Update: Bravo Brio Restaurant Group Earnings

Aug.12.14 | About: Bravo Brio (BBRG)

Summary

The company missed on the top and bottom lines.

We still see the company as one of the most compelling investments in the restaurant space and it has an activist backing.

The recent quarterly weakness was not foreseen by us and was due to a heavily competitive quarter.

Author UpdateDec. 22, 2014, 1:19 AM
Activist investor Red Mountain trimmed its stake by over 40% in Bravo Brio last Friday. It now owns 6.7% of the company. This comes just a week after Wellington Management trimmed its stake by 60% and it now owns just under 5% of the company.

This certainly sets our bull case back, as it appears Red Mountain is switching focus from Bravo Brio to its new campaign in the restaurant space -- Popeyes.

SEC filing here: http://www.sec.gov/Archives/edgar/data/1374588/000119312514448771/d840909dsc13da.htm

Bravo Brio Restaurant Group (NASDAQ:BBRG) managed to post 2Q earnings of $0.20 a share (missing consensus of $0.22). Revenues came in at $104.5 million (missing $107.9 consensus). Comp restaurant sales were down 5.1%, revenues were down 1.1% y/y and restaurant level operating profit was down 4.1% y/y. Shares fell over 7% on the news.

Shares are flat since we first covered the company back in September. We still have a $20.50 price target on the company. A year ago, the company traded at an EV/EBITDA multiple of 7x, it now trades at 6.7x. Activist, Red Mountain, now owns 9.7% of the company, up from 8.5% in our first article. As we noted back then,

Overall, we agree with Red Mountain and see BBRG as being an undervalued player in the restaurant space. The economics per new location make sense and the company can fund its growth plans with cash flow from operations and each new location generates a cash-on-cash return on investment of 30% to 40%. We believe that Red Mountain is looking to help BBRG accelerate this growth, where the company has a debt to equity ratio of only 0.13 (compared to 0.36 in 2011), which is well below peers.

Management noted with 2Q earnings that it's still opening new locations with internally-generated cash. It also noted that the recent quarterly weakness was due to heavy discounting by its competitors.

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