 8.5% and closed above the key $400 level. For the quarter, revenue increased 18.2%, comparable-restaurant sales increased 5.5%, earnings per share increased 10.2%, and the company opened 44 new restaurants.
Going forward, Chipotle is still looking to expand. For the full year, the company plans to open a total of 165 to 180 new restaurants. Growth for Chipotle will come from opening more restaurant locations, but the company is also excited about the potential for its ShopHouse Southeast Asian Kitchen restaurants. ShopHouse Southeast Asian Kitchen hopes to do for Asian fast-casual as Chipotle did for Mexican fast-casual. Currently, there are only two locations with plans for six more in the next year.
A competitor to both
A competitor to both is Yum! Brands (NYSE: YUM) with its KFC and Taco Bell restaurants. Its other restaurant brand is Pizza Hut. All together, Yum! operates approximately 39,000 restaurants in 125 countries.
The focus at Yum! is on its China business, where it gets about half of its sales. Recently, however, the China segment has been a headache for the company. Another outbreak of avian flu and tainted meat from a chicken supplier in China have lead to a drop in sales.
This month Yum! reported that net income for the quarter dropped 15%. Same-store sales in China declined 20% in the second quarter. To get traffic back into its Chinese locations, Yum! has had to discount items and heavily advertise. As a result, Yum! is forecasting that same-store sales in China will rebound by the fourth quarter of this year.
In the U.S., Yum! sees the popularity of the fast-casual segment and is looking to capitalize on that growing trend. Yum! has sought to improve its Taco Bell menu to better compete with Chipotle. Yum! has also sought to create a more relaxed atmosphere in both its Taco Bell and KFC locations. Yum! has the footprint to compete; its 39,000 locations and a stronger menu could make a Yum! a stronger competitor in the fast-casual segment.
The fast-casual trend is here to stay in the restaurant industry. My favorite is Fiesta Restaurant because of its small presence in the U.S. and tremendous room to grow. My second favorite is Chipotle because the company continues to defy skeptics and outperform. Lastly, I would pick Yum! Brands because of the company's problems in China. Yum! also, in my opinion, has not improved its menu enough. I still prefer eating at a Fiesta location or at Chipotle. If Yum! can improve its menu, it would be a much more formidable competitor with its size and scope in the restaurant business.
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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!