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Frisch Reports In-line 3Q

Zacks Equity Research

Cincinnati, Ohio-based Frisch's Restaurants Inc. (FRS) recently posted third quarter 2012 earnings of 57 cents per share, in line with the Zacks Consensus Estimate, but 54.1% higher than the year-ago quarter earnings of 37 cents per share. The year-over-year earnings growth was driven by higher same-store sales, margin expansion and lower effective tax rate.

Inside the Headline Numbers

The restaurant chain reported total revenue of $68.4 million in the third quarter, up only 1.4% year over year, owing to the shutdown of six underperforming Golden Corral stores in August last year and unfavorable weather conditions. However, excluding the closures, revenue jumped 5.5% on the back of strong performance of the 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 rose 1.7% at Big Boy based on a 2.5% jump in sales, benefiting from unit growth. Comparable restaurant sales climbed 12.4% at Golden Corral, due to the chain’s national marketing campaign and higher traffic.

The company’s gross margin expanded 120 basis points (bps) to 10.6%, despite food cost pressure, particularly for beef. Gross profit rose 14% year over year to $7.3 million as payroll and related cost fell 0.4% and other operating cost declined 3.2%, partially offset by 2.4% spike in food and paper cost.

Store Update

The company currently operates 95 company-owned Big Boy restaurants and 25 franchised Big Boy restaurants. The company also operates 29 Golden Corral restaurants. 

However, Frisch has recently inked an asset purchase agreement with NRD Holdings LLC for the sale of its Golden Corral operations in Ohio, Indiana, Kentucky, West Virginia and Pennsylvania. Financial terms of the deal remained undisclosed. Frisch’s is expected to seal the deal by the end of its fiscal year on May 29, 2012.

Financial Position

At the end of the quarter, cash and equivalents were $5.2 million, long-term debt was $17.6 million and shareholders’ equity was $127.4 million.

Our Take

We remain optimistic on the stock as the company continues to focus on new products to drive traffic 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.

In the last 30 days, estimates have not budged, implying that the analysts do not see any near-term catalyst. The Zacks Consensus Estimates for 2012 and 2013 stand at $1.97 and $2.07, respectively.

Frisch's, which competes with Texas Roadhouse Inc (TXRH), currently retains a Zacks #3 Rank, implying a short-term Hold rating.

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