BRAVO BRIO RESTAURANT GP INC BBRG
March 10, 2017 - 8:30pm EST by
SlackTide
2017 2018
Price: 4.60 EPS 0 0
Shares Out. (in M): 15 P/E 0 0
Market Cap (in $M): 68 P/FCF 0 0
Net Debt (in $M): 41 EBIT 0 0
TEV ($): 109 TEV/EBIT 0 0

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Description

 

Business Overview

Bravo Brio Group operates two distinct restaurant concepts: Bravo Cucina Italiana and Brio Tuscan Grille. Both brands are marketed as upscale affordable casual dining restaurants. Bravo offers a range of traditional Italian cuisine while Brio features a northern Italian menu with an emphasis on steaks, chops and seafood (Mediterranean Chophouse). The day-part mix for both concepts is approximately 70% dinner and 30% lunch. The average check size at Bravo is $21.40 and the average check at Brio is $26.36. Average AUV at Bravo is $2.9 million and $4.0 million at Brio.

There are currently 66 Brios and 51 Bravos in the U.S. The company has taken somewhat of a regrettable and unfocused shotgun approach to real estate strategy with 23 states having two or less Bravo or Brio locations. The most concentrated states are Ohio with 12 Bravos and 7 Brios, and Florida with 15 Brios and 3 Bravos.

Troubled Performance

The company has seen 16 consecutive quarters of negative same-store sales comps. Over this same time-period, restaurant-level profit margin has decreased by 410 bps from 16.8% in 2013 to 12.7% in 2016, and EBITDA has been nearly halved from $42.6 million to $22.5 million.

Despite this clearly troubling operational performance, almost the exact same management team is in place. The old CEO left at the end of 2015 and Brian O’Malley, the COO was promoted internally to CEO. O’Malley has been with the company since 1996. The CFO James O’Connor has been there since 2010. So there is no real new blood and no sense of urgency or new ideas despite the clearly deteriorating fundamentals of the business.

Consequently, the company’s stock has dramatically underperformed both its listed competitors and the restaurant industry as a whole. Since its IPO in October 2010, BBRG has underperformed a group of its listed comps (CAKE, DRI, EAT and BJRI) by 150% and the S&P 1500 Restaurant Index by 218%, on a total return basis.

 

Recent Activist Pressure

TAC Capital, a family office for billionaire Don Adam, began acquiring shares in BBRG in July 2016, quickly buying up 8% of the company. Within a couple months, TAC had almost doubled its position and now owns 15% of BBRG.  The firm remained passive until January 19th, 2017 when it filed a 13D stating that they intend to be a long-term shareholder and requested that three TAC nominees be added to the BBRG board.

A couple weeks later, on February 2nd, BBRG announced they were hiring an investment bank to explore strategic alternatives. The company also announced they had engaged with TAC and offered them 2 immediate board seats but TAC rejected the offer. The stock jumped up from $4.20 to $4.60 on the announcement, a quick 9.5% move, but the stock still remains at $4.60 today.

The stock is already trading at near distressed levels at 3.9x NTM EBITDA and we believe any buyout would come at a valuation with at least 24% upside for the stock. Looking at the metrics for 65 restaurant transactions from 2009 to 2016, the minimum EBITDA multiple was 5.5x, this would represent 60% upside to BBRG’s current price. EV to current 4-wall EBITDA is 2.1x, which is also a substantial discount to any transaction comp.

Risk

The major risk here is that nothing changes and the company continues its current path. Although we believe there is almost no positive fundamental news priced into the stock, it could still just continue to slowly melt down if nothing changes and eventually land in bankruptcy. Although not overly leveraged at 1.8x net debt-to-EBITDA, the company’s EBITDA has been halved since 2013 and could continue to decrease if nothing changes.

There is also of course the risk that the company isn't able to find a buyer. We feel this possiblity is somewhat mitigated by TAC's involvement, they seem to be in this for the long haul and they have the capital to easily buy BBRG outright if they want to.

Catalyst

Things are already in motion here with TAC Capital going activist and rejecting the boards offer for two seats as they push for more representation. At the same time, the company says they have engaged an investment bank to explore a sale of the company. Despite both these events, the stock hasn’t reacted in a meaningful way, leaving significant upside potential in the near term if a buyout occurs.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

-Stabilization of SSS comps

-De-levering

-Sale of company or sale of lower value Bravo segment to de-lever

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    Description

     

    Business Overview

    Bravo Brio Group operates two distinct restaurant concepts: Bravo Cucina Italiana and Brio Tuscan Grille. Both brands are marketed as upscale affordable casual dining restaurants. Bravo offers a range of traditional Italian cuisine while Brio features a northern Italian menu with an emphasis on steaks, chops and seafood (Mediterranean Chophouse). The day-part mix for both concepts is approximately 70% dinner and 30% lunch. The average check size at Bravo is $21.40 and the average check at Brio is $26.36. Average AUV at Bravo is $2.9 million and $4.0 million at Brio.

    There are currently 66 Brios and 51 Bravos in the U.S. The company has taken somewhat of a regrettable and unfocused shotgun approach to real estate strategy with 23 states having two or less Bravo or Brio locations. The most concentrated states are Ohio with 12 Bravos and 7 Brios, and Florida with 15 Brios and 3 Bravos.

    Troubled Performance

    The company has seen 16 consecutive quarters of negative same-store sales comps. Over this same time-period, restaurant-level profit margin has decreased by 410 bps from 16.8% in 2013 to 12.7% in 2016, and EBITDA has been nearly halved from $42.6 million to $22.5 million.

    Despite this clearly troubling operational performance, almost the exact same management team is in place. The old CEO left at the end of 2015 and Brian O’Malley, the COO was promoted internally to CEO. O’Malley has been with the company since 1996. The CFO James O’Connor has been there since 2010. So there is no real new blood and no sense of urgency or new ideas despite the clearly deteriorating fundamentals of the business.

    Consequently, the company’s stock has dramatically underperformed both its listed competitors and the restaurant industry as a whole. Since its IPO in October 2010, BBRG has underperformed a group of its listed comps (CAKE, DRI, EAT and BJRI) by 150% and the S&P 1500 Restaurant Index by 218%, on a total return basis.

     

    Recent Activist Pressure

    TAC Capital, a family office for billionaire Don Adam, began acquiring shares in BBRG in July 2016, quickly buying up 8% of the company. Within a couple months, TAC had almost doubled its position and now owns 15% of BBRG.  The firm remained passive until January 19th, 2017 when it filed a 13D stating that they intend to be a long-term shareholder and requested that three TAC nominees be added to the BBRG board.

    A couple weeks later, on February 2nd, BBRG announced they were hiring an investment bank to explore strategic alternatives. The company also announced they had engaged with TAC and offered them 2 immediate board seats but TAC rejected the offer. The stock jumped up from $4.20 to $4.60 on the announcement, a quick 9.5% move, but the stock still remains at $4.60 today.

    The stock is already trading at near distressed levels at 3.9x NTM EBITDA and we believe any buyout would come at a valuation with at least 24% upside for the stock. Looking at the metrics for 65 restaurant transactions from 2009 to 2016, the minimum EBITDA multiple was 5.5x, this would represent 60% upside to BBRG’s current price. EV to current 4-wall EBITDA is 2.1x, which is also a substantial discount to any transaction comp.

    Risk

    The major risk here is that nothing changes and the company continues its current path. Although we believe there is almost no positive fundamental news priced into the stock, it could still just continue to slowly melt down if nothing changes and eventually land in bankruptcy. Although not overly leveraged at 1.8x net debt-to-EBITDA, the company’s EBITDA has been halved since 2013 and could continue to decrease if nothing changes.

    There is also of course the risk that the company isn't able to find a buyer. We feel this possiblity is somewhat mitigated by TAC's involvement, they seem to be in this for the long haul and they have the capital to easily buy BBRG outright if they want to.

    Catalyst

    Things are already in motion here with TAC Capital going activist and rejecting the boards offer for two seats as they push for more representation. At the same time, the company says they have engaged an investment bank to explore a sale of the company. Despite both these events, the stock hasn’t reacted in a meaningful way, leaving significant upside potential in the near term if a buyout occurs.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    -Stabilization of SSS comps

    -De-levering

    -Sale of company or sale of lower value Bravo segment to de-lever

    Messages


    SubjectThoughts
    Entry03/13/2017 12:57 PM
    Memberdd12

    thanks SlackTide.  i am not surprised the rating is low so far, as i am in full agreement with you - no one likes my ideas on VIC.

    this microcap fits into the "no one cares" category for many reasons.  the SSS picture is bleak, and the macro picture there is getting worse.  and while the CEO is gone, everyone else is the same - they expanded with a poor plan, and it would appear the last leg down in SSS caught them very much by surprise.

    but, it is a simple story that i feel is more than amply discounted.  I would point out that the 3Q had some one-time expenses that were not well communicated, and I would also note that the 4Q showed margin improvement, sequentially over the 2Q and 3Q.  the 4Q EBITDA margin has historically been a very good indicator of the annual margin.

    at this price, i believe this one is worthy of a healthy shot.


    SubjectNew Letter to BBRG Board from TAC
    Entry03/14/2017 10:42 AM
    MemberSlackTide

    https://www.sec.gov/Archives/edgar/data/1450504/000119312517081242/d362283dex993.htm


    SubjectTurnaround story
    Entry03/14/2017 11:26 AM
    Memberdeep_discount90

    This many q's of SSS declines is almost impressive! In your research, would you say Bravio / Brio just needs to do a rebranding, or maybe spend more on promotions in a weak restaurant market, or do you think something is structurally wrong with the business? Just to determine why someone would take them out if the business is just declining. Looks cheap now, but could be expensive if it keeps declining of course. 


    SubjectRe: Turnaround story
    Entry03/14/2017 06:14 PM
    Memberdd12

    if i may chime in ... their mall presence has been the biggest driver in their almost impossible streak of SSS declines, combined with the bubbling restaurant recession.  while not trending up, i do not think the brands are broken.

    the expediency of their margin control in the 4Q, after the gong show in the 2 previous quarters, was quite impressive, IMO.

    my investment aspirations are not for a for a sale of the business or even a market-level EBITDA multiple - as SlackTide pointed out, 6x will do.  they expect to close 6 stores this year.  I believe that number comes in higher, and if not, almost certainly more stores will be closed next year as bad leases slowly roll off.  these stores have outsized declining SSS and are cash flow negative.  at some point a more measured and effective expansion is possible, i would advocate growing in vibrant "secondary" markets in places like the Southeast.  maybe 2-3 stores per year by 2019.  maybe not.


    SubjectRe: Re: Turnaround story
    Entry03/15/2017 09:03 AM
    Memberdeep_discount90

    Ah, the mall dynamic makes sense. The only Brio I've been to is actually at a mall so I should've thought of that. And of course, their 10-k really highlights the risk of that: "As of December 25, 2016, we leased 112 operating locations and owned four locations, of which 102 are located adjacent to or in lifestyle centers and/or shopping malls and 14 are free-standing units strategically positioned in high-traffic areas". 

    They also said they plan on closing a minimum of 6 stores. So it seems like they need to pivot and TAC is right that you can't have the COO who has been in charge the whole time lead the way to a change. 


    SubjectRe: Re: Re: Turnaround story
    Entry03/15/2017 10:07 AM
    Memberdd12

    I find myself uncomfortable in a rare defense of mgmt.  My view is the guy who did the damage is gone, the old CEO pushed too aggressively and into inefficent and ill-advised locations.  When an anchor and/or smaller tenant leaves the mall and their space is either left vacant or in many cases is replaced by new restaurants, I'll state the obvious and say it's a revenue problem, and that the blame resides with the capital allocater.  That was the CEO, who went to Bob Evans and swiftly exited the restaurant business.

    In contrast, the only thing that went well last quarter was operations, namely expense control in contintued challenging conditions - so the old COO now CEO should be commended there, IMO.

    I don't think it's a pivot as much as a rationalization of locations, followed by a new look at modest expansion once the closures have been completed.

    BBRG is not going to take over the world, but it's undervalued.  I like TAC's tact.  I think it's just right - a comment about it being somewhat toothless was made on this thread, and I think that is accurate.  TAC made some good points, and I think mgmt. needs to be on notice.  But let's see how it goes this year.


    SubjectAnyone still following?
    Entry09/01/2017 01:02 PM
    MemberMostly_Ugly

    Curious if anyone has thoughts about what this could sell for if they put it up for auction?  Cash flow is still positive, traffic is still negative, time is ticking fast on the amended term loan. 


    SubjectRe: Anyone still following?
    Entry09/01/2017 02:42 PM
    Memberdd12

    i am still following, wondering where i am wrong and/or what i am missing.  the stock is not as cheap as it looks given the deferred lease amortization (onerous deals involving upfront cash payments, with long-term ramifications ... very high lease expense as % of revenue).  however i still think it's worth $6-7 based on 6x my 2018E EBITDA number, and recent results have only solidified my view there.  both absolute EBITDA and the margin increased last quarter (year-over-year) for the first time in 2 years.  but the stock is down since.

    their food costs are in line, but their other expenses (labor, operating and g&a) are still too high.  even factoring in their high lease expense, and accounting for the deferred lease amortization, i just don't see why they can't get to a 6-7% EBITDA margin given their AUVs and $400M revenue base.

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