BJ’s Restaurants, Inc. (BJRI), Panera Bread Co (PNRA): These Restaurants Stopped Serving Up Growth

Page 1 of 2

Three restaurant growth stories reported disappointing second quarter numbers, and investors could not get out fast enough – price per share dropped swiftly on heavy volume. The three charts are interchangeable and a potent reminder of just how fast the herd can turn, and the subsequent effects on stock prices.

Ignite fizzles

Ignite Restaurant Group Inc (NASDAQ:IRG) announced preliminary second quarter results that failed to spark investor interest, and the share price shot down precipitously.

Investors react fast and en masse to bad news, as the chart shows. For the rest of us, we have to decide if it’s a buying opportunity or not. In the case of Ignite, probably not yet.

In the second quarter, total revenue increased 72% to $228.1 million versus $132.9 million in 2Q12. The increase includes $86 million from the Macaroni Grill acquisition in April. Without it, revenue increased a disappointing 6.5%. This is considerably slower than the 15.3% growth in revenue for 2012. While the Macaroni Grill revenue and comps were just short of ugly, Ignite scored a beautiful deal on the real estate – $262,000 per restaurant unit. That allows nothing for the value of the Macaroni Grill business, as the figure is close to what the business is/was worth. It’s a severely damaged concept with declining business and a tarnished brand. Ongoing negative comps and slow revenue growth weighed heavily on Ignite’s Q2.

Romano’s Macaroni Grill was acquired in early April 2013 for $55 million. Ignite Restaurant Group Inc (NASDAQ:IRG) estimates Q2 comps for the legacy business increased 1.3% – a 0.7% increase at Joe’s Crab Shack and a 6.4% increase for Brick House Tavern + Tap. These results were a letdown after the promising 7% comps for 2012. Comp sales for the Macaroni Grill restaurant were down 7.4%, and something of an improvement over its pre-acquisition numbers. Spending was well above predictions and Ignite now expects a diluted net loss per share between $0.10-$0.12 in Q2, compared to $0.25 a year ago. The Macaroni Grill ate up excess spending in marketing and reorganization of staff to the tune of a $2 million overage. If and when the Macaroni Grill is rehabilitated, this may prove to be money well spent. The turnaround is taking longer than Ignite was expecting, and is now just four months out. I anticipated it might take years.

From the press release:

Our vision for the potential of the Macaroni Grill brand and its benefit to the Ignite business are unchanged, however, it will likely take longer to prove accretive to our earnings than originally anticipated.

With the push that could come from the low capital invested in the Macaroni Grill restaurants, there may come a time when its anticipated improved performance makes Ignite a good investment. Not yet.

BJ’s blows it

BJ’s Restaurants, Inc. (NASDAQ:BJRI) had a good news/bad news second quarter. The company stated that these are the highlights. Can you guess which of these highlights is good news?

Highlights for the second quarter of fiscal 2013 were as follows:

1. Total revenue increased approximately 10% to $198.5 million
2. Total restaurant operating weeks increased 11%
3. Four new restaurants opened
4. Comparable restaurant sales were flat
5. Net income and diluted net income per share were $8.6 million and $0.30, respectively

BJ's Restaurants, Inc. (NASDAQ:BJRI)The good news is revenue increased by 9.8%. The bad news is operating income and net income declined 4%, as operating expenses increased and margins decreased. BJ’s Restaurants, Inc. (NASDAQ:BJRI) opened four new restaurants, creating some growth, a key part of the story for any growth stock. The bad news is that new restaurants with initially high weekly sales saw those sales drop when added to the comp base. That high growth period, called a honeymoon, is not lasting long enough to help comps. Decreasing traffic in mature restaurants is the force behind declining comps. The California is reaching saturation with 62 restaurants (136 total BJ’s Restaurants, Inc. (NASDAQ:BJRI) stores) clustered around Santa Rosa and Los Angeles, and the resulting cannibalization steals traffic from older units.

Page 1 of 2