Fine Dining May Have Saved Del Frisco's Restaurant Group


Source:  Del Frisco

Steak, steak, and more steak. That's what each of Del Frisco's Restaurant Group's  (NASDAQ: DFRG  ) three restaurant concepts serves a lot of. While its first-quarter earnings results look pretty good, a look below the surface suggests that one concept carried the other two. A quick peek at Bloomin' Brands (NASDAQ: BLMN  ) reveals a similar dynamic.

The thick, juicy results
Del Frisco reported fiscal first-quarter results on April 29. Revenue increased 11.4% to $66.6 million. Same-store sales popped 1.6% on a calendar basis. GAAP net income soared 25% to $4.5 million or $0.19 per diluted share.

Mark S. Mednansky, CEO of Del Frisco's Restaurant Group, pointed out that the strength came from positive same-store sales at Del Frisco's Double Eagle, the company's fine-dining chain. The other two more-casual chains suffered as a result of "weaker trends" and the harsh winter weather.

Fine dining only, please
Bloomin' Brands saw something slightly similar. Bloomin' Brands owns five different main restaurant concepts but its smaller fine-dining steak house reported the best performance. However, its casual steakhouse, Outback, managed to tick up a bit with 0.8% growth in same-store sales. Given that reality, it's a bit concerning that Del Frisco's casual restaurants couldn't go positive, although Elizabeth Smith, CEO of Bloomin' Brands, did describe the environment as "challenging."

Del Frisco's Double Eagle did perform rather strongly with a 5.1% jump in same-store sales even though all of that stemmed from a higher average check size. Maybe guests spent more time inside ordering desserts and coffee to stay warm? Either way, it was the 17th quarter in a row of positive same-store sales growth. Del Frisco should focus on expanding this brand by adding its locations specifically as it currently accounts for only 10 of the company's 40 restaurants. For Bloomin' Brands, its fine-dining concept is its smallest chain as well.


Source:  Bloomin' Brands

Going forward
Unfortunately Del Frisco only plans to open one Double Eagle this year out of the six locations it plans to add. The company guided for full year same-store sales of between 1.5% and 2.5%. It looks like the fine-dining Double Eagle will carry the torch by itself again.

The most encouraging comments came from CEO Mednansky. He mentioned that the company hired Tango Analytics, an outside consulting firm that consists of experts in real-estate models for restaurants, to weigh in on Del Frisco's domestic market potential. The firm concluded that its "findings point to the possibility of developing in excess of 170 Del Frisco's Grilles over time across a diversity of settings based upon minimum average unit volumes of approximately $5.2 million."

That's an over 325% upside in locations alone. At least Del Frisco appears to be nowhere near the point of saturation. That's good for the company and good for shareholders, but it's not much of a threat to a company like Bloomin' Brands. Bloomin' Brands' Outback concept alone has nearly 1,000 locations and it is growing.

During the conference call, Mednansky stated, "The pipeline for 2015 to 2017 is already taking shape and we look forward to sharing with you the details on these sites once the leases are all finalized ... There is no shortage of developers interested in bringing our concepts to their sites based on our favorable demographics and prestige that we provide."

My takeaway is that I'd wait on the sidelines for now until Del Frisco shares more details on the finalized leases and its expansion plans with us, especially in terms of how the restaurant concept mix will go. The Double Eagle brand could become a driving force for future growth with the right plans instead of a crutch for the weaker concepts like it currently seems to be. 

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