Despite the fact that the restaurant industry is quite cyclical, companies can find ways to soften the cycles. Franchising is one of the best ways to achieve expansion and widen margins while at the same time assuring some revenue stability.
Although Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL), Bob Evans Farms Inc (NASDAQ:BOBE), and Jamba, Inc. (NASDAQ:JMBA) do not initially seem to be great investment opportunities, their transitions toward asset-light models will bode well for them. On their way to increased profitability, are these restaurant chains worth your money?
Holding such a name…
Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL) is a leading operator of sandwich restaurants including the Einstein Bros, Noah’s New York Bagels, and Manhattan Bagel brands. With a market cap of less than $300 million, this small company caught my eye because of its ongoing restructuring program. Einstein Noah is shifting away from its company-owned stores business model and into a capital-light franchise and licensing model, and this augurs well for its future.
Offering one of the best unit economics in the industry, the company is certainly an attractive franchise opportunity. This already shows on the 14.7% (year-over-year) increase in franchise and license revenues reported last quarter, compared to the 0.7% growth in company-owned restaurant sales . More than 200 new location commitments currently in the franchisee pipeline confirm that this trend should only accentuate going forward. With barely 10% of its locations operating under a franchise model, there’s plenty of room left for refranchising and expansion, both nationally and internationally.
Another growth driver for the next few years stems on the management´s focus on increasing the profitability of its existing restaurants. Initiatives to achieve this goal include everyday value menus for breakfast and lunch, an expansion of the product offering, and an incursion into the specialty beverages segment. These steps should help the company reach the broader public while retaining existing customers.
Trading at 23 times its trailing earnings but only 0.7 times its sales, considerably below its peers’ average, while paying out a 3% dividend yield, this is a stock to buy and hold.
These farms can be harvested
Bob Evans Farms Inc (NASDAQ:BOBE) operates restaurant chains, and it also produces food products for national grocery stores. With a market cap of $1.4 billion, its scale is much greater than that of Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL)’s. Although the company seems poised to expand, most analysts expect it to under-perform its industry peers in terms of earnings-per-share growth over the years to come .
These projections are reflected in Bob Evans Farms Inc (NASDAQ:BOBE)’ valuation at 0.9 times its sales, less than half the industry’s average valuation . Although growth will be moderate, does the current valuation (and a 2.4% dividend yield) make this stock a good investment option?
By operating in both the restaurant and grocery segments, the company can better weather fluctuations in consumer spending. This added to the fact that Bob Evans Farms Inc (NASDAQ:BOBE) actually owns most of its restaurants´ real estate, provides it with considerable stability and predictability, as well as some backup in case things go wrong in one end of the business.
Similar to Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL), I believe that Bob Evans Farms Inc (NASDAQ:BOBE)’ future is reliant on the expansion of its licensing model, Bob Evans Express. Although the first Express store was opened only a few days ago, opportunities abound and growth prospects look promising. In addition, a remodeling plan for its existing stores should also drive growth and margins in the years to come.