Del Frisco's Restaurant Group: Premium Steaks At Premium Valuation

| About: Del Frisco's (DFRG)

Shares of Del Frisco's Restaurant Group (DFRG) had an uninspiring public debut on Friday. Shares of the Steakhouse restaurant group ended the day at $13.00 per share, unchanged from its offering price.

The public offering

Del Frisco's sold 7.0 million shares for $13 a piece in its public offering. Del Frisco, which currently operates 32 premier restaurants throughout the country raised $56 million in gross proceeds from the public offering. The company offered 4.3 million shares, with selling shareholders offering another 2.7 million shares. The public offering is quite a disappointment given that the company initially planned to sell its shares within a $14-$16 offer range in the beginning of July. Based on the $13 offer price, the firm is valued at $290 million. Major banks which brought the company public were Deutsche Bank, Piper Jaffray and Wells Fargo.


Del Frisco operates three franchise restaurant groups, Del Frisco's, Sullivan's Steakhouse and Del Frisco Grille. The company reported annual revenues of $201.6 million for its annual year of 2011. This represented a 21.8% growth compared to 2010, driven by an 11.2% comparable restaurant sales growth. The company reported an annual net income of $9.0 million for the year.

First quarter revenues in 2012 rose 23.8% to $53.7 million, although comparable restaurant sales growth slowed down to 6.7%. Net income rose over 81% to $5.0 million. The company guided for second quarter revenues of $51.1-$51.3 million and net earnings of $3.1-$3.5 million. The company hopes to expand its restaurant base by 3-5 restaurants per annum. The majority of the offering proceeds will be used to repay debt, making the company essentially debt free.

The firm reported a comparable same store sales growth of 12.1% for the full year of 2011, a figure which dropped to 6.7% in the first quarter of 2012. Based on a rough annual revenue estimate around $250 million for its full year of 2012, the firm is valued at 1.2 times annual revenues. Net income could come in around $15 million, valuing the firm around 20 times annual earnings.

Investment Thesis

Del Frisco's public offering has not been a great success as investors are worried about the impact of the global economic slowdown and the "fiscal cliff" in the U.S. on discretionary consumer spending.

With average checks running up to a $100 per customer, the restaurants cater to wealthy individuals. This leaves the company vulnerable to people cutting on spending during a recession. In 2009, the company reported an almost 19% decline in comparable restaurant sales as a result of the impact of the recession on consumer spending. First quarter comparable sales growth already fell substantially compared to the comparable growth rate for its annual 2011.

Last week, another restaurant chain went public. Chuy's (CHUY), which caters Mexican food and serves much less expensive fare, saw some decent returns after going public. With the economy showing renewed signs of a slowdown, investors favor discount restaurants.

Unless the economy stabilizes and shows quick signs of a recovery, I would not be interested in Del Frisco's.

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