Sector Watch: Restaurant stocks
Everyone likes a deal when they go out to eat: two-for-one appetizers or half-price drinks can be sources of exuberance for restaurant frequenters. But with casual dining restaurant stocks plummeting this year on recession fears, happy hour has now extended itself into the stock market, especially in the case of Buffalo Wild Wings Inc. (Nasdaq: BWLD) and BJ’s Restaurants Inc. (Nasdaq: BJRI). The two franchises are at bargain prices and have fundamentally strong restaurant concepts, consistent track records, good balance sheets and cash flow, and above-average long-term growth outlooks.
Buffalo Wild Wings was founded in 1982 and went public in 2003. The chain consists of nearly 500 casual dining restaurants operating in 37 states, with a menu that is competitively priced and positions the company between the fast food and casual dining segments. Aside from wings, the menu offers chicken tenders, shrimp, hamburgers and other sandwiches, wraps, tacos, appetizers and salads. Beers from local and/or regional micro-breweries are available on-tap at its restaurants as well as bottled beer, wine and liquor. Each Buffalo Wild Wings restaurant is designed to include an extensive multi-media system, a full bar and an open layout. Customers can choose from counter service, dining table service or carry-out.
Buffalo Wild Wings achieved its stated 2007 performance goals that included 15% unit growth, 20% revenue growth and 25% net income growth. At year-end 2007, the company was operating 493 locations, up from 429 locations one year earlier.
Buffalo Wild Wings’ revenues grew 21% year-over-year in 2007 to $330 million from $278 million and per-share earnings increased 30% year-over-year to $1.10 from $0.92. The 2007 revenue and income gains discussed above are comparables based on two 52-week periods; in actuality, FY 2006 was 53 weeks long whereas FY 2007 had 52 weeks.
Same-store sales have improved for 16 consecutive quarters., Compared with FY 2006, same-store sales grew 6.9% for company-owned stores and 3.9% for franchised restaurants in 2007. Average weekly sales have increased consistently for eight years and grew 8% year-over-year in 2007 for company-owned restaurants to $38,757 from $36,033. Weekly sales gains for franchised restaurants averaged 4% in FY 2007, with weekly sales climbing to $45,901 from $43,975. The number of company-owned locations grew 16% in 2007 to 161 sites while franchised locations grew 14% to 332 sites. The company had cash and marketable securities exceeding $68 million at year-end 2007 to support its further expansion and generated over $43.5 million of cash from operations in FY 2007.
Management targets 15% unit growth in FY 2008 and anticipates sales gains, combined with an emphasis on cost controls, will enable Buffalo Wild Wings to generate 25% net income growth this year. Analysts look for this company to produce 22% growth next year and longer-term growth exceeding 23% annually. These shares currently trade at a Price/Earnings Growth (PEG) ratio of less than one times growth. Buffalo Wild Wings shares traded as high as $48 last year. My $32 price target is about 50% above Tuesday’s closing price of $21.38.
BJ’s Restaurants was founded in 1978 and went public in 1996. This company originally began as a California pizzeria, but over the years has expanded into a 68-unit casual dining chain offering over 100 menu items, including deep dish pizza, salads, sandwiches, soups, pasta, entrees and deserts. BJ’s Restaurants are distinguished from competitor casual dining chains by hand-crafted beers produced at the company’s own in-house microbreweries. The company’s average guest check is around $12, positioning BJ’s among the most affordable casual dining chains. The company owns and operates restaurants under the brand names BJ’s Restaurant & Brewery, BJ’s Restaurant & Brewhouse and BJ’s Pizza & Grill. Its restaurants are located in California (39), Texas (11), Arizona (4), Colorado (3), Oregon (3), Nevada (2), Florida (3), Ohio (1) and Oklahoma (2).
BJ’s has generated 45 consecutive quarters of comparable restaurant sales gains. Comparable store sales grew 6.2% year-over-year in FY 2007 following 5.8% growth in FY 2006. BJ’s Restaurants’ revenues increased 32% year-over-year in FY 2007 to $316.1 million from $238.9 million and non-GAAP net income, excluding non-cash charges related to asset sales, improved 33% year-over-year to $13.1 million from $9.9 million. Non-GAAP per-share earnings climbed 20% year-over-year to $0.49 from $0.41. The company opened 13 new restaurants last year and has plans to open as many as 15 new locations in 2008.
To counteract softness in the $90 billion casual dining market, BJ’s is investing in a number of traffic-building initiatives this year, including a “curbside-to-go” program that capitalizes on online ordering, and a “call ahead” seating program managed by the company’s automated table management system. BJ’s management believes that company sales-building initiatives will enable its restaurants to outperform industry peers in 2008.
Analysts target 34% growth for BJ’s (BJRI) this year, 30% growth next year and 28% average annual longer-term growth. Over the last 52 weeks, shares have traded between $11.63 and $24.80 last year. My $17 price target is 35% above Tuesday’s closing price of $12.61.
