Should You Ignite Your Passion for This Restaurant Stock?

Successful restaurant operator Ignite Restaurant Group leverages its portfolio of multiple brands by optimizing real estate and copying elements of each individual brand's success.

Mar 28, 2014 at 12:06PM

Source: Ignite Restaurant

The restaurant industry is inherently competitive, with many me-too competitors fighting for a share of consumers' wallets. Among restaurant companies, Ignite Restaurant Group (NASDAQ:IRG) stands out for having outperformed the industry at large for the past few years. Moreover, it comes with a potential catalyst in the form of the turnaround of a newly acquired entity.

From 2011 to 2013, Ignite grew its comparable-restaurant sales by 11% in total compared with a mere 1% increase for the industry benchmark, Knapp Track's Comparable Store Sales index. At the individual brand level, Joe's Crab Shack has delivered positive comparable-restaurant sales growth for 21 out of the past 22 quarters since 2009; Brick House Tavern + Tap grew comparable-restaurant sales by 5.3% in 2013.

Ignite also completed the acquisition of Romano's Macaroni Grill in April 2013, a concept which has room for improvement. Macaroni Grill registered negative comparable-restaurant sales growth of 5.3% in 2013, and Ignite has plans to improve its operations.

Synergy between old and new brands
Prior to Ignite's management of Joe's in 2006 (following a transfer of ownership), it was underperforming. Ignite started implementing changes to Joe's menus and marketing approach since it took over. For example, crabs used to account for 17% of Joe's sales prior to 2006; they now make up about half of its revenue. This means that Joe's positioning became clearer, and it lived up to customers' expectations of its brand name.

In addition, it also shifted its advertising focus from network TV to national cable to expand its reach. Ignite claimed to have improved Joe's average unit volumes and restaurant level margin by 33% and 450 basis points, respectively.

Source: Ignite Restaurant

Similarly, Ignite is applying the same successful turnaround formula to Macaroni Grill. It has worked on transforming Macaroni Grill's positioning from a standard family dining place to a premium Italian restaurant: Waitstaff are now trained to greet diners with traditional Italian greetings; new food items emphasizing Macaroni Grill's innovation and premium Italian positioning were added to the menus; an emphasis is being placed on advertising on national cable as opposed to local TV.

Initial results have been positive. Ignite has already tweaked 85% of Macaroni Grill's existing menu items and cut its general and administrative expenses by 25%.

Synergy between existing brands
A multi-brand strategy can be very positive for some restaurant operators. Even prior to the acquisition of Macaroni Grill, Ignite was already leveraging the synergy between its existing brands Joe's and Brick House through the optimization of its real estate portfolio.

In the past three years, Ignite converted two Brick House restaurants to Joe's restaurants and three Joe's restaurants to Brick House restaurants. Some concepts just work better in certain locations, and Ignite's multi-brand strategy allows it to open new, converted restaurants with significantly lower capital outlay than ones built up from scratch.

Looking ahead, Ignite has plans to convert underperforming Macaroni Grill restaurants to either Joe's or Brick House. It estimates that about $500,000 in cost savings can be realized for each restaurant opening.

However, the multi-brand strategy doesn't necessary work well for everyone, especially if there aren't sufficient synergies between existing brands.

Darden Restaurants (NYSE:DRI) recently announced plans to spin off its Red Lobster operations. While Darden's cumulative same-restaurant sales growth outperformed Knapp Track's Comparable Store Sales index by 550 basis points since 2009, Red Lobster was the worst performer in its portfolio. Red Lobster experienced negative 6.8% same-restaurant sales growth during this period, while Darden's Longhorn brand of steakhouses grew same-restaurant sales by 6.5% since 2009. More importantly, Red Lobster was a mature restaurant concept, which differs significantly from Darden's more promising growth concepts like Longhorn.

In contrast, Ignite's group of restaurants are more complementary. They belong to the 'polished casual' category, an upscale version of casual dining with a greater emphasis on sophisticated culinary.

Menu innovation
The fickle-mindedness of consumers makes it critical that diners always enjoy new menu additions when they return. Ignite makes it a point to introduce new items on its menu every six months for both Joe's and Brick House. These include duck wings introduced to the menu for Brick House, which make the claim that 'chicken wings are so last season.' For Ignite's new Macaroni Grill, braisers that contain slow-cooked meats served tableside were part of the menu revamp.

Menu innovation doesn't naturally mean more expensive items; sometimes it could be the other way around. Denny's (NASDAQ:DENN), which calls itself 'America's Diner,' introduced its value menu in 2010, offering food items at prices ranging from $2 to $8, with much success. It narrowed the negative same-store sales growth from 6% to 2% in the quarters that followed the launch of the value menu.

Approximately one in five visits to Denny's involved the purchase of a food item from the value menu. Following an advertising campaign which focused partly on the value menu, Denny's achieved 11 consecutive quarters of positive same-store sales growth since the second quarter of 2011.

Foolish final thoughts
Ignite has exploited the synergy between its new and existing restaurant brands to great effect, resulting in strong comparable-restaurant sales growth outperforming that of the industry benchmark. Going forward, its prospects look promising, as it turns around Macaroni Grill. In addition, Ignite is attractively valued at approximately 0.7 times enterprise value-to-revenue, well below the 1 mark that most of its restaurant peers trade at.  

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Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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