A Rising Stock Market Is Good News for These Restaurants

The restaurant industry is highly dependent on the state of the consumer. The consumer has been affected in many ways since the financial crisis of 2008 and 2009. Large student loans have had a direct impact on the younger generation. Many are still not earning the same amount of money as they were before the financial crisis hit.

Source: Del Frisco's Restaurant Group

However, one segment that hasn't been hit as hard is the 1%. Wall Street is doing much better than Main Street these days. As the stock market continues to make new highs, bankers and high-income earners will continue to dine out at fine-dining establishments, particularly at steakhouses.

Source: Ruth's Hospital Group

For Main Street investors looking to play the space, there are really only two pure bets on fine dining, Del Frisco's Restaurant Group (NASDAQ: DFRG  ) and Ruth's Hospitality Group (NASDAQ: RUTH  ) . Both chains are known for their great steaks. Their closest competitor is The Capital Grille, which is owned by Darden Restaurants (NYSE: DRI  ) .

Source: Darden Restaurants

A closer look at Del Frisco's
Del Frisco's has three restaurant concepts -- Del Frisco's Double Eagle Steak House, Sullivan's Steakhouse, and Del Frisco's Grille. Each concept offers fresh steaks, chops, seafood, and an extensive wine list. The focus is on offering great service in a high-class atmosphere. Del Frisco's owns and operates only 40 restaurants across 20 states. So there's plenty of room for expansion.

Source: Del Frisco's Restaurant Group

Over the past three years, Del Frisco's has managed to grow revenue at a 17% annual rate. This comes as the company opened six new restaurants last year and plans to open another six this year. In the first quarter of this year, revenue grew 11% year over year even though the company lost some days due to the severe winter weather. Across all three concepts, same-store sales increased 1.6%. The average Del Frisco's location generated $7.6 million in sales last year.

Ruth's Chris is known for its steaks
Ruth's Hospitality Group owns 64 Ruth's Chris Steak Houses and 18 Mitchell's Fish Markets. There are also 75 franchised Ruth's Chris locations. For the fourth straight year, Nations Restaurant News ranked Ruth's Chris Steak House as the No. 1 consumer pick among fine-dining chains. Ruth's Hospitality Group acquired Mitchell's Fish Market in 2008 to complement its steak house business.

Source: Ruth's Chris Steak House

In the first quarter, earnings per share increased to $0.25 from $0.22 last year. Same-store sales for Ruth's Chris' company-owned locations rose 2.6%. The weak spot was Mitchell's Fish Market. Its same-store sales declined 4.3%. This year the company plans to open a total of three new company-owned Ruth's Chris locations and its franchise partners plan to open two new locations.

How is The Capital Grille doing?
At the end of February, Darden Restaurants had 53 Capital Grille locations. This is an increase of five locations from this time last year. In its most recent quarter, The Capital Grille saw same-store sales increase just 0.1%. While results were not as strong as Del Frisco's or Ruth's Chris, they did outperform some of Darden's other concepts. Darden's weakest performer outside of Red Lobster was the Olive Garden, which posted a drop of 5.4% in same-store sales.

Source: The Capital Grille

The Capital Grille is known for being a power lunch location. The Capital Grille has been adding new menu items to help increase its business during this time frame. Last month, The Capital Grille added three new burgers to its menu. Diners can choose from a Kona coffee-crusted Wagyu burger, a wild mushroom Wagyu cheeseburger, and a Wagyu burger with jumbo lump crab meat and bearnaise. All burgers come with a side of Parmesan truffle fries.

Source: The Capital Grille

Activist investors want Darden Restaurants to spin off The Capital Grille and other specialty restaurant concepts Bahama Breeze, Seasons 52, Eddie V's, and Yard House. This does make sense, as the these restaurants saw their combined revenues grow by more than 11% in the latest quarter. This compares to a revenue drop of 3.4% at Olive Garden.

How do shares compare?

 

Ruth's Hospitality

Del Frisco's

Darden Restaurants

Y/Y Quarterly Earnings Growth

15.70%

26.70%

(18.40%)

Forward P/E

14.64

22.63

17.62

Price/Sales

1.08

2.32

0.76

1 Year Return

1.39%

33.27%

(7.41%)

Return on Equity

24.65%

6.83%

16.35%

Source: Yahoo! Finance

Of the three, Del Frisco's is growing earnings the fastest. However, Ruth's is just behind Del Frisco's in terms of earnings growth and has a higher return on equity. If Ruth's can turn around its Mitchell's Fish Market concept, I think we could see faster earnings growth from Ruth's.

Foolish final thoughts
As long as the stock market continues to move higher, I think we'll still see strong sales numbers from Ruth's Chris and Del Frisco's. Ruth's Hospitality has its work cut out for it in turning around Mitchell's Fish Market. It seems that when it comes to splurging on a meal, more customers are choosing steak over fish. This explains why shares of Del Frisco's have outperformed Ruth's Hospitality in the past year.

However, shares of Ruth's now look quite cheap compared to Del Frisco's. With a lower forward P/E multiple, shares of Ruth's look like the better bet now over Del Frisco's. And for Darden Restaurants, until it spins off The Capital Grille and its other faster-growing concepts, the problems at Olive Garden will overshadow any bright spots.

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