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Del Frisco’s considers options for Sullivan’s Steakhouse

Company, facing an activist investor and weak sales, is slowing the chain’s development

Amid sluggish sales at its two biggest concepts, Del Frisco’s Restaurant Group Inc. said at the recent ICR Conference that it is nearing a decision on what to do with its Sullivan’s Steakhouse chain.

In addition, the company said last week that it plans to slow down development in 2016 as it works to right its sales ship.

The comments came after the company said it closed two locations of its growth vehicle, Del Frisco’s Grille. They also come as the company faces an activist investor in Fidelity National Financial Inc.

Fidelity, which has a long track record in the restaurant industry and is a controlling shareholder at American Blue Ribbon Holdings, has increased its stake in Del Frisco’s to more than 10 percent. In a Securities and Exchange Commission filing last week, Fidelity indicated that it “may engage in discussions with management or the board of directors.”

Del Frisco’s CEO Mark Mednansky said at the ICR Conference last week that the company was honest about the struggles and uncertain future at Sullivan’s at its 2012 initial public offering, with a goal to do something with the chain by 2015 or 2016. Since the IPO, the company has worked to level off the chain’s sales and make money off existing locations. It closed one underperforming unit.

Del Frisco’s is now nearing a resolution on the brand’s future. “Soon we will have a decision to be able to communicate with you on what we will do with the Sullivan’s brand,” Mednansky said at ICR.

Sullivan’s has 18 locations in 14 states. The chain’s unit volumes of $4.3 million are strong for casual dining, but pale in comparison to Del Frisco’s Grille’s $5.7 million in sales, even though Sullivan’s restaurants are much larger and its average check of $62 is higher than the Grille’s.

Same-store sales at the chain increased 0.2 percent in 2015, but decreased 1.8 percent in the fourth quarter ended Dec. 29.

Same-store sales decreased for the other two concepts in the fourth quarter, too, including a 1.6-percent decline at Del Frisco’s Double Eagle and a 4.5-percent decline at Del Frisco’s Grille.

The Grille concept had a tough year, with a 4.4-percent decline in same-store sales. “Our fourth quarter top-line and comparable restaurant sales results fell short of our expectations,” Mednansky said in a statement. He cited “macro pressures” and the oil industry slowdown — some of the chain’s restaurants in Texas, in particular, struggled last year.

Mednansky noted at ICR that traffic at the Grille chain was better than the sales demonstrated. Traffic in the fourth quarter fell 0.7 percent — meaning that consumers spent less when they dined at the concept.

He said the company focused in the quarter on traffic initiatives to get people in the door, and toward the end of the quarter traffic was on the upswing. Mednansky did not go into detail on those initiatives.

Del Frisco’s closed two of its Grille units in the fourth quarter, and executives said at ICR that the company would slow overall development this year.

The company typically develops 4 to 8 locations of all of its brands a year, but this year the company is planning to add two to three units, plus one Del Frisco’s relocation. Del Frisco’s plans to open two of its Grille locations and one Del Frisco’s Double Eagle.

Paul Westra, analyst with Stifel, said in a note last week that limited development was “a needed move that … will help reverse negative sales trends and improve underlying profitability.”

Not everybody is convinced, however. “We maintain a level of concern related to the ongoing turnaround of the Grille concept and the inconsistent same-store sales trends at the Double Eagle,” Piper Jaffray analyst Nicole Miller Regan wrote in a note last week.

Del Frisco’s stock has been on a steady decline since mid-2014, when it came close to $28 a share. The stock increased more than 11 percent last month after the Fidelity investment was first revealed, but it has given up much of that increase since then.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

TAGS: Finance News
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