Fool.com: Sbarro Rolls Past Q2, Investors Yawn (News) September 1, 1999

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Sbarro Rolls Past Q2, Investors Yawn

By Richard McCaffery (TMF Gibson)
September 1, 1999

Italian eatery Sbarro (NYSE: SBA) posted earnings of $6.2 million, or $0.30 per diluted share, for the quarter ended July 18, up from $5.1 million, or $0.25 per diluted share, from the same period a year ago.

As far as meeting estimates, only the company's shareholders know what they were expecting, since no analyst coverage is reported in 1999 by Zacks or First Call. A quick look at Sbarro's financials for the quarter reveals earnings growth of 22% and earnings-per-share growth of 20%, compared to the same period last year. That's impressive, since revenue grew just 3.4%. However, the results for 1998 include charges related to closing outlets and merger activity.

Why the dearth of coverage? Probably because this company hasn't done much to grab attention. Restaurant revenue grew 14% from 1996 to 1998. Income actually decreased over the same period, from $37 million to $34 million, or from $1.83 per diluted share to $1.76 per diluted share. And it seems the company's plans to open another 57 eateries this year are off track. As of July 18, it had opened only 10 new outlets.

Early this year the Sbarro family announced plans to purchase all outstanding shares of the company for $28.85 each. On August 13, the company ironed out the details and moved forward on the plan, which involved buying 13.5 million shares (65.6% of common stock they don't own) for $389 million. The deal is contingent upon the family's ability to secure financing for the deal, according to a Reuters report.

If the Sbarro family's plan to purchase all of the outstanding shares is part of a coup to create momentum, it sure would be nice to know, but the company doesn't do much talking. At least you won't find out from looking at its website, which provides little more than a photo of Sbarro headquarters.

The company owns 908 restaurants mostly in malls, though it's been expanding to larger sites in major cities such as New York, Chicago, and Boston since 1995. The issue investors should focus on is growth. Through April 25, comparable store sales grew at a paltry 0.2% in fiscal 1999, and most of that growth came from higher menu prices, not increased traffic. Operating expenses and general and administrative costs are trending up, and who knows when cheese prices will take off again?

If the company is waiting for its next homerun idea, it sure has been patient. It's been testing new concepts for the past four years. Sbarro owns a 40% interest in five casual dining restaurants called Boulder Creek Steaks & Saloon. It runs one fine-dining steakhouse and is building another. It also owns a 70% interest in a small Italian restaurant chain with a Mediterranean slant, an 80% interest in the Umberto chain (which is very similar to Sbarro), and a 50% interest in a small Mexican food chain.

Sounds like a management looking for a business. Until the company figures out what it wants to do and lets the world know, investors should watch from a distance.

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