These Steakhouse Chains Are Serving Up Profits and Great Food
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As economic growth picks up steam and consumer confidence rises, Americans are stepping out of the kitchen and hitting the road to their favorite dining establishment. The industry’s major trade group, the National Restaurant Association, estimates that restaurant sales were roughly $661 billion in 2012, a 3.8% gain over the prior year. While Americans are trying to eat healthier, given the rising incidence of obesity, they still like their steaks, from New York strip to filet mignon. So, which steakhouses are winning the hearts and wallets of diners?
At the top of the class
While there are a number of great steakhouses, Ruth’s Hospitality's (NASDAQ: RUTH) Chris Steak House is usually at the top of the list. From an initial New Orleans steakhouse bought by founder Ruth Fertel in 1965, the company has expanded to almost 160 restaurants across the U.S. and in select international markets. In addition to its namesake brand, Ruth’s also participates in the seafood fine dining segment, primarily through its 2008 purchase of the Mitchell’s Fish Market chain.
In FY2012, Ruth’s generated solid financial results, which led to a breakout performance for its stock price. For the period, the company reported an increase in revenue and adjusted operating income of 7.9% and 13%, respectively, versus the prior year. Despite rising commodity prices, including beef, Ruth’s maintained its gross margin near a five year high as it passed through higher menu prices and increased its high-margin wine sales. The company also benefited from relatively low advertising spending, approximately 2.5% and 4% of sales, due to its highly-regarded name brand recognition.
Looking ahead, Ruth’s sees substantial growth opportunities in international markets as it seeks to export its high-priced, high-quality dining experience to the rising income areas of the Asia-Pacific and Latin American regions. The company opened four international locations in 2012, including Dubai and Singapore, and it has agreements for another twenty franchise locations to be built over the next five years.
Legendary service at non-legendary prices
Texas Roadhouse (NASDAQ: TXRH) doesn’t try to compete with the high-priced steakhouses, choosing to focus on a middle market, family-oriented customer base. Its average guest check of $15 in 2012 pales in comparison to Ruth’s average guest check of $73, but the lower prices opens the company to a much larger pool of customers. Texas Roadhouse’s strategy seems to be working too, as it added 26 restaurants to its base in 2012 and enjoyed a third straight year of rising comparable sales.
In FY2012, Texas Roadhouse achieved record financial results, thanks to both rising unit volumes and its expansion activities. For the period, the company reported increase in revenue and adjusted operating income of 13.9% and 16.3%, respectively, compared to the prior year. Like Ruth’s, Texas Roadhouse was able to offset commodity inflation with menu price increases, which was supplemented by its food price hedging strategy. More importantly, the company’s rising cash flow is providing ample funds for growth in both the U.S. and select international markets, with roughly 28 new restaurants slated for 2013.
A slice of Australia for only $20
Like Texas Roadhouse, Bloomin’ Brands (NASDAQ: BLMN) caters to the middle class through its Outback Steakhouse chain, as well as its Carabba’s Italian Grill and Bonefish Grill concepts. The company also participates in the upscale dining segment through its Fleming’s unit, which is half the size of Ruth’s Chris unit, but pursues the same discerning customer base. With a presence in nineteen countries, Outback is the largest of the steakhouse chains and provides a good blueprint for other companies’ concept expansion ambitions.
In FY2012, Bloomin’ Brands continued to deliver on its multi-year business re-positioning plan with a successful initial public offering in August 2012 and the first meaningful expansion of its Outback restaurant base in years. Like its competitors, the company has benefited from benign labor costs and an ability to pass along commodity inflation through menu price increases. In addition, the breadth of Bloomin’ Brands’ operating footprint allows it to create economies of scale that are unavailable to smaller entities.
Looking ahead, the company expects to complete the upgrade process for half of its Outback locations by the end of 2013, while also adding roughly 50 restaurants to its system-wide base. Its strong cash flow trend will hopefully continue, thereby allowing Bloomin’ Brands to pay down its sizable debt load that was incurred during its 2007 leveraged buyout.
The bottom line
When the economy perks up, consumers invariably trade up from the quick-serve and fast casual chains to casual and fine dining establishments. While these steakhouse chains currently sport above-average P/E multiples, due to substantial stock price appreciation, investors should take a small bite on any short-term market weakness.
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