It's been a busy week for restaurant stocks, and I'm not even talking about the brow-raising liquidation of the parent company behind the Bennigan's and Steak and Ale chains. Plenty of publicly traded chains that you -- and your gut -- may know all too well reported earnings this week. It's time to get those taste buds going, investors.
I realize that this may seem like the worst possible time to dive into this sector. Food costs are rising, squeezing margins even as penny-pinching patrons demand menu specials. Higher fuel prices are a double whammy, sucking out discretionary income while giving drivers one more reason to stay home for dinner.
Great! Perfect, really. This kind of climate will shake out the weaker players. I'm going to miss you, Bennigan's, but your exit will make it that much easier for the survivors to thrive when the economic lull passes. When even Starbucks (Nasdaq: SBUX ) is planning to close more domestic stores than it opens in the year ahead, there are opportunities for companies still moving forward.
I don't care if I'm one of the few still following restaurant stocks. My relative solitude will make it that much easier to get in early on the chains that will lead the way -- make that feed the way -- in the future.
Let's go over some of this week's reports:
Denny's (Nasdaq: DENN )
The value-priced diner has been serving up grub at great prices for ages, so it's already giving the market what it wants. Comps don't necessarily bear that out in the latest quarter -- falling by 0.7% at company-owned units, with a steeper 3.7% plunge at franchised locations -- but Denny's is built to last.
Revenue fell by a sharp 21% during the quarter, to $190.3 million, but that is the result of the company's plan to sell more of its company-owned stores to franchisees. The initiative will eat away at the top line, of course, but it should result in higher-margin franchisee royalties. Since all of the asset sales blur the path to the bottom line, it's best to judge Denny's by its pre-tax adjusted income figure (which backs out several one-time charges). The diner's performance nearly quadrupled there, to $5.7 million. That's still a small absolute sum, but at least it's a profit in these challenging times.
Morton's (NYSE: MRT )
On the other end of the pricing spectrum, Morton's of Chicago is also scoring with carnivores. The chophouse chain's stock opened 7% higher this morning after the company posted a solid report. No surprise, given its niche of feeding premium steaks to the corporate dining crowd.
Comps fell by 1.9% during the quarter, but Morton's still expects to post positive comps for all of 2008. Revenue inched 4% higher to $88.7 million. Earnings dipped to $0.11 a share, but Morton's is looking to earn $0.57 a share to $0.62 a share this year. Opening new steakhouses and updating its stuffy bars with the more accessible Bar 12-21 concept is the right approach. We'll get a better snapshot of the chophouse segment when Ruth's Chris (Nasdaq: RUTH ) reports next week, but it certainly seems that the upscale chains are exceeding Mr. Market's expectations.
Kona Grill (Nasdaq: KONA )
Things are going a little rougher for Kona Grill. The classy, Polynesian-flavored casual-dining chain, with its signature Macademia-encrusted chicken, saw its stock hit new lows this week after a dreadful report.
Comps fell by 5.6%. Last year's second-quarter profit turned into a loss this time around. The company is also talking down its guidance. Kona Grill is still early in its growth cycle, with less than two dozen locations. If it can turn its unit sales around -- proving to investors that the blip is temporary, not indicative of waning popularity -- the inventive concept could be one to watch as it wades into the single digits.
Texas Roadhouse (Nasdaq: TXRH )
Casual steakhouse concepts are hard to find on the stock listings page. Outback, Lone Star, and Logan's Roadhouse have been taken private, while Darden (NYSE: DRI ) snapped up LongHorn Steaks. That apparently spells opportunity for Texas Roadhouse, which aims to open 30 new steakhouses this year.
Expansion is helping offset a slight dip in comps. Quarterly revenue grew by 20% to $217.3 million, and earnings rose 13% to $0.14 a share. The company expects fully diluted earnings per share to climb 5% to 15% higher this year. That's not exactly peanuts -- or even a floor full of peanut shells -- in this dicey environment.
Am I really the only one watching these stocks? Is this really a table for one? Prove to me that I'm not lonely. In 100 words or less, hit the comment box at the bottom of this page and let me know about your favorite restaurant stock.