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Top Restaurant Chains For Growth

Posted: Sep 05, 2008 10:36 AM by Will Ashworth

Tickers in this Article: CEC, DRI, PFCB, JBX, BWLD, BJRI

Ask a restaurant owner "how's business?" in this dragging economy, and he or she will likely to spew expletives before collapsing in utter despair. It hasn't been easy, and so when I received an email about Restaurant Hospitality Magazine's annual list of the Top 10 growth chains, my curiosity was piqued. Growth? Whom were they kidding?

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Growth is an elusive word in today's market, reserved for references to the deficit or bad loans. Surprisingly, not only were there 10 on the list, but three of them are publicly traded. I thought I'd explore each business further to see if there was a common theme for their success. Here's what I found. (Don't put your money on the table before getting a taste for analyzing this sector, check out Sinking Your Teeth Into Restaurant Stocks.)

BJ's Restaurants (Nasdaq:BJRI)
Originally called BJ's Chicago Pizzeria, the first restaurant opened in 1978 in Santa Ana, California. In 1996, with seven restaurants open, it began brewing its own beer and the BJ's Restaurant & Brewery was born. Today, it has 71 restaurants in 11 states, with 39 in California. Most of its restaurants are between 7,000-10,000 square feet and six have full-scale breweries included. The average unit does $698 in sales per square foot; this is comparable to PF Chang's (Nasdaq:PFCB) and Olive Garden, a division of Darden Restaurants International (NYSE:DRI). However, its average check is $11.71, far less than PF Chang's $20.50. Its restaurants are affordable, yet fun.

How BJ's Makes Money
Beer, alcohol and pizza account for 38% of BJ's sales - all high margin items. Its sales growth has been good. In 2003, revenue was $103 million and by 2007, it was $316.1 million. In the same period, income from operations grew to $13.4 million in 2007 from $5.3 million in 2003. Certainly, margins could have been better; in 2007, they were 4.3%, the lowest since 2003. Offsetting lower margins has been higher same-store sales, up 6.2% in 2007. Since 1996, it's reeled off positive same-store sales in 45 of 46 quarters. So, I'd have to say consistent growth is this stock's formula for success.

Buffalo Wild Wings (Nasdaq:BWLD)
Buffalo Wild Wings has one of the highest percentages of short interest (48.5% of the float) on the S&P 1500, currently, sitting 15th on the list. My guess is many investors don't feel it can continue to meet its target of 15% unit growth, 20% revenue growth and 25% net earnings growth. So far, the company has proved them wrong. Another issue may be Buffalo Wild Wings return on equity. At 15.62%, it is lower than many in its industry including CEC Entertainment (NYSE:CEC) at 24.6% and Darden Restaurants at just under 30%. Certainly, the shorts feel it has a lot to prove. I don't see it that way. (Find out how this figure can be a real eye-opener on the market sentiment of a given stock, read Short Interest: What It Tells Us.)

Stay on the Wing
Buffalo Wild Wings was founded in 1982; it began franchising in 1991, and it went public in November 2003 at $17 a share. Total revenue has grown to $329.7 million in 2007 from $126.5 million in 2003, while income from operations has grown to $25.6 million in 2007 from $7.1 million in 2003. The second quarter saw total revenue increase 28.8% to $97.9 million from $76 million one year earlier and same-store sales increase 8.3% at company-owned locations and 4.5% at franchised locations. Same-store sales in July continued to be strong, up 6% at company-owned locations and 2% at franchised ones. Once again, you're seeing consistent growth.

Jack In The Box (NYSE:JBX)
The growth story here has very little to do with the company's Jack In The Box burger joints; instead, the growth push is coming from Qdoba Mexican Grill, its much smaller franchise operation that serves nouveau Mexican cuisine. Most of Jack in the Box's fine-tuning is for the burger unit. Qdoba itself is doing great, hence its place on the growth list. In fact, Qdoba's 2007 same-store sales increase was 4.6%. the 33rd consecutive quarter of same-store-sales growth. Because of this growth, it has quadrupled in size since its 2003 acquisition, expanding from 16 states to 39. Once again, consistency rears its wonderful head.

Qdoba's Contribution To Grow
Qdoba's revenue in the past three years has grown to $94.47 million in 2007 from $58.40 million in 2005. Its operating earnings grew to $11.0 million in 2007 from $4.42 million in 2005. Unfortunately, its operating earnings are only approximately 5% of the total $219.69 million. At the end of 2007, 395 Qdoba Mexican Grill restaurants were open with plans to add 75-100 franchised outlets annually for the next few years. In the meantime, Jack in the Box continues to convert company-owned outlets to franchised ones, hoping to move from 33% franchised in 2008 to 70-80% in the future. As a result, shareholders will own a much less capital-intensive business. (Find out more in Zooming in on Net Operating Income.)

Bottom Line
In two words, the common theme of all three is "consistent growth". What more can you ask for?

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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