Del Frisco’s Restaurant Group (DFRG) is on the Hedgeye Restaurants Best Ideas list as a LONG.

 

HEDGEYE OPINION

Despite this morning’s mixed earnings report (both consolidated revenues and COGS missed estimates), there was a sense of optimism and “glass half full” perspective among company leadership. As many of you know, we view DFRG as a long term call, and company leadership appears to share this sentiment, as they inundated call participants with positive forward-looking commentary (the market is also eating this up, as the stock is up ~3% as of this note). Undoubtedly, the macro environment is playing a key role in limiting consumer spending, as seen by management’s astute revelation that weakness at several East Coast (Boston & New York City) locations was due to reduced tourism spending and Brexit fallout (GBP devaluation). As sales begin to pick-up in the fourth quarter, management is confident that the holiday season will be a positive impetus, pushing DFRG to a positive Q4 earnings report.

NOTABLE COMPANY THOUGHTS:

  • “Across the board it was choppy…Sales choppiness during our seasonally weak third quarter yielded results that fell short of our expectations and have caused us to revise our annual guidance,” (Mark S. Mednansky, CEO)
  • “Saw struggles in areas that are usually high tourist environments…This was a summer tourist phenomena on the east coast for us (Boston & NYC),” (Mark S. Mednansky, CEO)
  • “In this quarter we had a varying cadence among concepts, but we are encouraged that guests began to spend more toward quarter-end and into Q4,” (Mark S. Mednansky, CEO)
  • “About half our restaurants generate a positive comp, but the two locations with greater exposure to the energy industry continued to experience weakness. In addition, a significant reduction in European summer tourist and the devaluation of the British pound earlier this year negatively affected our late night sales in our East Coast Del Frisco's,” (Mark S. Mednansky, CEO)

QUICK COMPS:

  • Consolidated revenues increased 4.0% to $71.4mm, from $68.9mm this time last year, and missing consensus estimates of $72.66mm
  • Revenues at Del Frisco’s Grille rose 20.9% to $24.1mm from $19.9 mm this time last year, and beating estimates of $22.54mm
  • Total comparable restaurant sales decreased by 3.0% vs. estimates of -0.4%

—   Del Frisco’s Double Eagle: -3.7% vs estimates of -0.3%

—   Del Frisco’s Grille: -1.4% vs estimates of -1.3%

—   Sullivan’s: -3.2% vs estimates of 0.3%

  • COGS (as a percent of company revenue) improved by 70bps to 28.3% from 29.0% this time last year, beating estimates of 28.47%

DFRG | QUICK TAKE | 3Q16 EARNINGS NOTE - Chart 1

DFRG | QUICK TAKE | 3Q16 EARNINGS NOTE - Chart 2

DFRG | QUICK TAKE | 3Q16 EARNINGS NOTE - Chart 3

FY 2016 GUIDANCE:

  • Total comparable restaurant sales of minus 1.0% to minus 0.5% (represents positive Comparable restaurant sales in 4Q)
  • One Del Frisco’s Double Eagle Steak House relocation and three Del Frisco’s Grille openings
  • COGS of 28.3% to 28.6% of consolidated revenues
  • General and Administrative costs of approx. $24.5mm to $25.0mm
  • Pre-opening costs of approximately $3.6mm to $3.8mm
  • Effective tax rate of approximately 29.5% to 31.0%
  • Gross capital expenditures of $32.0mm to $35.0mm
  • Annual adjusted net income per diluted share between $0.79 and $0.81

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst