Catch The Joe's Crab Shack IPO - Ignite Restaurant Group Preview

May. 8.12 | About: Ignite Restaurant (IRG)

IPO Terms

Ignite Restaurant Group (NASDAQ:IRG), the parent company of Joe's Crab Shack, is set to go public this week. Almost 5.8 million shares will be sold at a price point of $12-$14. Shares of Ignite Restaurant Group will trade under the symbol "IRG" on the Nasdaq exchange. The deal will value the restaurant company for between $300 and $400 million. The proceeds from the initial price offering are being used to pay senior debt ($40.6 million), pay large shareholder J.H. Whintey a termination fee ($1.0 million) and general corporate purposes (remaining).

Joe's Crab Shack

Established in 1991, Joe's Crab Shack is America's only national crab house restaurant. An average Joe's Crab Shack location is 8,000 square feet and has seating for over 200 guests. Outdoor patios and playgrounds for children are present at almost all locations. Since new management took over Joe's Crab Shack, the focus on crab entrees has increased. Entrees with crab now represent 45% of total food revenue (2011 fiscal year), compared to 20% in 2007. In fiscal 2011, the average guest check at Joe's Crab Shack locations was $23.07. Dinner makes up almost three quarters of the restaurants sales (73% in 2011). Broken down by category, food (84%) makes up the largest portion of the restaurant chains sales, compared to alcohol (13%), and retail merchandise (3%).

There are currently 122 Joe's Crab Shacks in operation (as of 03/26/12). The locations break down as follows (number of units):

· Alabama (1), Arizona (3), California (13), Colorado (4), Delaware (1), Florida (12), Georgia (5), Iowa (1), Idaho (1), Illinois (4), Indiana (3), Kansas (1), Kentucky (2), Louisiana (2), Maryland (3), Michigan (3), Minnesota (1), Missouri (1), North Carolina (1), Nevada (2), New Jersey (4), New York (3), Ohio (1), Oklahoma (3), Pennsylvania (3), Tennessee (2), Texas (29), Utah (2), Virginia (5), Washington (1).

· Coming soon are also more locations in: Florida (1), Maryland (3), Nebraska (1), Pennsylvania (1), and Tennessee (1).

Brick House Tavern + Tap

Brick House Tavern + Tap began in 2008, when an existing Joe's Crab Shack was converted into a new concept restaurant. Brick House locations offer over 70 varieties of beer, including beer from local breweries. Catering to males who like drinking options, unique beer bongs are also offered inside the restaurants. The majority of Brick House's sales come from dinner time until the close of business. In fiscal 2011, Brick House's sales broke down as:

· 20% Lunch

· 25% Afternoon

· 38% Dinner

· 17% Late Night

Dinner and late night made up a combined 55% of all Brick House's 2011 sales. As more of a social restaurant with a sports environment, Brick House's food and alcohol made up 47%. Entrees at Brick House range from $8-$20, while cheaper appetizers are often ordered.

Brick House Tavern + Tap has 16 restaurants currently in operation in the following states:

· Florida (3), Illinois (2), Kentucky (1), Missouri (1), New Jersey (1), New York (1), Ohio (1), Pennsylvania (1), Texas (5).

Key Strategies for Ignite Restaurant Group include:

· Disciplined new restaurant growth - The intent for the company is to open Joe's Crab Shack locations in tourist attraction areas or cities with a high population density. These two characteristics are met by 21 of the top 25 restaurants in the Joe's chain. Brick House is a brand that is being optimized as a brand prior to adding more restaurants. Future development sees the chain being introduced to the top 50 pre designated market areas by Ignite Restaurant Group. In 2012, the company plans on adding 11 new restaurants, which will all likely be Joe's Crab Shack locations.

· Comparable restaurant sales growth - Through menu innovation and new marketing initiatives, Ignite is hoping to continue its streak of increasing sales at existing locations. The company has begun national advertising on cable channels for the Joe's Crab Shack brand, as opposed to the normal regional coverage. The company typically does two new menu promotions throughout the year and likes to add items that sell well to the permanent menu.

· Leverage our scale to enhance our profitability - There are many potential locations for Joe's Crab Shack and Brick House locations. The company also has the potential to move to a franchise based model years down the road.

Financials

Revenue for Ignite Restaurant breaks down as:

· 2009 - $307.8 million

· 2010 - $351.3 million

· 2011 - $405.2 million

Net income for the same years was:

· 2009 - $9.8 million

· 2010 - $11.8 million

· 2011 - $11.3 million

Fiscal 2011 saw net income per share of $0.61. This would make shares trade with a price earnings ratio of 21, based on an IPO price of $13 a share. EBITDA was $44.1 million in fiscal 2011, versus $39.9 million the prior year.

Comparable sales at Joe's Crab Shack locations have increase fifteen consecutive quarters. For the most recent quarter (end 03/26/12), comp sales rose +5.3% for Joe's locations open at least 104 weeks. Since 2008, the average Ignite restaurant has generated sales of $2.4-$3.0 million. The company's profit margin has increased to 16%, from 12.6% in fiscal 2008. Ignite Restaurant Group has turned around and improved to profitability. In 2008, Ignite had a net loss of $3.2 million.

The most recent quarter (ending 3/26) saw earnings per share of $0.13.

Risk Factors

After the initial price offering, the largest shareholder will be J.H. Whitney Capital Partners. The firm will own up to 70% of the company, depending on underwriters' options to buy additional shares. This majority control will also mean the company's board of directors can be handpicked and no independent directors are required. I usually tend to shy away from recommending buying shares of companies with one large owner.

The majority of the company's restaurants (45%) are in three states: Florida, California, and Texas. Any potential economic slowdown in those regions could hurt same store sales growth.

Only four of the company's Brick House locations have been opened 104 weeks or more. The limited number of older restaurants doesn't make the same store sales growth numbers as accurate.

Buyout Possibility

Now I know what you're thinking, the company is going public and already I am discussing a buyout possibility, crazy right? With the recent deal to take PF Chang's (NASDAQ:PFCB) private and Buffalo Wild Wings (NASDAQ:BWLD) talks of acquiring a smaller chain, the idea doesn't seem so crazy. The large ownership stake by a private equity firm leaves the decision in their hands and could make a deal more likely.

In a recent article, I discussed possible acquisition targets for Buffalo Wild Wings and I would have to add Ignite to that list. The Joe's Crab Shack brand would fit in nicely with Buffalo Wild Wings to offset its reliance on chicken. The Brick House brand could be sold off or converted to Buffalo Wild Wings locations. There also would be the possibility to keep the Brick House brand although this seems less likely as the restaurant is similar to the company's existing brand.

The PF Chang's buyout comes for $1.1 billion, representing 8.5 times EBITDA. The same ratio for Ignite would represent a market capitalization of $378 million.

Recommendation

I am not as familiar with the Brick House brand but like that the company is backing off and going after the growth of Joe's Crab Shack locations. The model for the company opening in tourist areas has paid off and makes the chain destination restaurants. The fifteen consecutive quarters of same store sales growth gets me excited about this IPO.

I recommend looking further into Ignite Restaurant shares and have a price target of $18 by the end of 2012.

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