3 Outperforming Restaurant Stocks With Strong Sources Of Profitability

Includes: RRGB, RUTH, TXRH
by: Kapitall

Last week, NBC News reported that restaurant sales reached a record high of $45.9 billion in April, a 0.4% increase from the previous record in December 2012. Since summer is a popular season for restaurants and less than a month away, we wanted to look for restaurant stocks that could deliver great returns in the coming months.

We began with a universe of restaurant stocks and screened for those that have outperformed over the last quarter, with over 20% return.

Next, we decided to focus on profitability since it's an important consideration when choosing a stock. With this in mind, we then analyzed sources of profitability using the DuPont formula.

The DuPont formula uses return on equity (ROE) for its profitability measurement. The higher the ROE, the more profitable the company appears, but this profitability can come from many sources -- some better than others.

In general, an encouraging DuPont breakdown implies one or more of the following:

-Improving Net Profit Margin, i.e., higher Net Income/Revenues
-Improving Asset Efficiency, i.e., higher Sales/Assets
-Decreasing Financial Leverage ratio, i.e., lower Assets/Equity

Companies passing all requirements are thus experiencing increasing profits due to operations, and not to increased use of leverage.

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you expect these stocks to continue to outperform as summer approaches? Use this list as a starting point for your own analysis.

1. Ruth's Hospitality Group Inc. (NASDAQ:RUTH): Operates steakhouses, with company-owned and franchisee-owned restaurants in the United States, Aruba, Canada, China (Hong Kong), El Salvador, Japan, Mexico, Singapore, Taiwan, and the United Arab Emirates

  • Market cap at $413.12M, most recent closing price at $11.53.
  • Performance over the last quarter at 22.53%.
  • MRQ net profit margin at 7.13% vs. 6.07% y/y. MRQ sales/assets at 0.48 vs. 0.431 y/y. MRQ assets/equity at 2.466 vs. 3.334 y/y.

During the first quarter of 2013, Ruth's Hospitality Group's had income of $7.7 million, or $0.22 per diluted share, compared to a net loss of $30.3 million, or $0.89 loss per diluted share, in the first quarter of 2012. Revenue rose by 7% to $107.4 million from $100.3 million in the same quarter last year. The company experienced its 12th straight quarter of growth in same-store sales with a 6.6% year-over-year increase at its 63-store Ruth's Chris Steakhouse franchise and a 1.5% year-over-year increase at Mitchell's Fish Market. CEO Michael Donnell credited an earlier Easter with 1% of the increase at Ruth's Chris Steakhouse.

For the 13th straight quarter, Ruth's Hospitality Group reported a 2.9% rise in traffic at Ruth's Chris Steak House while the average check increased by 3.6. In addition to the Easter shift, prix-fixe Ruth's Seasonal Classics Menu, which made up roughly 20% of first quarter sales, and the steakhouse's Sizzle, Swizzle, and Swirl Happy Hour contributed to the franchise's performance. With graduation season underway and Father's Day approaching, Ruth's Chris Steak House is well-positioned to continue its streak of positive same-store sales growth.

Ruth's Hospitality Group's net capital expenditures totaled $1.2 million at the end of the quarter, after $2.3 million in property and equipment acquisition and $1.1 million in restaurant sale proceeds. Its outstanding debt currently stands at $43 million, reflecting a 44% decrease from the same period last year. The company used its free cash flow to pay down the debt, resulting in -$1 million in free cash flow at the end of March and $36 million TTM. For some context, fellow small cap steakhouse company Del Frisco also has -$1 million in free cash flow presently, but its -$3 million TTM falls short of Ruth's Hospitality Group's.

Investors should also note the company's focus on shareholder returns. Earlier this month, the Board of Directors approved a $0.04 quarterly dividend and the company announced a $30 million share buyback program.

2. Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB): Develops, operates, and franchises casual-dining restaurants in the United States and Canada.

  • Market cap at $730.19M, most recent closing price at $51.64.
  • Performance over the last quarter at 21.14%.
  • MRQ net profit margin at 2.7% vs. 1.41% y/y. MRQ sales/assets at 0.403 vs. 0.347 y/y. MRQ assets/equity at 1.946 vs. 2.012 y/y.

Red Robin Gourmet Burgers Inc.'s income during the first quarter of 2013 was $9.5 million, or $0.66 per share. Income dropped 10.4% from $10.6 million, or $0.71 per share, from the first quarter in 2012. While the company also saw a decline in year-over-year traffic of 0.6%, revenue rose by 2.28% year-over-year to $306.3 million an same-store sales increased by 2.2%.

During last quarter, Red Robin Gourmet Burgers introduced beer shakes as well as a new appetizer and dessert menu during the last quarter. It will continue to expand its alcohol offerings through the summer with special cocktails on its new menu, which launches on June 3. The restaurant company is currently trying to increase annual alcohol sales by 0.5%. Alcohol comprised 7.5% of total sales in the first quarter, reflecting a 0.4% increase from the same quarter last year.

The company is in the process of opening 20 full and midsize Red Robin restaurants as well as an undisclosed number of Burger Works this year. In addition to the new stores, Red Robin Gourmet Burgers is relocating two Red Robin restaurants, expanding two existing restaurants, and remodeling twenty locations. The company now expects these growth initiatives to lead to roughly $70 million in capital expenditures and $87 million in general and administrative costs this year. As for financials, Red Robin Gourmet Burgers' free cash flow is at $34 million, and its free cash flow TTM stands at $34 million.

3. Texas Roadhouse Inc. (NASDAQ:TXRH): Operates a full-service, casual dining restaurant chain in the United States.

  • Market cap at $1.67B, most recent closing price at $23.90.
  • Performance over the last quarter at 26.59%.
  • MRQ net profit margin at 7.28% vs. 5.81% y/y. MRQ sales/assets at 0.449 vs. 0.432 y/y. MRQ assets/equity at 1.455 vs. 1.474 y/y.

Last quarter, Texas Roadhouse had a 39% jump in net revenue to $26.17 million, or $0.37 per diluted share, from $18.87 million, or $0.27 per diluted share. The company's $359.7 million in revenue reflected an 11% increase from last year's $324.8 million, with company same-store sales rising 3.5% and franchise same-store sales rising 4.5%. Traffic increased for the 12th consecutive quarter by 0.5%, and the average check increased by 3%.

Texas Roadhouse's year-over-year restaurant operating profit increased by 9.7%; since this is greater than the company's 8.4% store regrowth, CEO Wayne Taylor notes that, on average, restaurants made money despite the new sites; below average system sales. Speaking of new stores, Texas Roadhouse opened 5 restaurants last quarter and is on track to open an additional 28 company restaurants and 5 franchise restaurants this year.

However, at 7.5% during the quarter, food cost inflation was an obstacle for the company. Taylor expects the combination of inflation and a likely smaller average check increase to become more of a challenge through the remainder of the year and 2014. Texas Roadhouse plans to test menu price increases in the summer to help it combat inflation. Lastly, when it comes to company financials, Texas Roadhouse has $24 million in free cash flow and $70 million TTM.

Compare performance over the last year with Kapitall's Turbo Chart. Click through to adjust time frames.

*Profitability data sourced from Fidelity. All other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.