Sector financial performance:

This company, who owns and operates Del Frisco’s, Sullivan’s, and the Grille, has been grouped into steakhouse fine dining restaurants sector in foodservice industry.

Data indicates the average increase in comparable sales all across this sector went down from around 1.7% of 2015 to around 0% of 2017 and then went up to 1.2% in 2018.  Correspondingly, traffic all across the sector decreased 0.5%, 0.5%, 1%, and 1.5% in 2015, 2016, 2017 and 2018 respectively. It seems that slowing down traffic contributes the downturn in comparable sales of fine dining restaurants between 2015 and 2016. However, the accelerating decline in traffic since then has been completely offset by more spending per customer.

Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to this sector than to casual restaurants as indicated by their numbers of decrease in traffic. For some companies, reduced menu prices help slow pace of decrease in traffic while caused decrease in sale simultaneously.

Unlike in QSR where companies use franchise as buffer, companies’ margins in this sector declined as traffic and thus sales slowing down. However, to retain traffic and as well because of small space to allow price to go up, few companies in this sector improve their margin and sales by significantly raising menu price. In fact, since 2017, it seems companies started more aggressively promote menu to offset the decline in traffic. Most of companies experienced shrinking gross margins (12%) and operating margins (4%) in 2018.

According to our analysis, the current companies’ enterprise price/EBI ratios (or /sales) is average 24 with an interest/EBI ratio of 14%.

The average cash flow/share of companies in this sector presents decrease of 10% and 4% for 2017 and 2018.

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Company performance:

It seems that the demand for restaurants service/products of this company has been weak in the past three years and the decline seems to be continuing as indicated by generally decreasing traffic and the decreasing ability to offset the decline traffic by raising menu price. However, data indicates that consumption is still sensitive, to less extent, to reduced price. Traffic suddenly plunged in first half of 2018.

For the first two quarters of  fiscal 2018 compared with the same period of 2017(20180626)

Comparable sale:

Consolidated: -2.5%

Growth in Traffic:

Consolidated: -8.4%

Increase in check size:

Consolidated: 5.9%

The Fiscal 2017 compared with the same period of 2016

Comparable sale:

Consolidated: -2%

Double Eagle: -0.1%

Sullivan’s: -6.3%

Grille: -1.9%

Growth in Traffic:

Consolidated: -1.8%

Double Eagle: -0.2%

Sullivan’s: -7%

Grille: -0.1%

Increase in check size:

Consolidated: -0.2%

Double Eagle: 0.1%

Sullivan’s: 0.7 %

Grille: -1.8%

 The first 36 weeks in Fiscal 2017 compared with the same period of 2016

Comparable sale:

Consolidated: -2.2%

Double Eagle: -0.7%

Sullivan’s: -3.8%

Grille: -3.3%

Growth in Traffic:

Consolidated: -1.3%

Double Eagle: -1.2%

Sullivan’s: -4.3%

Grille: 0.2%

Increase in check size:

Consolidated: -0.8%

Double Eagle: 0.5%

Sullivan’s: 0.5 %

Grille: -3.5%

Fiscal 2016 compared with 2015

Comparable sale:

Consolidated: -0.8%

Double Eagle: -1.2%

Sullivan’s: -0.2%

Grille: -0.7%

Growth in Traffic:

Consolidated: -0.8%

Double Eagle: -1.4%

Sullivan’s: -0.8%

Grille: 0.1%

Increase in check size:

Consolidated: 0%

Double Eagle: 0.4%

Sullivan’s: 0.6 %

Grille: -0.8%

Fiscal 2015 compared with 2014

Comparable sale:

Consolidated: -0.6%

Double Eagle: 0.1%

Sullivan’s: 0.2%

Grille: -4.1%

Growth in Traffic:

Consolidated: -2.6%

Double Eagle: -2.8%

Sullivan’s: -3.2%

Grille: -1.6% 

Increase in check size:

Consolidated: 2%

Double Eagle: 2.9%

Sullivan’s: 3.4 %

Grille: -2.5%

Its gross margin (including company-operated expenses mainly-commodity cost, labor costs, occupancy costs, and other operating expenses) went down from about 17% to about 13% since 2015 primarily due to increased labor costs and occupancy and deleveraging of expenses as a result of new added restaurants. As its SG&A as percentage of sales went up to about 9%, its operating margin has gone down to about 4.5% in 2018 from 11% of 2014.

Stock price

This stock currently has an enterprise price/EBI ratio of 19. We think that its stock is being relatively overvalued considering its recently accelerating decline in traffic.