The restaurant chain that operates as Del Frisco (DFRG) is set to go public, selling 7 million shares. The company will be selling 4.3 million, with an additional 2.7 million coming from an existing shareholder (Lone Star Fund). Shares will trade on the Nasdaq Global exchange with an expected pricing of $14 to $16.
Del Frisco operates with three unique restaurant concepts:
- Del Frisco's Double Eagle Steak House - features USDA Prime steaks, locations in 7 states, average unit=$12.5 million annually, average check $100
- Sullivan's Steakhouse - features an open kitchen with live music in the restaurant, 19 locations in 15 states, average unit=$4.4 million annually, average check $59
- Del Frisco's Grille - newest concept started in 2011, target of $4.5-$6.0 million in annual sales per unit, average check currently $45-$55
With the three concepts, Del Frisco enjoys 32 restaurants in 18 states. The three unique chains also make Del Frisco one of the largest full-service steakhouses in the United States. The concept of the restaurants is "destination dining" by placing locations in urban settings. Many of the restaurants feature award winning wine selections to complement the entrees.
The company's strengths are listed as:
- Multiple Top Performing Concepts With an Expanding National Platform
- Operating Model Driving Higher Margins
- Fine Dining Concepts With Complementary Market Position
- Focus on Innovation
- High Quality Menu Offerings With a Focus on Social Experience and Customer Service
- Experienced Executive and Restaurant Management Teams
By using its strengths, the company hopes to accomplish the following in the future:
- Pursue Disciplined New Unit Expansion
- Grow Our Existing Restaurant Sales
- Further Grow Our Private Dining Business
Del Frisco is not going to grow into a 500 unit chain ever. It has a very disciplined approach to site selection and maintaining clientele. Plans call for 3 to 5 restaurants to be opened every year, with most of that growth coming from the newer Grille concept. Long-term plans also call for international exposure by opening restaurants or licensing the brands out. A new Del Frisco cost $7 to $9 million for the company in capital, while a Sullivan's or Grille restaurant is $3 to $4.5 million.
Revenue has grown each of the last three fiscal years. In 2009, Del Frisco had revenue of $160.2 million. The company grew that number to $165.6 in fiscal 2010, before reporting $201.6 in the most recent year ending 2011. Net income has also grown every year in that period with numbers of $8.6 million, $8.7 million, and $9.0 million respectively. Earnings per share were $0.39 each of the three fiscal years.
In the most recent quarter (ending March), revenue was $53.7 million, a 24% increase from the prior year's period. Comparable sales at restaurants grew 6.7%. Earnings per share in the quarter were $0.22, up significantly from the prior year's $0.12.
Lone Star Fund, a private equity group and 100% current owner, will own over 68% of Del Frisco after the public offering. A total of 22,380,000 shares will be outstanding. Net proceeds from the offering will go toward paying long-term debt, a one time payment to Lone Star, and working capital. Long-term debt will stand at $15 million after the debt payment from the proceeds.
Del Frisco's key competitors are The Capital Grille, owned by Darden (DRI), Fleming's, Morton's, and Ruth's Chris (RUTH). If shares price at $15, it would give the company a market capitalization of $335.7 million. Larger chain Ruth's has a current market cap of $226.3 million. Ruth's has annual revenue of $372.9 million. Ruth's however is not profitable like Del Frisco has been for the last three years. With $15 shares, Del Frisco will trade with a price-to-sales ratio of 1.7. Price-to-earnings ratio based on last fiscal year's $0.39 is 38. I think Del Frisco is a good long-term trade as it has a limited number of restaurants, but each new one adds a significant amount of cash to the top line. If shares jump on the IPO, Ruth's could also be a nice pair trade, as it may look undervalued. Shares are expected to price the week of July 23.