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I've never understood why some investment analysts shy away from consumer stocks. The consumer sector represents more than two-thirds of the total American economy. Surely within an economy as gigantic as ours, there must be a significant number of consumer-facing businesses that are performing well, even in a time of uneven performance by the general economy.
And of course there are restaurants among them. Americans love to eat out, and restaurant companies have provided tempting and vast choices in cuisine, dining style, and price point. Something for everyone.
Today we cover a tasty investment buffet of noodles, wings, and pancakes and see why the companies behind the food are positioned for even greater success tomorrow.
What's new in noodles?
Noodles & Company (NASDAQ: NDLS ) was founded back in 1995 but went public just this summer. The company's niche is serving noodle and pasta dishes based on cuisines from around the world in a fast-casual restaurant format.
The company announced in its third quarter ending Oct. 1 that total revenue was up $11.8 million, or 15.4% from the same quarter last year. Comparable- restaurant sales rose 2.1%, with company-owned restaurants performing better than franchise properties, which account for only 16% of Noodles' total units. At company-owned restaurants, the increase in comparable-restaurant sales was due to a modest 0.7% increase in traffic and a rise in per-person spending of 1.7%.
The company was very pleased with its nearly 45% increase in adjusted net income for the quarter, particularly in light of what CEO Kevin Reddy termed "a tepid consumer environment."
My question is: What does a tepid consumer like to eat?
What impressed me was that income from operations rose to 6.3% of revenue compared to 5.2% in last year's third quarter. Revenue growth is great -- but can sometimes be due to opening new locations rather than any improvements in operating efficiency. Noodles & Company was able to lower both cost of sales and general and administrative costs as a percentage of revenue. A solid performance.
This company hungers for expansion. In the last four quarters it has increased its number of locations from 309 to 368 -- a 19% increase.
On the wings of growth
Buffalo Wild Wings' (NASDAQ: BWLD ) restaurant concept combines the friendly neighborhood sports bar with a menu of boldly flavored chicken wings served with an amazing variety of zesty sauces the company has created.
The wild wings are wildly popular with diners, as evidenced by the company's expansion. In the last four years, the number of company-owned restaurants has soared from 220 to 415, and franchise properties have increased from 400 to 534.
An expanded number of units doesn't always mean better performance, but as with Noodles & Company, in Buffalo Wild Wings' case it clearly does. Third-quarter revenue increased nearly 28% from the same quarter of 2012, a combination of the greater number of locations, a splendid 4.8% increase in same-store sales at company-owned locations, and a 3.9% same-store sales increase at franchise properties.
Higher sales also meant much higher profits -- a 66.9% jump in net earnings to $17.9 million. The company benefited from a drop in the per-pound cost of chicken wings, which resulted in the cost of sales as a percentage of revenue dropping a full 120 basis points. But cost management was excellent in other areas. General and administrative expenses as a percentage of sales declined 100 basis points.
Hotcakes remain hot with diners
DineEquity (NYSE: DIN ) is a much larger restaurant chain than the first two companies discussed, with more than 3,600 restaurants in 19 countries. The company's brands are Applebee's Neighborhood Grill & Bar and IHOP. Its business model is based on franchising. Only 23 of the more than 2,000 Applebee's locations and 12 of the nearly 1,600 IHOP locations are company-owned.
Chief executive officer Julia A. Stewart described the third quarter as "a challenging economic environment." Is that better or worse than tepid?
Same-restaurant sales performance at Applebee's for the third quarter -- a decline of 0.4% -- reflected these challenges. The company reported that customer traffic was down. IHOP same-restaurant results were substantially better, up 3.6%, mainly due to a higher average guest check offset somewhat by lower traffic.
This company emphasized the development of its IHOP segment rather than Applebee's in the last year. In that period, the total number of Applebee's locations dropped by six to 2,010. A net of 37 new IHOP locations were added for a total of 1,602 at quarter's end.
Despite the weakness in customer traffic, DineEquity's net income for the quarter was strong. Adjusted net income available to common stockholders increased 11% to nearly $21 million. Lower general and administrative expenses brought about the positive variance, as the continued shift to a franchising model allows the company to operate with a smaller corporate staff.
What we learned
Americans have greatly expanded the range of cuisines they enjoy and are willing to try. With that expansion of consumer tastes and preferences comes the opportunity for restaurant chains to create innovative concepts that customers flock to.
This in turn is an engine for growth -- the opportunity for popular chains to rapidly increase the number of restaurant units in their system. Seeing this robust growth, investors have been flocking to the restaurant chains as well.
There's not much to criticize about the growth and earnings performance for Noodles & Company. During these times when consumers are seeking the greatest value for their discretionary dollar, this company's menu is a perfect fit for consumers' current preferences.
DineEquity's decline in customer traffic is a concern, particularly at Applebee's, which has to compete against other strong brand-name family restaurant chains. With IHOP, the company occupies its own special niche, with room to continue expansion. Other chains, however, are on a faster growth trajectory.
Buffalo Wild Wings has tremendous sales momentum. In the last 11 quarters, same-store-sales growth per quarter has averaged 5.5% at company-owned restaurants and 4.6% at franchise locations. The company has brought innovation and unique flavors to what had been a generic restaurant concept, the sports bar. This is my favorite choice among these three companies.
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