Casual-dining chains try buying their way to growth

Del Frisco’s acquisition of Barteca shows Wall Street’s willingness to accept more strategic deals, says RB’s The Bottom Line.

Last week, Del Frisco’s Restaurant Group acquired Barteca Restaurant Group, the owner of Barcelona and Bartaco, for $325 million.

Meanwhile, Dine Brands Global CEO Steve Joyce told Business Insider that he wanted to buy a fast-casual concept by the end of the year.

He said this, by the way, just days after insisting that the death of casual dining was “false news.”

Neither the Del Frisco’s deal, nor Joyce’s comments about buying a fast-casual chain, were particularly surprising.

Last year, for instance, Del Frisco’s CEO Norm Abdallah said that his company was looking to make a deal. He confirmed that to me in an interview in January. Shortly thereafter, Fogo de Chao was sold and, it turns out, was being targeted by another public company. Del Frisco’s has refused comment on whether it was the bidder.

Meanwhile, this isn’t the first (or perhaps even the second) time that a chief executive of the owner of Applebee’s and IHOP has indicated a desire to buy a fast-casual concept. Joyce’s predecessor, Julia Stewart, said as much in a CNBC interview back in 2015.

The growing willingness of companies to add different concepts to their portfolios is a natural result of weakness in casual dining.

In both cases, the companies’ flagship chains have struggled. Growth has been harder to come by. They’re targeting growth chains to give them something to build and add and keep investor interest.

Del Frisco’s, for instance, has struggled to find a growth chain to go along with its flagship Double Eagle Steakhouse.

Sullivan’s was aimed at suburban growth. But it’s been a problem, and Del Frisco’s has considered franchising the brand, but now has it up for sale. It won’t likely get much of a valuation after a first quarter in which the chain’s same-store sales declined more than 10%.

Del Frisco’s Grille, meanwhile, was created as something of a smaller version of the Double Eagle and was targeted as a growth concept. But it’s not doing much growing right now while the chain fixes its sales challenges, as my colleague Pat Cobe noted in her interview with Abdallah.

The company’s revenues grew just 6.5% in the first quarter with those difficult sales and the lack of a true growth chain. It also didn’t make much in the way of profits: Net income was just $400,000.

A fast-casual chain could help Del Frisco’s generate more growth in the coming years.

Dine Brands is a bit different. Its chains have largely hit a ceiling, at least in the U.S.

Both IHOP and Applebee’s are legacy brands. Applebee’s, in particular, has struggled in recent years.

Its sales weakness in recent years has taken a giant ax to its unit volumes, which now average less than $2.3 million per location, according to Technomic data. That’s about $500,000 behind the average Chili’s.

It’s also lower than the average unit volume for McDonald’s.

For all of Joyce’s comments about casual dining—which is not dead; it’s just changing—bar and grill remains perhaps the weakest single subsector in the restaurant business. And Applebee’s itself expects more locations to close this year as supply in the business reconciles with weakening demand.

So the best strategy would be to find that growth. It could also add locations in international markets, but Wall Street tends to like domestic growth.

Wall Street is also more receptive. While Del Frisco’s stock fell after its acquisition, it recovered some later in the day as investors grew excited about the prospect of investing in Barteca, one of the more highly regarded growth concepts in the industry.

And last year, Darden Restaurants decided it needed another growth chain and bought Cheddar’s Scratch Kitchen.

Darden’s stock last year rose 32%.

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