The restaurant business can be further broken down into four major sub-categories. They are: fast-casual, casual, upscale, and fine dining. "Polished casual" is a fifth style smack in the middle that's a class above Applebee's or Chili's yet is still affordable. PF Chang's is a classic example, as are BJ's Restaurants (NASDAQ:BJRI), The Cheesecake Factory (NASDAQ:CAKE), and Kona Grill (NASDAQ:KONA). All three of the latter companies have solid growth histories and expect to further growth in the years ahead, but for Foolish investors one stands out above all others.
What do these three have in common?
Besides all three companies being polished-casual restaurants with very similar atmospheres (they even look somewhat similar on the outside of their buildings), each one has a distinctive feature that draws people in. Their menus all have the typical steaks, sandwiches, pastas, seafood, and American-Asian fusion trendy creative dishes.
BJ's Restaurants distinguishes itself by having its own brewed craft beer. Cheesecake Factory has every type of gourmet cheesecake you've ever thought of and dozens more that you never thought of. Kona Grill has a fancy fresh sushi bar that's just as good or better as a sushi specialty restaurant that specializes in it.
Of the three companies, BJ's Restaurants seems to have struggled the most during the quarter in terms of growth. Although revenue increased 9.1% due to new restaurants opening, same-store sales slipped 2.9%; adjusted net income per share plunged 31% to $0.29.
BJ's Restaurants blamed "severe weather" and "industry traffic headwinds." Severe weather didn't seem to bother Cheesecake Factory or Kona Grill as much, but maybe they both contributed to the industry headwinds that hurt BJ's Restaurants.
Cheesecake Factory saw revenue rise 4% and same-store sales inch up 0.9%. It was the 16th straight quarter of positive same-store sales despite what Cheesecake described as the most challenging quarter in the industry in years.
According to David Overton, chairman and CEO of Cheesecake Factory, the company "continued to significantly outpace overall casual dining trends." He noted that Cheesecake Factory has locations scattered throughout the country in markets less affected or not affected at all by winter, and the brand performed strong no matter where it was located; and this performance came without "promotions or discounting."
With only 26 restaurants, Kona Grill is much smaller than BJ's Restaurants and Cheesecake Factory, but its growth last quarter was a jaw dropper. Revenue leaped 17.5% to $27.6 million, and same-store sales jumped 6.2%. It was the fourth consecutive quarter and the 14th out of the last 15 quarters of positive same-store sales growth.
Kona Grill simply credited its growth strategy that includes remodels, marketing toward the nontraditional hours of the day (in between meals) to drive traffic, and an increase in its guest frequency, or "regulars" coming into its restaurants. That suggests satisfied guests and a little restaurant chain that's quickly building a brand.
The polished-casual restaurant matchup
BJ's Restaurants trades at a P/E ratio of 44 based on the current share price and analyst estimates of $0.71 per share for the year ending December. Giving BJ's Restaurants the benefit of the doubt in terms of weather, the P/E ratio is 34 based on analyst estimates for 2015 of $0.91 per share.
Cheesecake Factory, meanwhile, trades at a P/E ratio of around 20, or less than half that of BJ's Restaurants based on the same criteria. Analysts expect a 17% growth rate for 2015, which is slower than the expected 28% growth for BJ's Restaurants; but Cheesecake Factory has a history of producing reliable, steady, and sustainable growth. It is expected to show growth for 2015 come on top of a strong 2014 rather than just stage a recovery. Based on this, Cheesecake Factory seems like the more compelling value over BJ's Restaurants.
Finally, there is Kona Grill. According to a February company presentation, it is targeting more than 100 locations, or more than quadruple its current size. This certainly suggests significant long-term potential in terms of the percentage. Kona Grill currently trades with a P/E of 75 based on the current share price and analyst estimates of $0.26 per share for the year ending in December.
Kona Grill would appear to be the most pricey of the group; however, it is making many investments toward its future growth this year and incurring numerous charges that are relatively large compared to its small size. For 2015, the P/E is 38 with earnings growth of nearly 100%
The wild card with Kona Grill is that analysts are very often wrong with their estimates while they've been fairly accurate with BJ's Restaurants and Cheesecake Factory. For example, in the trailing 12 months, analysts expected Kona Grill to report $0.16 per share in earnings; Kona Grill instead reported $0.33, or more than double expectations. Analysts may prove again to be far too cheap.
The Foolish bottom line is that Cheesecake Factory seems to be decent if you want steady and reliable growth with low risk, but Kona Grill is the better buy in terms of more potential for great percentage growth. That potential comes at more of a premium (compared to short-term earnings) and therefore higher risk, especially in terms of entry timing. Overall for my taste, Kona Grill stands out as the winner.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. 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.