Good Food and Good Times -- But Are They Good Stocks?

The National Restaurant Association's Restaurant Performance Index, or RPI, tracks restaurant operators' views about the current situation and future outlook for their industry. In August, the RPI declined for the third month in a row, though it remained above 100 for the sixth straight month, a positive sign according to the Association.

Let's see if we say bravo to these financial results
Bravo Brio Restaurant Group (NASDAQ: BBRG  ) is the operator of two Italian-themed restaurant brands, BRAVO! Cucina Italiana and BRIO Tuscan Grille. BRAVO! locations have a Roman ruin décor and an open-style Italian kitchen where guests can watch their food being made -- almost like theater. BRIO offers the flavors of Tuscany.

The company is smartly positioned in the "upscale affordable" niche, meaning that it aims to provide a strong value proposition by offering fine food at the relatively modest prices that casual dining chains charge. In the second quarter, revenue was up 2.7% compared to the same quarter of 2012, although comparable restaurant sales decreased 3%, meaning that the gains in revenue came from new restaurants being added to the system.

The Roman ruins outperformed the delightful fresh flavors of Tuscany for the quarter. Comparable restaurant sales at BRAVO! decreased just 1.6%, whereas BRIO locations declined 4%. Operating profit was down 3.4% to $17.9 million, and net income declined from $5.1 million to $4.5 million -- a nearly 12% drop.

The company attributed the lackluster results to a 2.1% decrease in guest counts and a nearly 1% drop in the average check. Responding to guests' requests for healthier cuisine, the company introduced its Lighter Side of Tuscany menu, which received positive reviews, but results in a lower average check at BRIO locations.

The company made a downward revision to its full-year outlook, forecasting lower revenue compared to previously issued guidance, a larger decline in comparable store sales, and $0.05 less in EPS.

On the fast but casual track to growth
Fiesta Restaurant Group (NASDAQ: FRGI  ) owns the Pollo Tropical and Taco Cabana fast-casual restaurant brands. The company reported outstanding second-quarter results, both in terms of sales and profits. Total revenue was up 9.4% compared to the same quarter last year, and net income was up nearly 27% to $5.0 million.

Fiesta's star performer was its Pollo Tropical brand, whose signature dishes are Caribbean-inspired, citrus marinated grilled chicken. Comparable store sales rose a healthy 6.4% compared to a 1.1% increase for Taco Cabana, as guest traffic was up 2.8%, and the average guest check rose 3.6%.

Although only 37% of the company-owned locations are Pollo Tropical, they contributed 62% of EBITDA during the quarter. Not surprisingly, the company views Pollo Tropical as the primary engine of growth, with 12 new locations planned for 2013, and an expectation of accelerating this expansion pace over the next few years.

Stripping quarterly results down to the bare facts
Rick's Cabaret  (NASDAQ: RICK  ) operates restaurants and adult nightclubs that cater to a clientele of upscale businessmen and professionals. What is an "adult nightclub?" The company's brand names, such as "XTC" and "Temptations," should give you a hint.  

For its third quarter ending June 30, the company reported a nice 18.3% increase in revenue over the same quarter last year. Net income rose 20% to $2.2 million. The company's improvement in margins should definitely take center stage. Cost of goods for same locations declined substantially from 13.7% to 12.9%. Operating margin increased more than 300 basis points to 20%.

CEO Eric Langan said, "We have learned from our mistakes...and we are now on a solid growth trajectory." How refreshing! Usually CEOs in these press releases blame everything on externalities such as vague economic "headwinds," or my favorite so far this year: Easter wasn't on the right day to suit the company's business model. Well, boo-hoo.

In the conference call, management said that important strategic initiatives like going after the higher profit customer, diversifying into non-adult concepts such as sports bars, and continuing to pursue acquisitions were the main reasons behind its success. The company has identified 500 potential acquisition targets.

What we learned
Fiesta Restaurant Group's recent sales growth was impressive considering that other chains are reporting sluggish customer traffic and comparable store sales. The company doesn't face daunting competition from other fast-casual chains in its key markets, and has identified significant expansion opportunities in Texas.

Also, chicken is a lower-cost ingredient compared with other proteins, so cost of goods sold will remain under control. Fiesta would be my first choice among the three.

Rick's Cabaret is definitely on the upswing, and its acquisition plan is admirable, but I question whether you can create a true brand and sustainable competitive advantage with these adult restaurant/nightclubs. Does the desired upscale customer really differentiate a Rick's location from others like it?

Also, the company's interest expense as a percentage of revenue was rather high, at 6.6%. In comparison, Fiesta's was 3.6%. A positive aspect of Rick's business model is that more than 82% of its revenue comes from cover charges and beverage sales, so its margins are insulated from the risk factor of rising food commodity prices that the pure restaurant chains face. 

Bravo Brio Restaurant Group occupies a well-positioned niche and an extremely popular style of cuisine. But it issued kind of a Debbie Downer outlook for the rest of the year compared to some of the other high-quality restaurant chains -- especially since the word "brio" means vivacity. Until it gets a little more brio in its customer traffic, this would be my third choice.

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