One of the valuation metrics I use to quickly compare companies operating in the same industry is enterprise-value-to-EBITDA. By this measure, over the trailing 12-months, Bravo Brio's stock is more expensive than either Brinker or Darden at 9.24 times EBITDA. Given its operating margin in the most recent quarter ended March 30 was 5.8%, 200 basis points less than Brinker and 160 basis points less than Darden, it seems crazy to be making the comparison in the first place.
However, if there's one thing I've learned over the years, it's that margins don't tell the ent ire story. Not until you've also studied the balance sheet and cash flow statement can you make a good assessment of a company's financial health. In the case of Bravo Brio, what strikes me as positive in its particular situation, is that it generates more revenue and EBITDA profit per dollar of debt than either of its bigger competitors. Its net debt is $21.9 million while its EBITDA profit for the trailing 12 months is $42 million, meaning that for every dollar of debt, it generates $1.92 in EBITDA profit. Meanwhile, for every dollar of debt at Darden and Brinker International, they generate 51 cents and 70 cents in EBITDA profit respectively. It's even more lopsided when you look at revenues. Despite low interest rates, the past few years has clearly demonstrated that debt isn't a good thing to have. On that basis, at least, Bravo Brio appears healthier than its two rivals.
Cash Flow Statement
Bravo Brio's cash flow from operations increased 38% in the first quarter to $9.5 million. Farther down the cash flow statement, you'll see that its free cash flow was substantially less year-over-year due to a 118% increase in the purchase of property and equipment. On the surface, some might see this as a negative, until you realize that the increase was due to opening three restaurants in Q1 2012 compared to one location in Q1 2011. Each new restaurant requires a total cash investment of $1.5 million to $2.5 million. In 2012, it anticipates spending $24-26 million opening a total of nine restaurants as well as the initial construction costs associated with restaurants opening in 2013.
Its two restaurant concepts are Bravo! Cucina Italiana and Brio Tuscan Grille. Brio Tuscan Grille is the more upscale brand with its 46 units generating an average $5 million in volume and a guest check of $24.72 per guest. The still upscale but more affordable brand is Bravo! Cucina Italiana, whose 47 units generate $3.4 million per unit and a guest check of $19.12 per guest. Approximately 70% of its customers come for dinner, with the remainder at lunch. Both concepts are currently operated in eight states with one or the other in another 22 states.
The company has opened at least one new restaurant every year since 1994 and on two occasions, in 2005 and 2008, it opened 10 or more. Since 2007, Bravo Brio has opened new restaurants at a compounded annual growth rate of 10.2%, which it should do once again in 2012. It expects to open 45-50 in the next five years. Considering they have none in New England or the Pacific Coast, those will be where some of the new locations end up. The average unit takes a little less than three years for it to earn back the entire investment, so you can expect that by 2019 it will have paid off the entire $100 million required to fund the expansion. Those 50 units will generate approximately $38 million or slightly less than $2 a share in additional profits at the restaurant level.
First Quarter Highlights
Revenues increased 8.8% to $98.4 million, while comparable restaurant sales were up a mediocre 0.2%. At the restaurant level, operating profits increased 10 basis points to 17.5%. It might not seem like much, but in this environment, any good news is welcome. In addition, it announced that it was introducing online ordering at BRIO and catering at Bravo! to take the brands beyond their four walls. With people stretched for time, online ordering is essential for any high volume Italian eatery. Management expects comparable restaurant sales to increase by 1-2% in 2012 with revenues of at least $415 million and earnings of $19 million or 92 cents per share. Hitting this level of net income would be its best result yet.
The Bottom Line
Bravo Brio went public at $14 in October 2010. As of May 14, the company is up 33% since its IPO. While it might not be growing as fast as restaurant brands like Chipotle Mexican Grill (NYSE:CMG) or Buffalo Wild Wings (Nasdaq:BWLD), it's holding its own. Financing new stores through existing cash flow rather than debt, investors will be thankful when the economy truly recovers and it's sitting with no debt on the balance sheet and lots of cash to pay out as dividends. It will take a few more years, but it will be worth it.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.