Frisch's Reports In Line

Zacks

Frisch's Restaurants Inc. (AMEX:FRS - News) recently posted second quarter 2012 earnings of 56 cents per share, in line with the Zacks Consensus Estimate. Reported earnings also outpaced the year-ago earnings of 49 cents per share. The year-over-year earnings growth was driven by higher same-store sales and margin expansion at Golden Corral segment.

Inside the Headline Numbers

The restaurant chain reported total revenue of $70.7 million in the second quarter, up only 0.1% year over year, owing to the shutdown of six underperforming Golden Corral stores in August 2011. However, excluding the closures, revenue jumped 4% driven by strong performance of Golden Corral segment.

The company primarily operates under two segments namely, Big Boy – full service family-style restaurants and Golden Corral - grill buffet style restaurants. Same-store sales crept up 0.4% at Big Boy as traffic dipped 2.4% and climbed 7.8% at Golden Corral due to a 4.4% rise in guest count. Sales inched up 2.5% at Big Boy segment, benefiting from unit growth, but sales plunged 5.1% at Golden Corral segment due to the closure of six units.

The Cincinnati, Ohio-based company’s gross margin fell 20 basis points (bps) to 10.3% as food and paper cost as a percentage of sales rose 90 bps to 35%, payroll and related cost spiked 40 bps to 33% and other operating cost leaped 30 bps to 21.7%. Gross profit of the Big Boy segment dropped 6.6% due to food cost inflation, but gross profit of Golden Corral expanded 39.1% on same-store sales growth and shutdown of underperforming restaurants, partially offset by food cost pressure.

Store Update

During the quarter, Frisch's opened one Big Boy restaurant. The company currently operates 95 company-owned Big Boy restaurants and 25 franchised Big Boy restaurants. The company also operates 29 Golden Corral restaurants. 

Frisch’s currently has no plans to open any Golden Corral restaurants, but is making efforts to open additional Big Boy restaurants, but not before summer 2012.

Financial Position

At the end of the quarter, cash and equivalents were $1.7 million, long-term debt was $19.2 million and shareholders’ equity was $125.1 million.

Our Take

We remain optimistic on the stock based on the company's ability to post profit and enhance shareholders’ value via dividends every year since 1960. However, stiff competition and food cost inflation are expected to remain headwinds for the company. The Zacks Consensus Estimates for 2012 and 2013 stand at $1.97 and $2.07, respectively.

One of Frisch's closest peers, BJ’s Restaurants Inc. (BJRI) reported third-quarter 2011 adjusted earnings of 24 cents per share, in line with the Zacks Consensus Estimate and higher than the prior-year earnings of 20 cents. The upside was attributable to double-digit growth in the top line and strong comparable restaurant sales growth.

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