It's been a busy week for the hospitality stocks, with several restaurant chains posting their latest quarterly reports.
I've always warmed up to this sector, and not just because I'm a foodie at heart. I actually got my start in Fooldom back in 1995 as the sector analyst for food and restaurant stocks. To this day, my personal portfolio gravitates toward an unhealthy balance of eatery equities.
It's been a tough time for restaurant industry investors, even though not every chain is faring badly. Let's take a look at what five of the players brought to the table this week.
Kona Grill (Nasdaq: KONA)
Yesterday was a wipeout for Hawaiian-themed upstart Kona Grill. Shares fell by 16% as the company posted disappointing quarterly results. Expansion fueled a 22% gain on the top line, though comps fell by 0.8% during the period. The company posted a small loss for the period; that's fine, since few expect Kona to turn a profit this early in its growth cycle.
However, Kona also provided 2008 guidance that calls for losses to continue for the year ahead. I've been rooting for the eclectic concept, which has just 18 locations. Providing a high-end casual dining vibe, serving everything from sushi to signature dishes like macadamia nut-crusted chicken, Kona stands out among many of its boring peers. It just hasn't been winning over investors lately, and now the stock has dipped below its IPO price of $11 (set back in the summer of 2005).
Denny's (Nasdaq: DENN)
On the other end of the dining spectrum, Denny's also landed with a thud yesterday. The value-minded diner chain saw its stock surrender 15% of its value after posting weak quarterly results and talking down its near-term prospects.
Denny's expects lower comps in 2008, fearing that a weaker economy and higher gas prices are going to curb trips to the neighborhood greasy spoon. Denny's expects a steep drop in revenues as it sells many company-owned locations to franchisees. This isn't a bad move. Sure, the top line will take a hit, but franchisee royalties are high-margin gravy. Denny's should also be able to tackle its debt with the sale proceeds.
P.F. Chang's (Nasdaq: PFCB)
Things are holding up better at P.F. Chang's. The operator of moderately upscale Chinese restaurants saw its quarterly revenue climb 16% in its latest quarter. Earnings from continuing operations came in at $0.37 a share, slightly ahead of both Wall Street's estimate and last year's performance.
The company will be adding more Pei Wei units than its namesake bistros in 2008. It is also abandoning its Taneko Japanese concept. P.F. Chang's sees earnings from continuing operations coming in between $1.32 a share and $1.38 a share this year. The shares may appear pricey, given the company's slowing growth, but the stock is a rare winner so far into 2008. Shares have risen by just more than 20% this year.
California
Pizza Kitchen (Nasdaq: CPKI)
Another chain clawing its way back is California Pizza Kitchen. The stock has soared by more than 50% since bottoming out at $9.32 last month. Things aren't perfect at the casual-dining chain, but clearly, the pessimism of a few weeks ago was overdone.
In its latest quarter, CPK's revenue inched 12% higher, while earnings grew even faster. Comps also rose by 1.8%, a refreshing sight given the negative trends at so many of its rival chains.
CPK does expect comps to be flat in 2008, but it still sees earnings improving slightly in 2008 from last year's depressed levels. With expectations of profitability between $0.56 a share and $0.62 a share, CPK isn't cheap at 23-25 times forward earnings, but the 236-unit chain will have legs once the economy bounces back.
Bob Evans (Nasdaq: BOBE)
The comfort-food specialist also held up well during the quarter. Net sales and profits grew by 7% during the period. However, because Bob Evans has been aggressively repurchasing its shares, earnings on a per-share basis actually grew by 20% to $0.61.
Comps rose at its namesake restaurants, but fell at its slightly more upscale Mimi's Cafe chain. The company is sticking to its guidance, calling for earnings this year to come in as high as $1.84 a share.
Earnings in a carryout container
Add it up and what have you got? Well, this sector is clearly nervous about its near-term performance. Even the chains that held up well during the holiday quarter are skeptical about consumer spending patterns over the next few quarters.
Many consumers' stimulus-package rebate checks will likely be going to pay off debt or bankroll big-ticket purchases. It remains to be seen how much of that found money will find its way into the coffers of the industry's leading players.
We'll see how it goes. I'll save you a seat at the table.
