Investors Should Stay Away From Bravo Brio Restaurant Group

Summary

• Bravo Brio experienced fundamental degradation in 2014.
• Bravo Brio has a frighteningly low amount of cash on its latest balance sheet.
• Bravo Brio is losing customers in a highly competitive environment.

On Feb. 24, Italian restaurant chain Bravo Brio Restaurant Group (NASDAQ: NASDAQ:BBRG) came out with its 2014 earnings announcement. The company didn't do so well. However, it did beat the Wall Street expectations game. The company's stock was up roughly 3% the day after the earnings announcement. Let's take a look to see how well Bravo Brio Restaurant Group fared.

Lousy numbers

In FY 2014, Bravo Brio saw its revenue decline 0.7% year-over-year. Its net income increased due to the absence of impairment charges; however, when this gets backed out net income actually declined 26%.

Bravo Brio sits on a scary balance sheet. Its $427 thousand in cash equated to a meager 0.8% of stockholder's equity at the end of FY 2014. This compares unfavorably to the $7.6 million in cash it had at the end of FY 2013 which equated to 7% of stockholder's equity. Both fell short of my personal threshold of 20% or more. Moreover, Bravo Brio tripled its long-term debt in 2014 going to 104% vs. 13% in 2013. I like to see companies with long-term debt to equity ratios of 50% or less. However, in fairness to the company times interest earned expanded to 11.5 in 2014 vs. 7.4 in 2013.

Customers are shying away

The numbers in the earnings announcement indicate that customers aren't frequenting Bravo Brio's locations as much. Same store sales declined 6% at Bravo and 5% at Brio in 2014. This is partially attributable to a decline in customer traffic which dropped by 4% in its 4th quarter. This gives indication that customers aren't happy with their experiences and are going elsewhere. Also, the company location count declined by three in 2014.

Management makes moves to improve

The restaurant industry is highly competitive with many choices for the consumer. Specifically, consumers are showing increasing propensity to eat at fast casual chains that utilize higher quality food which people perceive as healthier. Management understands this and is making moves to acquire food from sustainable sources and come out with products such as "Light fare". Bravo Brio also introduced an online reservation system which should cater to consumers increasing propensity to shop online. It also came out with a new loyalty program to boost repeat business, but this will most likely come at a cost in the form of lower margins.

Taking on debt to buy back stock

I never liked share repurchase programs. Share repurchase programs only serve to reduce shares outstanding and artificially improve earnings per share. While it does in theory make the stock price go up in value on a temporary basis, any negative news about the company serves to negate it. And, I really don't like it when companies go in debt to buy back shares. Bravo Brio entered a $100 million credit facility to finance its "Dutch Auction" tender offer for the purchase of its shares.

Looking ahead

Bravo Brio needs to figure out a way to bring customers through the door. I would also like to see an improvement in the company's balance sheet. The share buyback program only serves to compromise its financial position, which it desperately needs in this time of transition. Finally, this company trades at a P/E ratio of 52 vs. 18 for the S&P 500 which gives it high market price risk in addition to the degradation in fundamentals highlighted above. Investors may want to take their capital elsewhere.

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.