These are interesting times for the restaurant industry. We've clawed our way out of concerns that we were in a "restaurant recession," and now there are pockets of excitement. The buoyant economy is giving consumers the means to eat out and the jobs to make preparing meals at home more challenging. There's also the emergence of the gig economy, as delivery services continue to spring up to give eateries new ways to drum up out-of-restaurant sales.
Dave & Buster's Entertainment (NASDAQ:PLAY), Habit Restaurants (NASDAQ:HABT), and Del Frisco's Restaurant Group (NASDAQ:DFRG) are three stocks in this space that I feel offer healthy upside at current levels. All three are trading below their highs, but there are good reasons why they should be worth more than they are at the moment. Pull up a seat. I'll serve you this three-course meal.
Dave & Buster's
The chain that has often been described as Chuck E. Cheese for adults is having a great week. The stock soared after posting better-than-expected financial results on Monday. Revenue rose nearly 10% to $333.2 million. Analysts were targeting just $322.1 million on the top line. Earnings inched slightly higher to $1.04 a share, but analysts were ready to settle for just $0.92 a share. The is the fourth time in the past five quarters that Dave & Buster's has come through with a double-digit percentage beat on the bottom line.
It wasn't a perfect report. Comps declined 4.9%, continuing a problematic trend in diminishing popularity at the individual unit level. Expansion is what's driving growth. Dave & Buster's also announced that its CEO would be retiring this summer, replaced by the eatery's current CFO. Guidance for the full year also wasn't ideal, as Dave & Buster's continues to eye negative comps for all of fiscal 2018.
The good news is that analysts generally ate the quarter up. They're encouraged by trends, and the potential of virtual reality gaming spicing up its in-store traffic. This week's spike finds Dave & Buster's at its highest level since early January, but it's still 24% below last year's all-time high.
The "better burger" craze has helped bring a lot of interesting companies to the publicly traded forefront. IHOB anyone? Habit hit the market with the distinction of being singled out in a Consumer Reports survey as the top burger chain in terms of quality of its signature burger. It even beat out cult darlings Five Guys and In-N-Out. After some initial buzz, the shares have been market laggards. Habit stock was one of the worst restaurant stocks of 2017, and it's been marching in place so far in 2018.
Habit fell short of Wall Street's revenue and profit targets in its latest quarter. Same-unit sales were negative, a pretty big deal for a chain that had rattled off more than a dozen years of positive comps until recently. The argument for Habit is that revenue growth continues to climb at a double-digit clip, and despite the negative comps, it's a concept that continues to cultivate an audience for signature Charburgers.
One of the restaurant industry's cheapest stocks -- on a forward earnings basis -- is one of the more expensive steakhouse chains. Del Frisco's is trading for just 14 times next year's projected net income. The high-end chophouse operator is out of favor. The stock hit a seven-month low on Wednesday.
It's easy to see why Del Frisco's is not on the investing radar of mainstream investors. It has fallen short of Wall Street's earnings expectations in each of the past four quarters. It's also coming off a rough quarter, as comps fell 3.6% with a 9.3% decline in customer counts more than offsetting a 5.7% increase in average check.
Steakhouses tend to fare well when the economy's buzzing and companies are schmoozing clients, and while Del Frisco's isn't executing on that front, it did announce a game-changing acquisition last month. Del Frisco's is buying the parent company of the Barcelona Wine Bar and Bartaco concepts. The $325 million deal for the 31-unit chain throws Del Frisco's hat into the wine and tapas ring, giving it a differentiated strategy from its steakhouse bent, which isn't at its best right now. It's a smart move, but the stock at its lowest levels since late last year suggests that the market isn't seeing it that way. And that could spell a tasty opportunity.