Battle of the Lunch (and Dinner) Ladies: A Casual Dining Stocks Competition
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Three CEO's girded for battle but only one comes out. Welcome to the ring, Sally Smith of Buffalo Wild Wings (NASDAQ: BWLD), Elizabeth Smith, Esq. of Bloomin' Brands (Nasdaq: BLMN), and Julie Stewart of DineEquity (NYSE: DIN), CEO's of three casual dining chains. OK, they're not hairnetted lunch ladies, but top executives of companies with market caps between 1 and 2 billion armed only with spreadsheets and a dream to crush commodity costs. Let's have a nice clean fight, ladies.
The up-and-coming contender
Bloomin' Brands was taken public in August 2012 and ran from $11.60 to a high of $18.99 in February before it reported Q4 2012 results. Bloomin' Brands owns Outback Steakhouse (their biggest concept), Bonefish Grill, Carrabba's Italian Grill, and upscale concepts Fleming's Steakhouse and Roys. Bloomin' has the highest P/E at 40.57 and still has a huge debt load it inherited from the days when it was held by Bain Capital. Bain owns a 55.45% controlling stake, by the way. But Bloomin' has paid off $600 million of the debt overhang in 2012 and arranged for favorable debt refinancing saving $2 million in interest expense.
One interesting thing about Bloomin' is that CEO Elizabeth Smith received $24.45 million pay package compared to the $1.41 million pay package for Sally Smith at Buffalo Wild Wings and the $2.38 million for Julia Stewart at DineEquity but $22 million of that was a retention bonus.
On that Q4 call in which they guided lower 1% from their Q3 call, they mentioned beef commodity costs were expected to rise 10-12% and would be partially offset by seafood costs. They also said they had already contracted for 72% of 2013 foodstuff purchases.
One of the big changes for Bloomin' is rolling out lunch hours for Outback and Carrabba's and on the Q4 Q&A it was a question that Smith replied they were very happy with the results so far. Analysts expect a robust 16.57% five year EPS growth rate.
This fighter ain't chicken
Sally Smith, CEO at Buffalo Wild Wings sports bar and restaurant chain, helped it grow from 35 locations to 900 (with another 105 openings planned for 2013.) and took it public. International expansion is just beginning in Canada. Smith's rise to CEO is amazing as she was just a finance officer at the fledgling chain when the man newly hired for CEO didn't show up. Call in Sally.
Despite being sports bars/restaurants the locations are family friendly with strong community involvement hosting Little League celebrations and such, quite different from the original wings and suds joint for college kids. Buffalo Wild Wings also enjoys a growing lunch business which attracts local businesspeople.
Buffalo Wild Wings may be a victim of its own success. As the popularity of wings has exploded so has the cost of the commodity. Commodity costs are always an issue with this stock, but the percentage "other" menu items besides wings stands at 39%, same as wings. Smith saw the writing on the chicken wing wall a few years ago and the company has expanded the menu.
Although Buffalo Wild Wings has no debt and a lower P/E of 27 the stock is actually down 0.66% over the last year. The short interest is very high at 26.30% and has been increasing despite analyst optimism giving the chain a 19% five year EPS growth rate When the company reported Q4 results on February 12, Smith announced they had reached a milestone of $1 billion in net revenue for 2012 and achieved a five year CAGR of 25% for revenues and 24% for net earnings. (source February investor presentation)
This March, a traditionally strong month for the chain, is bolstered by an exclusive marketing/promotion agreement with the NCAA to make Buffalo Wild Wings the "Official Hangout" of NCAA March Madness.
Despite market sentiment that has kept the stock mired in the mid-$80s Ken Griffin's Citadel Investment Group reported in their latest 13-F owning a 5.1% stake in Buffalo Wild Wings.
Coming out swinging
Last, but not least, is DineEquity, owner of Applebee's and IHOP (International House of Pancakes), the value name of this group with a 10.71 P/E and a 4.20% yield. Despite having only a $1.36 billion market cap it has 3,600 restaurants in 17 countries, making it the largest full-service restaurant company in the world. Applebee's was acquired in 2007 and now is 99% franchised as is IHOP. The company has paid off $1 billion in debt related to that purchase with $1.4 billion remaining.
Chairman and CEO Julia Stewart's rise to power may be even more unusual than Sally Smith's. She waited tables at IHOP, worked her up in restaurants to become President of Applebee's and left after being passed over for CEO. Then she became CEO back at IHOP and bought her former employer, Applebee's. Revenge is a dish best served a la mode.
Since Smith took over Applebee's in 2007 90% of the menu items have been improved or replaced. The company has also authorized an $100 million share repurchase. Most of the Applebee's and IHOP have or will be refurbished to make them fresher as Q4 2012 same store traffic declined, slightly offset by higher tickets.
The 99% franchisee percentage makes DineEquity flush with cash with less volatility. It innovated its supply chain crushing commodity costs using an independent purchasing co-op earning it the #2 spot on Fast Money's Most Innovative Companies in Food. The company is on track to reduce general and administrative expenses by $10-12 million per year since the 99% franchisee model was attained.
Going forward analysts expect 10% five year EPS growth but return on equity stands at 55.03% and profit margin at 15.02 %. The stock is up 35% over the last year and has been quietly outperforming belying its ticker DIN.
And the winner and champion is...
Not Bloomin' Brands simply because of the hedge fund controlling interest as well as its debt. Having the biggest P/E and share price surge puts it on the ropes for valuation.
So close between Buffalo Wild Wings and DineEquity but that 4.2% yield gambit, lowest P/E, and the franchisee percentage allowing DIneEquity a less cash-intense operation along with generating cash to pay off debt, buy back shares and pay the dividend make DineEquity the winner.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Buffalo Wild Wings. The Motley Fool owns shares of Buffalo Wild Wings. 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!