All information for this article was pulled from their most recent earnings call
Del Frisco's Restaurant Group (NASDAQ:DFRG) owns and operates restaurants under the names: Del Frisco's Double Eagle Steak House, Sullivan's Steakhouse, and Del Frisco's Grille. Their restaurants are also the namesake of their operating segments, Del Frisco's, Sullivan's, and Del Frisco's Grille. The grille is a mix for both business and casual diners. Del Frisco's is a chain a steakhouses. Sullivan's is a fine dining experience that includes live music, a bar, and an open kitchen. Del Frisco's operates its 50 restaurants in over 20 different states and Washington D.C.
Their most recent earnings call was on October 14th. October 20th close, the stock price is $14.05 or 5.56% higher since earnings.
Del Frisco's revenue has increased on a year over year basis by 4.04% or from $68.63 million to $71.4 million for Q3. Adjusting for the $3.34 million impairment charge accounted for last year, operating income decreased from $1.26 million to $1.12 million. Increasing 8.08%, most of the decrease in earnings seems to come from the increase in restaurant operating expenses.
For the quarter, revenue growth was entirely driven from Del Frisco's Grille. That segment grew revenue 21% on a year over year basis.
On a 9 month ended basis, Del Frisco's has increased earnings across the board in revenue, operating income, and net income. Revenue has increased 6.9%, operating income increased 5.3%, and net income 1% (operating income and net income adjusted for impairment charges).
Again on a 9 month ended basis, almost all of the growth came from the Grille, growing revenue 24.28% on a year over year basis.
Three quarters running, Del Frisco's has zero long term debt. Del Frisco's has maintained approximately $35 million to $45 million current liabilities in their working capital, however the last time they had recorded long term debt was Q4 2015 of $4.5 million. Del Frisco's has significant room to leverage up and open up new markets around the United States. Del Frisco runs a negative working capital of $5.82 million. Their quick ratio looks worse currently sitting at 0.37.
With the current interest rate environment it would be best to look into the lower rates now to save future earnings on interest expenses. Del Frisco should use this opportunity to issue long term debt to cover their shorter term liabilities.
PRICE TO EARNINGS
Del Frisco's current P/E sits at 17.85, this is lower than their sector and industry, services and restaurants, currently at 25.39 and 38.60 respectively. Even with current earnings looking flat, price to earnings shows Del Frisco's is undervalued
Del Frisco's does not currently pay a dividend yield. Also, they are not necessarily in the position to pay one either. They run a negative working capital and investors would have to go back 3 quarters to Q4 2015 to find the most recent quarter that had a positive change in cash. However, if Del Frisco's can get their operations in order, their sector and industry have average dividend yields of 1.55% and 2.23% respectively. An average of these two would result in approximately a $0.25/dividend payout at its current price.
Del Frisco's 3Q earnings are down when adjusted for impairments. There is virtually no growth from their two larges revenue generators. Luckily their Grille segment, that has grown on a 20% year over year basis for Q3 is now their second largest EBITDA generator behind the Del Frisco's segment.
Another large risk for this company is their net working capital. If they don't change something quickly, there are going to be some bills that they will not have the money to pay for. Del Frisco's looks to open two more Grille locations by the end of the fiscal year which will hopefully be part of the solution to this cash problem.
I rate this company as a B (see my instablog for ratings sheet). Del Frisco's looks good, especially when looking at their Grille segment growth. However, investors would like to see more growth out of their biggest segments, Del Frisco's and Sullivan's.
DECISIONS TO BETTER COMPANY
Del Frisco's needs cash and fast to help fix their NWC issues. However, once this is solved. There aren't too many problems for them in the future. They have the ability to lever up and potentially see some solid growth in all of their segments in the future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.