Del Frisco's shares drop following 2Q report

Del Frisco's shares drop following 2Q report

Analysts say Tuesday sell-off was an ‘overreaction’

Del Frisco’s Restaurant Group Inc. shares dropped 12 percent Tuesday, after the steakhouse operator cautioned on earnings guidance and unit development, despite analysts’ warnings of an overreaction.

Executives at the Southlake, Texas-based parent to Del Frisco’s Double Eagle Steak House, Del Frisco’s Grille and Sullivan’s Steakhouse said in a call with analysts that it would delay some unit openings until later in the year.

“We now expect fewer restaurant operating weeks in 2014 relative to our initial plans, as several openings have been delayed,” said Mark Mednansky, chief executive of Del Frisco’s.

Mednansky said a planned Double Eagle in Washington, D.C., is now scheduled for a fourth-quarter opening, and two of three Grille openings would be later than originally scheduled.

“All of these timing issues deal with later than planned delivery of sites from our landlords,” Mednansky said. “We have also lowered sales projections for our Chicago Del Frisco's Double Eagle based on its current run rate. [At our] Palm Beach Del Frisco's Grille, we still have not been given clearance by local ordinance to serve lunch, brunch or make use of patio seating as we had modeled.”

Those delays, he added, were short term.

“We remain confident in the health of the upscale consumer segment and in their willingness to spend discretionary income at Del Frisco's next-generation dining experience,” he said.

Lynne Collier, an analyst with Sterne Agee, said Tuesday’s sell-off, which leveled off into Wednesday’s trading session, was an “overreaction.”

“We believe that the announcement of slight delays for unit openings does not signal that management's long-term growth outlook has changed,” Collier wrote in a note. “For the most part, we view the bulk of these issues as short-term in nature. Importantly, we do not view management's comments surrounding the delay of the opening of a Del Frisco's unit and two Grille units as a signal that the long-term development outlook has changed.”

Del Frisco’s reported Tuesday that net income increased 7.6 percent [3] in the June 17-ended second quarter, to $4.8 million, or 20 cents a share, from $4.4 million, or 19 cents a share, in the prior-year quarter. Revenue increased 11.6 percent, to $67.4 million, from $60.4 million in the same period last year.

Same-store sales at Double Eagle units rose 5.2 percent in the second quarter, and increased 0.9 percent at Sullivan’s, the first positive same-store sales comparison for Sullivan’s in nearly two years.

“We're deploying capital to remodel enhanced [Sullivan’s] restaurants at the top and mid-tier, where we believe further sales and margin improvements can be achieved,” Mednansky said

Nicole Miller Regan, senior research analyst at Piper Jaffray & Co., said the Sullivan’s top-line trends were encouraging in the second quarter.

Jeff Carcara, chief operating officer at Del Frisco’s, said that remodeling projects at Sullivan’s and operational changes, such as a faster lunch, and focused advertising were benefitting that brand.

“We're raising our profile with more concentrated radio, digital and direct mail, which is fostering greater brand awareness. This has facilitated better trends particularly for our lunch program, which is also helping cost to sales,” Carcara said. “Faster execution at lunch is also getting great guest response.”

“Same-store sales at Sullivan's turned positive in 2Q for the first time in seven quarters,” noted analyst Collier, adding that she expected same-store sales to stabilize, and forecast a 1.8-percent increase in the third quarter and 1 percent in the fourth quarter.

Collier said the company was addressing some location-specific sales challenges, and bringing in new management at the Del Frisco's Double Eagle in Chicago.

The Grille in Palm Beach, Fla., has faced municipal hurdles in getting its patio occupancy approved, according to Tom Pennison, Del Frisco’s chief financial officer.

“We had thought that these issues would be behind us by now,” Pennison said, adding that the Palm Beach unit is operating below sales volumes that the company had forecast.

Analyst Bryan C. Elliott with Raymond James said in a note that Tuesday’s stock-price decline was “a sufficient reset of investor expectations to limit further downside risk.”

Elliot added, “We also expect investor confidence to take some time to rebuild. We believe the pressures evident in 2Q results are manageable and that these issues should dissipate over time, and thus we remain optimistic about the long-term investment potential of DFRG.”

Contact Ron Ruggless at [email protected] [5].
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