July 29, 2012, 9:49 am

2012-07-19
DFRG - Del Frisco's

DFRG - Del Frisco's plans on offering 8.1 million shares at a range of $14-$16. Insiders are selling 3.7 million shares in the deal. Deutsche, Piper Jaffray and Wells Fargo are leading the deal, Cowen and Raymond James co-managing. Post-ipo DFRG will have 22.3 million shares outstanding for a market cap of $335 million on a pricing of $15. Ipo proceeds will go towards wiping out most of DFRG's debt.

Lone Star Funds(the main selling shareholder) will own 65% of DFRG post-ipo.
From the prospectus:
'We develop, own and operate three contemporary, high-end, complementary restaurants: Del Frisco’s Double Eagle Steak House, or Del Frisco’s, Sullivan’s Steakhouse, or Sullivan’s, and Del Frisco’s Grille, or the Grille.'
High end steakhouse chain. Have never been to a Del Frisco's, but have been to Sullivan's in Denver numerous times when I lived there. Good spot.
Texas based(always good for a steakhouse group) with 32 restaurants in 18 states.
2011 same store sales growth of 11.2%. 6.7% same store sales growth in the first quarter of 2012 with 4% in the second quarter. 9 consecutive quarters of same store sales growth through the second quarter of 2012.
Del Frisco's Double Eagle Steak House - 10 locations. USDA Prime steaks hand cut at time of order. Also serving prime rib, prime lamb and seafood. Extensive wine list. Seating for 300 people. $12.5 million in revenues per restaurant in 2011 with the average check of $100.
Sullivan's Steakhouse - Open kitchen, live music and focus on the bar area. 19 locations with seating for 250 people. $4.4 million in annual revenues per restaurant with average check of $59.
Del Frisco's Grille - Smaller size, lower build out cost than the other two. More diverse menu. Prime steaks, extensive wine menu but also pizza, sandwiches and salads. Less formal than the namesake steakhouse. First Grille opened in 8/11 in Manhattan with three more since in Phoenix, Dallas and DC. Seating for 200 average revenue target is $4.5 - $6 million with check of $50.
***The 'Grille' concept will be the growth driver here going forward.
The New York Del Frisco Steakhouse was the highest grossing restaurant in the steakhouse industry in 2010 and 2011. The New york locations alone accounted for 18% of 2011 revenues.
Growth - 3 restaurants in 2011 including two Grille locations. Thus far in 2012 there have been two Grille openings.
66% food, 34% alcohol revenues.
DFRG believes that each of their concepts can co-exist in a geographic market. Currently six markets have multiple DFRG concepts.
DFRG believes the can open approximately three to five new restaurants total annually.
Private group dining was 14% of 2011 revenues. These are generally corporate events.
Store opening costs - $8 million for a new Del Frisco's Steakhouse, $4 million for each of the other two.
Risk - Economic weakness in the US. DFRG's restaurants rely on robust business and discretionary spending. Same store sales dropped 10%+ in 2009 and really didn't recover until mid-way through 2010. If a recession hits, DFRG's stock price would be impacted...you could say that about most stocks though.
Competition - Plenty in this space, possibly too much for all to thrive. Flemings, Capital Grille, Smith & Wollensky, The Palm, Ruth's Chris and Morton's are the national chain competitors.
Financials
$15 million in both cash and debt post-ipo.
4th quarter is strongest seasonally.
2011 - $201.6 million in revenues and increase of 22% from 2010. As mentioned above a strong year of growth with same store sales increasing double digits from a sluggish 2010. Solid 13.2% operating margins. Plugging in minimal debt servicing and full taxes, net margins of 8.3% EPS of $0.75.
2012 - On track for 18% revenue growth in 2012 to $240 million. Operating margins have been ticking up in recent quarters and should hit 15%. Net margins of 9.3%. EPS of $1.00. On a pricing of $15, DFRG would trade 15 X's 2012 estimates.
Closest public comparable is RUTH. Multiple is comparable with the two however RUTH's growth is sluggish single digits at best in 2011, 2012 and forecast for 2013 while DFRG is double to triple that on a growth basis.
Conclusion - Well managed with nine strong quarters of same store sales growth. Ipo allows for the clean up of the balance sheet. Very good looking high end dining ipo. As long as the US economy continues to chug along and avoid a slowdown, DFRG has room to appreciate.