I grew up in a diner. My parents have owned and operated Edelweiss restaurant in Auburn, Calif., for the better part of 30 years. I'm not a restaurant analyst, but I know first-hand how tough the business can be.
Studies show one in four restaurants close in their first year of business. Extend that to three years, and the failure rate rises to three in five.
When that first lease is up, many entrepreneurs realize that the restaurant business just isn't for them.
Then there are the exceptions that prove the rule: Great restaurants that really shine. These businesses juggle pleasing customers, keeping the food consistent, managing vendors, keeping the staff content, fixing refrigerators and a hundred other endless jobs.
Easy? No. But the operators who can do it make serious money. So can their shareholders.
The list of publicly traded U.S. restaurants -- 151 in all -- has a lot of well-known and well-loved restaurants, but many aren't making money.
Of the 151 restaurants listed on U.S. exchanges, only 68 have a market cap of more than $5 million. That's a teeny company in the big scheme of things, but it's Nasdaq's minimum, and for now, it's a decent starting point.
Next, let's weed out restaurants that have negative revenue growth for the past year. We want to see companies that have begun to grow, not some mom and pop -- like my mom's and my pop's -- that are happy with a few locations.
Having assured ourselves of top-line growth, we now look to the bottom line at earnings per share. We want to see growth. We don't just want more locations, we want more profitable locations. Tasty stocks doesn't translate into tasty burgers. The inverse is also true.
After sifting through market cap, revenue and earnings data, we've narrowed the list from 151 to nine:
|Peet's Coffee & Tea||PEET|
|Buffalo Wild Wings||BWLD|
These are all good operators. Now let's find out which one is the best.
I tightened the screen and excluded companies with less than 20% EPS and revenue growth during the past year. I eliminated any company with a forward P/E above 20, a price-to-book ratio above 4.0, and excluded restaurants with a net profit margin of less than 5%.
Three companies remained: Buffalo Wild Wings, Panera Bread and Nathan's Famous.
The raw data shows these three restaurants to be the best in the business. Of the three, Buffalo Wild Wings is the clear winner. Right now, the company has 615 stores in the U.S., and there's still a lot of expansion opportunities. In fact, the company is looking to break the 1,000 store mark in the next few years. That 66% increase in the number of stores will increase both sales and franchise fees.
While other restaurants struggle to attract customers today, Buffalo Wild's weekly sales have continued to grow. At the end of the second quarter, the figure topped $44,234 for the 217 company-owned locations, up from $42,141 at the end of 2008.
I like the store because it provides three things with broad appeal in great atmosphere -- You can't beat chicken, beer and sports on TV. In fact, Nathan Slaughter is also a fan of the restaurant, as well as the stock. He profiled the company in depth in his most recent issue of Half-Priced Stocks. To learn more, click here.