Returning to Restaurant Row

 | Nov 14, 2011 | 12:45 PM EST
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This time last year, I wrote a column focused on what I refer to as restaurant row, an area near the entrance to the Pennsylvania Turnpike that is teaming with publicly-traded restaurant names. A return visit just one year later revealed some major changes and also bears testament to the ever-changing and competitive nature of the restaurant business.

Of course, Cracker Barrel (CBRL) is my preferred stop on restaurant row. By now, colleagues are no doubt tired of meeting me there for lunch and my family has had it with my channel-check dinners. While shares are down 17% in the past year, revenues have been stagnant and comps declining, the company has continued putting up decent earnings numbers overall. I've been more cautious on restaurants, especially casual dining names over the past year or so given the fears of rising costs and a still very troubled economy. While I've been out of Cracker Barrel since early 2010 when shares were in the low $50s, I continue to watch for opportunity.

Meanwhile, the company is mired in some activist activity as Sardar Biglari of Biglari Holdings (BH), which owns 9.3% of CBRL, is waging a proxy contest and seeking a board seat. Biglari is upset with the company's disclosure of the retail operation, and this should make for an interesting fight. Cracker Barrel remains both a restaurant and real-estate play. As of September, the company owned 404 of its 604 locations.

The second stop on restaurant row, Red Robin Gourmet Burgers (RRGB), has certainly had an interesting year. Between last November and June, shares more than doubled. A marketing campaign to put more bodies in the seats was seemingly successful. The company was also able to raise prices and has been putting up better-than-expected numbers throughout the year. Same-store sales for the third quarter rose 2.1% and earnings per share of $0.24 were 2 cents ahead of estimates.  While share have pulled back since summer, they are still up 50% in the last year. Interestingly, Red Robin was also at one time being accumulated by Biglari, but he never went the activist route and did not hold shares for very long.

Finally, the biggest change on restaurant row was been the closing of the local Ninety Nine store and its ultimate replacement by a Bertucci's restaurant. Last December, parent company O'Charley's (CHUX) closed 16 underperforming restaurants, including five Ninety-Nine locations and 11 O'Charley's. The company has been struggling overall and has been in the black in just one of the past eight quarters. Still, shares are down just 3% over the past year following a 50% run-up since late August. Interestingly, the company owns the land and building for 98 of its O'Charley's locations, yet has an enterprise value of just $235 million. This would be more compelling if there was some visibilityon the company's ability to turn a profit.

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