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Frisch's Restaurants' Earnings: A Wolf In Sheep's Clothing

William Bias profile picture
William Bias


  • Declining traffic does not bode well for Frisch’s Restaurants.
  • Price increases propped up same stores sales.
  • Real estate gains boosted net income and free cash flow creating the illusion of fundamental gain.

On Oct. 30, Frisch's Restaurants (NYSEMKT: NYSEMKT:FRS) which, along with its franchisees, operates 126 restaurants under the name "Frisch's Big Boy" came out with its Q1 fiscal year 2015 10-Q. This followed up on the earnings statement released on Oct. 22. At first appearance, the results seem good. However, there appears to be a wolf in sheep's clothing. Here's why.

Fundamental expansion not as good as it looks

In the most recent quarter, revenue, net income and free cash flow all increased 2%, 37%, and 17% respectively. The same stores sales increase of 1.8% contributed to the increase in revenue. However, customer count declined 1.1%, meaning that the same store sales increase came from price increases imposed on a dwindling customer base. When a restaurant or any business loses customers, it loses the opportunity to make a sale. A dwindling customer base is not a good sign.

Net income and free cash flow gains mostly came from a one-time gain on, and disposition of, the real estate that was formerly occupied by a Big Boy restaurant. It is not good to see net income and free cash flow expansion come from the downsizing of a business. Net income and free cash flow should come from location expansion and higher traffic at established locations. Lower capital expenditures also contributed to free cash flow generation.

Balance sheet lacks cash but doesn't harbor significant debt

Frisch's Restaurant's $3.4 million in cash only equated to 4% of stockholder's equity. I prefer that companies possess plenty of cash for tough times at 20% of stockholder's equity or better. However, long-term debt which can create profit draining interest expense, only amounted to 4.5% vs. 5% in June of 2014. Interest expense also declined 48% providing some aid to net income expansion. Operating income exceeded interest expense by 35 times. The rule of thumb for safety here lies at 5 times

This article was written by

William Bias profile picture
I have been analyzing stocks since 1992 and a freelance writer since 2012.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

OXBORO profile picture
FRS is a consistent cash machine. If it did have 20% of its equity in cash, earning a whopping 1% return is hardly anything to write home about.

I would like to see it leverage up it balance sheet by putting a mortgage on it 90 owned locations at 4-5% 15 year FIXED rate long term money and buy another cash machine at 5 times cash flow. They have the back office to support it without incurring a large increase in staff.

Stop paying a 3% dividend and buy a little stock back with the money instead .
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