Margins
Revenue growth is not as impressive as the favorites in the sector including Chipotle Mexican Grill, Inc. (NYSE:CMG), Panera Bread Co (NASDAQ:PNRA) and Buffalo Wild Wings (NASDAQ:BWLD) that can manage 20% growth or better. All three have consistently higher same store sales than Ignite. Ignite’s net and operating margins are lower than Chipotle and Panera but compare favorably to BWLD. Gross margins are competitive and occupancy costs are very much in line. Operating margins were low and trailed some of the better chains by nearly 50%. The last three quarters have seen much-improved margins and it’s this improvement that is at risk with the consolidation of Mac Grill. By the numbers, it does look like management is good at turnarounds, but Mac Grill may be more difficult than Joe’s was. The polished casual Italian space is crowded and Mac Grill customers have grown accustomed to discounts and may not take kindly to a full-priced menu. The average check at Mac Grill is $18 compared to $24 at Joe’s.
Quarterly margins
While margins were improving in the last nine months, same store sales slowed to 0.4% and traffic dropped into negative territory – (1.5%) for Q3 2012. The 0.4% increase in comps was made possible by a 1.9% in prices — average Joe’s check was $24 compared to $23 in Q3 2011. There are rumblings across the restaurant industry that polished casual is suffering from consumers with less money to spend looking to trade down to value menus. Pizza and beer casual chain BJ’s Restaurants, Inc. (NASDAQ:BJRI)’ fourth quarter was disappointing with flat EPS, 3% positive same store sales, continuing high percentage occupancy costs (21% of revenue), and lower net margins. Of more concern were BJ’s Restaurants, Inc. (NASDAQ:BJRI) comments that comps for Q1 2013 were (0.5%) for the first 7 weeks and trends were softening as consumers pull back on spending. For Joe’s, the BJ’s Restaurants, Inc. (NASDAQ:BJRI) comments have a canary in a coal mine flavor since they occupy the same polished casual space and have similar average check amounts. If Ignite was still mainly Joe’s Crab Shack and a tiny amount of Brick House, this trending down would be less concerning and more easily weathered, but taking on the turnaround at Mac Grill at this particular time presents a bigger problem.
Quarterly growth
Average weekly sales (AWS) continue to increase but at a slower pace as comps decline. Same store sales at Ignite were decelerating with negative traffic numbers in Q3 and by inference Mac Grill is not doing much better. Average unit volume (AUV) was flat and while some of the new Joe’s prototypes were doing better than average AUVs the older units are probably falling off as traffic declines. The turnaround from 2007 is convincing, but Ignite appears to be pausing at least in Q3-Q4 2012 and guidance for Q1 2013 is not much better.
Preliminary fourth quarter results
Total revenues were $112.5 million, an increase of approximately 11% compared to revenues of $101.4 million in Q4 2011. Revenues were negatively impacted by approximately $1.0 million (0.9%), due to lost operating days during Hurricane Sandy. Comps increased 0.8% excluding a 0.1% impact from Sandy. Increased media spend and the launch of a new winter menu helped push sales.
For the full year 2012, total revenues increased approximately 15% to $465.0 million compared to $405.2 million in 2011 and comps increased 2.2% The restaurants that I consider the Big Three – Chipotle, Panera and Buffalo Wild Wings—all had better numbers and comps through 2012 than IRG with higher revenue growth. Ignite’s net margins compare favorably to Panera and are better than BWLD. Nobody beats Chipotle.
The future and guidance
Over the long term, management may be able to repeat their success with Joe’s, but the timing of the acquisition of a damaged polished casual is not optimal. Not only will Ignite be attempting to refurbish the Mac image; they will be doing it in a macro-environment unfavorable to restaurants in this price niche between premium and value.
Ignite does have the latitude to move between brands and put Joe’s or Brick into underperforming Mac Grills, taking advantage of the real estate they acquired by converting a Macaroni Grill to Joe’s or Brick House and save roughly $500,000 in build-out costs. They have already converted a Macaroni Grill into a Joe’s Crab Shack prior to the deal and know it can be economically feasible.
The plans to reinvigorate the brand are ambitious and there will be an overhaul of the menu and the service. They will also attempt to spend marketing dollars more effectively across cable and concentrate less on local markets. Part of their challenge will be weaning customers off coupons and make the menu, the ambience and the amenities enticing enough to convince consumers to pay full price.
In Q1 2013, Joe’s and Brick House same store sales will be around 1%. They are comping against a strong 15.2% compounded two-year average same store sales increase in Q1 2013 making it difficult to post impressive numbers. The best growth stories seem to be able to defy the numbers. Chipotle had a string of double-digit comps extending for six quarters that just ended in June 2012.
Mac Grill will become part of the financial statements in the late to mid-second quarter with projected revenues at $180 to $190 million including $1.4 million in franchise fees. That is a 0.7% increase in comps. The good news is comps will not be negative, but less than 1% is anemic. For the existing Ignite business, 2013 cost of sales is projected in the 31.1% to 31.3% range, labor at 27.3% to 27.5% and gross margins could decline slightly from Q3 2012 down to 41.2%.
Restaurant-level profit comes in at the 16.4% to 16.8% range and is a decrease from Q3 2012 (last reported result available) of 19.7%. Restaurant level margins for the Mac Grill based off their prior-year run rates are estimated at 6%. Ignite has a lot of work to do.
What this comes down to is a disappointing 2013 if guidance is accurate. The Ignite legacy restaurants appear to be stalling and even giving back some of the margin gains established in 2012. Mac Grill operates at a level far below Ignite and is going to be a huge project to take on with the current trend of slowing sales in the casual concept sector. They believe 2014 will be the turning point for the consolidation. There is an opportunity to wait for the back half results that would let the investor form some picture of just what Mac Grill’s financials look like. The price of the stock is unlikely to run away before then.
Relative valuations to the best in the business and BJ’s
By these relative valuations Ignite is a better value than the premium names in the restaurant universe. Chipotle sells at the highest premium and its long history of superlative performance supports the price. Investors may need to look at the consolidated Ignite Mac before deciding whether it’s a bargain.
The article C’mon Ignite, Light My Fire originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
