Bravo Brio Restaurant Group's Earnings: Fewer Customers Doesn't Bode Well For Shareholders

Summary

• Bravo Brio Restaurant Group’s year-to-date revenue and net income fell due to fewer customers.
• Bravo Brio Restaurant Group saw more free cash flow due to a rightful slowdown in expansion.
• Bravo Brio wants to go in debt to buy back shares which will further compromise its balance sheet.

On Nov. 7, Italian restaurant chain Bravo Brio Restaurant Group (NASDAQ: NASDAQ:BBRG) came out with its Q3 2014 quarterly statement which followed up with more detail on its earnings announcement released Nov. 6. The company is not doing so well. Here's why.

Losing ground in a competitive marketplace

Bravo Brio Restaurant Group saw its year-to-date revenue decline 1% due to intense discounting by the company's competitors. The company saw its year-to-date comparable sales decline 5.3%. Guest count declined 6.8% which is a bad thing. Fewer customers means fewer opportunities for sales and to build rapport which enhances its brands over the long-term. The company operates under two brands-Bravo and Brio-which saw year-to-date same store sales declines of 6% and 5% respectively. This means the entire company is suffering which doesn't bode well for the investor. The decline in revenue filtered down to net income which has decreased 22% vs. the same time last year.

Free cash flow increased

Incredibly, Bravo Brio Restaurant Group saw its free cash flow increase 3,102% going from $225 thousand this time last year to $7.2 million this year. However, this mostly occurred from sources other than profitability such as favorable accruals within its assets and liabilities as well as lower capital expenditures due to lower expansion and the timing of spending on construction projects. The company has opened two restaurants this year vs. four the same time last year. This represents a wise move considering its customer traffic woes.

Balance sheet lacks cash

Last quarter Bravo Brio Restaurant Group's cash amounted to a scary $346 thousand which equated to a microscopic 0.34% of stockholder's equity. Personally, I like to see a company holding cash amounting to 20% or more of stockholder's equity to get it through tough times. Its cash balance represents a small amount compared to its $14.4 million in long-term debt. However, its debt only equates to 14% of stockholder's equity which lies respectably below my personal threshold of 50%. So far this year, Bravo Brio Restaurant Group's operating income exceeds interest expense by 15 times vs. 17 the same time last year mostly due to lower operating income of 28%. The rule of thumb for safety lies at five times interest or more.

The future doesn't look good

It's obvious that Bravo Brio Restaurant Group operates in an immensely competitive environment. Management expects that same store sales will exceed 5% in the negative range. They also lowered their revenue range estimate to $405 million to $408 million from $405 million to $410 million.

Moreover, the company plans on going in debt to buy back shares further compromising its balance sheet for a capital return process with only theoretical benefits, in my opinion. The company also trades at a P/E ratio of 49 vs. 19 for the S&P 500 and 25 for the industry average meaning it possesses high market value risk in addition to the fundamental risks highlighted above. Investors should definitely stay away from this company until the fundamentals improve.

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.