Brazilian steakhouse chain Fogo de Chao, Inc. FOGO rose nearly 6% in after-hours trading yesterday, subsequent to the announcement of the company’s strong fourth-quarter 2016 results.
Q4 2016 Earnings & Revenues
Adjusted earnings of 28 cents per share beat the Zacks Consensus Estimate of 27 cents by 3.7%. Also, revenues of $80.9 million surpassed the estimate of $77.3 million by 4.7%. Further, revenues increased 11.2% over the prior-year period, on a constant currency basis, excluding the impact of an extra week of operations last year.
Including the forex impact and the extra week of operations last year, revenues increased 4.4% over prior-year quarter. This increase was primarily attributable to additional sales from new restaurant openings.
Performance since IPO
The fourth quarter of 2016 marked Fogo de Chao’s seventh quarterly report since its IPO in Jun 2015. The company has met/missed earnings estimates in four of these seven trailing quarters.
The company’s share price performance mirrors this trajectory. Fogo de Chao shares have recorded a dip of 45.4% since being listed on the NASDAQ. During the same time frame, the Zacks categorized Retail – Restaurants industry dipped 1.2%.
One of the primary reasons behind this dismal performance was the soft industry backdrop. We note that 2016 turned out to be the worst year for the U.S. restaurant industry, since the end of recession. Same-store sales growth was rather dull in a difficult sales environment.
Moreover, despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out. This resulted in low consumption over the past few quarters. Thus, Fogo de Chao despite being in its potential growth phase saw comparable restaurant sales decline.
Further, the company has a sizeable exposure to Brazilian markets. This makes it highly vulnerable to adverse foreign exchange translations and ongoing recessionary headwinds in the region. While the company’s U.S. results are much stronger than the Brazil business, the latter was big enough to drag down the consolidated results.
Thus, despite operating at good margins due to commodity costs deflation, Fogo de Chao wasn’t able to overcome fears over top-line growth due to comps decline and forex conversions.
What Could Mark a Turnaround Now?
The company has been undertaking various strategic initiatives to mark a turnaround in its business and its earliest signs have begun to show via the strong fourth-quarter results.
One of the most successful initiatives taken by the company is an attempt to drive traffic through daypart expansion by opening earlier on Saturdays and incorporating weekend brunch at its U.S. restaurants.
In addition to fortifying its presence in the North America and Brazil by consistently opening new restaurants, the company also anticipates foraying into the Middle East market with a store in Jeddah, Saudi Arabia later in 2017, followed by a restaurant in Dubai. Marking a global presence would thus help the company capture greater market share, going ahead.
Along with the results on Mar 14, Fogo de Chao also announced its largest ever U.S. bar menu innovation. The Bar Fogo area will now feature an expanded menu of new Brazilian cocktails, bar bites and South American wines. Meanwhile, the Happy Hour program is expected to appeal to the price-conscious consumers.
Further, a number of other initiatives such as remodeling of outlets, driving awareness through marketing campaigns, cost containment efforts, etc. also bode well for the long-term standing of the company. In fact, management expects the remodel program to aid revenue growth by approximately 2-3% on an average.
Fogo de Chao currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Forex translation losses and the weak Brazilian economy remain headwinds. Meanwhile, competition from other steakhouses like Texas Roadhouse, Inc. TXRH, Ruth’s Hospitality Group, Inc. RUTH and Bloomin’ Brands, Inc.’s BLMN Outhouse Steakhouse, limit upside potential.
However, it is to be noted that shares of the company are currently trading at a PE metric of 15.06, while the industry’s average is as high as 23.66. This signifies that the stock is comparatively undervalued than its peers. Meanwhile, the multiple initiatives augur well for the long-term profitability of the company. In fact, earnings and sales for full-year 2017 are expected to grow 7.4% and 10.3%, respectively, year on year.
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