A Chain Restaurant the Market May Have Missed

For those unfamiliar with Del Frisco's Restaurant Group (NASDAQ: DFRG  ) , the company is made up of three similar concepts: Del Frisco's Double Eagle Steakhouse, Del Frisco Grille, and Sullivan's Steakhouse. The company has 37 restaurants around the country and has caught the attention of at least one higher-profile analyst for its encouraging ROIC and positive same-store sales growth in the face of tough macroeconomic conditions. In its recent earnings, Del Frisco was able to substantially narrow its loss, though it still missed the Street's estimates. While overall the company appears to be doing well, one of its properties is proving to be a problem child. Is Del Frisco headed toward better days, or will its anchor keep it down?

Earnings recap
In spite of the aforementioned bullishness from a Wells Fargo analyst, Del Frisco was unable to maintain market confidence in its recent earnings announcement. On the bottom line, the company brought in a loss of $0.02 per share -- far better than the previous year's $0.12-per-share loss. With unusual items removed, Del Frisco earned $0.10 per share -- $0.01 short of analyst estimates.

Companywide, revenue grew 13% to more than $54 million, though same-store sales ticked down slightly (down 0.2%). The company's primary chain, Del Frisco's Double Eagle, grew same-store sales an attractive 4.4%. More convincing was the source of sales: traffic increases rather than just price increases. But Sullivan's Steakhouse, a casual dining restaurant, saw its sales drop 5.9%. Management offered little comfort, mentioning that it was struggling with Sullivan's and planned to renovate some stores and increase promotions of its fixed-price menu.

Looking ahead, the company cut full-year EPS guidance from $0.92-$0.96 per share to $0.89-$0.93 per share. Same-stores sales are expected to grow 1%-1.5%, down from 1.5%-2.5%.

Multiple corrections?
According to the analyst note, Del Frisco could experience multiple enhancement as same-store sales and high ROIC per new unit convince the market of a stronger operation.

Today, the company trades at more than 16 times its forward earnings. The balance sheet is attractive with zero debt, though the company may benefit from leveraging and increasing its capital allocation to the struggling parts of the business.

Compared to high-end steakhouses such as Ruth's Hospitality Group, Del Frisco trades in line (earnings multiple-wise) with the potential to grow faster. The much, much larger Darden Restaurants trades slightly cheaper, at 16.02 times earnings, and has a more mired balance sheet -- total liabilities are more than six times current assets.

The chain restaurant industry is going to continue experiencing difficult circumstances on a macro level. In the long run, though, Del Frisco does have compelling growth opportunities that the market may have yet to reward in its valuation.

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