Don’t look now, but roadside family-style restaurants are having a bang-up year.
Heck, restaurants in general are doing well, with stocks up 25% year-to-date through Sept. 18 — 190 basis points better than the S&P 500. But some stocks are doing even better than that: Denny’s (DENN), Bob Evans Farms (BOBE) and Cracker Barrel (CBRL) are at or near 52-week highs and doing better than their peers.
Which, if any, should be on your buy list? Here are my thoughts on each.
Only a decade ago, it seemed like Denny’s was on its last legs. However, if you’d invested $10,000 in Denny’s in Sept. 2003, buying at the high of $0.57, you would have $111,228 today, a compound annual growth rate of 27%. The same amount invested in the SPDR S&P 500 (SPY) would only be worth $16,528 or a 5.2% CAGR.
Six years ago, Denny’s moved to a business model that was franchise friendly. Implementing what it called its “Franchise Growth Initiative,” it began to sell company-owned locations to interested operators who would reopen them as franchise locations. Within the first two years it had sold 200 company restaurants to franchisees, using the proceeds to pay down debt.
Its total long-term debt at the end of 2006 was $453 million. At the end of its most recent quarter, that was down to $157 million — a drastic improvement. In 2007, 24% of its locations were company-owned. Today, that’s down to 10%. For comparison, McDonald’s (MCD) owns 19% of its locations and it’s considered to be almost exclusively focused on franchising.
On the downside, Denny’s has shown little consistency when it comes to profits. Second-quarter revenues declined on flat comps, which in turn reduced its operating profit by 34%. The company only managed its two-cent increase in earnings per share because of $8 million in deferred financing costs. Given that the stock’s up 30% year-to-date with no real improvement in its profit picture, I would be hesitant to buy at this point.
Bob Evans Farms
BOBE is up 44% year-to-date through September 18%, and 20% in just the last month alone. Something’s cooking at the Columbus restaurant chain/retail food products company. Its brands resonate with both restaurant and grocery customers, which makes for a very healthy combination.
Back in June I compared Bob Evans and Cracker Barrel. I came to the conclusion that CBRL was the better stock because its business model is less complicated — it’s just a restaurant (with a small retail component) while BOBE has its mitts in several fires. And while I like BOBE’s move to vertically integrate, its Q1 results show some significant growing pains. Both its restaurant and frozen foods businesses experienced reasonably significant declines in operating profits year-over-year.