Why Del Frisco’s Steakhouses Aren’t Worried About Rising Beef Prices

Steaks of all varieties are becoming luxury items in the wake of rising beef prices, which are approaching multidecade highs. These soaring prices are expected to affect restaurant chains that specialize in steaks, companies like Del Frisco's Restaurant Group, Texas Roadhouse, and Bloomin Brands. However, Del Frisco's steakhouses are less worried about beef prices than the competition is.

Jan 31, 2014 at 5:05PM

The US Department of Agriculture now estimates that retail beef prices will increase another 2.5% to 3.5% this year, resulting in nearly a 30% rise over the past five years. This acceleration of beef prices has affected every entity throughout the restaurant industry. Del Frisco's Restaurant Group (NASDAQ:DFRG), Texas Roadhouse (NASDAQ:TXRH), and Bloomin Brands (NASDAQ:BLMN) are a few companies known for their steaks. However, there are several reasons why Del Frisco's steakhouses aren't as worried about rising beef prices as their competitors.

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By _BuBBy_ from USA, via Wikimedia Commons

Rising beef prices
The summer of 2013 was actually normal regarding precipitation. Despite that, previous summers have had a lagging effect on the entire farming industry. It takes years for cattle feed to increase in production after enduring several years of droughts -- and even longer for cattle herd sizes to return to normal.

Even if this coming summer is a repeat of 2013, farmers will still be hesitant to rebuild cow herds in an environment where there will still be uncertainty over the availability of cattle feed.

With less beef available and relatively stable demand overall, restaurants have had to survive these higher beef costs. For many restaurants, they have had to pass these rising beef costs onto the consumers.

What makes Del Frisco's different

 

Del Frisco's Restaurant Group

Texas Roadhouse

Bloomin' Brands

Market Cap

$550 million

$1.76 billion

$2.88 billion

Total Restaurant Units

40

416

1,495

COGS Margin

29.9%

35.1%

33.2%

Operating Margin

10.5%

8.7%

6.2%

Average Sales per Unit

$6.38 million

$3.26 million

$2.73 million

Note: Data collected and calculated through latest company earnings.

The table above shows that Del Frisco's three upscale high-end concepts, Del Frisco's Double Eagle Steak House, Sullivan's, and Grille, excel compared to Texas Roadhouse and Bloomin Brands in terms of cost-of-goods-sold margins, operating margins, and average annual sales per restaurant unit.

Del Frisco's average unit sales actually range between $13.8 million for the Double Eagle Steak House concept down to $4.4 million for the Sullivan's concept.

In the 16th annual ICR XChange earlier in January, Del Frisco's management cited that the company has maintained excellent cost controls despite climbing beef prices.

One major reason for the company's ability to control costs is its composition of sales. Despite being known as a steak-restaurant company, wine and other beverages make up the largest component of cost of sales. Beef costs rank second.

The company's 67/33 food/beverage split and average checks that go up well-past $100 per person for dinner at some locations give Del Frisco's an added edge over its competition.

Del Frisco's growth strategy
With only 40 locations across 20 states, it would appear that Del Frisco's could easily add dozens of restaurants a year. Instead, the company has plans to just add five-seven units per year with a focus around big cities like Washington, D.C. and locations of existing concepts.

In its latest quarter, the company had some issues with the Sullivan's concept and missed earnings-per-share estimates by a penny, coming in at $0.10. Even though the company saw a net loss of $0.4 million, it was a great improvement over 2012's comparable-quarter loss of $2.4 million.

Nevertheless, the company believes that no cannibalization will occur by adding two or more concepts in the same city. This growth strategy actually makes sense because the company's high-end concepts attract a specific customer. Testing new locations while the company is still expanding, however, may backfire and hurt future earnings.

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Inside Del Frisco's Double Eagle Steak House. Credit: Company presentation.

Texas Roadhouse and Bloomin Brands stuck in casual
There is only so much Texas Roadhouse and Bloomin Brands can do in regards to raising menu prices before each starts losing its main customer base. As beef prices continue to increase, both will need to make a decision to either raise menu prices at the cost of customers or maintain menu prices at the cost of profit margins.

Almost 45% of Texas Roadhouse's sales are steak. In contrast to Del Frisco's at the ICR XChange, Texas Roadhouse stated that beef prices definitely affected business. Because the company revolves around aggressive price-points throughout its menu, where the average $9.99 meal is steak, two sides, bread, and peanuts, Texas Roadhouse doesn't have much more room to increase prices and still stay competitive among casual dining.

Bloomin Brands is in similar shape but needs to balance high beef prices across five concepts that all aim at slightly different clientele. One highlight for Bloomin Brands is that despite menu-price increases, Fleming's Prime Steakhouse, the company's upscale steakhouse concept, actually saw comp sales increase 4.2% while the other concepts saw negative or zero comp-sales growth.

This echoes what happened with Del Frisco's last quarter. In the conference call, the company stated that Sullivan's traffic declined due to the casual-dining scene. Since the concept is heavily dependent on the spending habits of the middle class, it is more susceptible to increased menu prices due to higher beef costs.

Bottom line
Higher beef prices will continue to be affect the steak-restaurant industry. However, Del Frisco's may be in one of the best positions. The company's upscale customers already expect to pay premium prices, and wine has been a great hedge for the company to maintain profits. Del Frisco's stock is up more than 74% since the company's 2012 IPO. However, it still appears to be an under-the-radar growth story, and it can easily go up much higher from here.

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Michael Carter has no position in any stocks mentioned. The Motley Fool recommends Texas Roadhouse. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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