Should You Take a Bite of the Latest Restaurant IPOs?

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It's been more than two months since Facebook's (FB) messy IPO cooled the market for new listings, but things are starting to heat up again.

There were seven companies that pulled off successful IPOs last week, and one of the more notable names on that list is Del Frisco's (DFRG).

The restaurant operator watches over 32 high-end chophouses. There are nine Del Frisco's Double Eagle Steak House eateries, 19 Sullivan's Steakhouse restaurants, and four of its newer Del Frisco's Grille concept locations.

Aged Beef

Del Frisco's wanted to go public in 2007, but iffy markets got in the way. As soon as the economy began to get wobbly, chophouses frequented by corporations taking their prized clients out to eat fell out of favor.

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It's not as if the market is hungry for upscale steakhouses again. Ruth's Chris parent Ruth's Hospitality (RUTH) has been trading in the single digits since late 2007. The parent company of Morton's of Chicago agreed to be acquired late last year, but that buyout also took place in the single digits.

Del Frisco's had to make sacrifices to make its own deal happen. Underwriters originally planned to offer 7 million shares for as much as $16 a share. Uninspiring demand resulted in the chain offering just 5.8 million shares at $13 apiece.

Save Room for Dessert

The good news here is that Del Frisco's is in a good groove lately. Revenue climbed 24% in its most recent reported quarter, and profitability nearly doubled. There's also the Del Frisco's Grille concept to warm up to. Nation's Restaurant News just named it one of its Hot Concepts for 2012.

Del Frisco's Grille is a more casual spin on the classic steakhouse. The menu and decor is more modern, and there's even a rooftop bar to draw patrons upstairs before, after, or in lieu of the restaurant itself.

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Should You Take a Bite of the Latest Restaurant IPOs?


Burger King (BKW) might still be home of the Whopper, but it's far from ruling the burger industry these days.

The fast-food restaurant ranks third among the hamburger giants: Last year, Wendy's (WEN) unseated the chain for the No. 2 spot, and it has never been in range of McDonald's (MCD), the undisputed leader, according to consulting firm Technomic.

Burger King's new status as a public company could give the place to "Have it your way" a fresh start, and energize its recent efforts to woo back shoppers, Steven West, an analyst with ITG Investment Research, tells DailyFinance.

The company returned to the New York Stock Exchange last week, its home from 2006 until 2010, when it was acquired by private investment firm 3G Capital.

3G's revival strategy for Burger King included its biggest menu expansion ever last year -- adding items from premium salads and frappe drinks to bacon sundaes -- and a star-studded national ad campaign that ditched its (arguably creepy) "King" mascot for celebrities like soccer star David Beckham and Jay Leno.

Fast-food lovers seemed to respond: For its most recent quarter, Burger King posted its best comp-store sales performance in more than two years.

But there's still work to be done at the No. 3 burger chain if it's going to take a bigger bite out of the fast-food market, West says.

In the battle for burger supremacy, McDonald's has been eating the competition's lunch for the past eight years, West says.

"They're on their second remodeling effort in the U.S., and they have definitely raised the bar when it comes to consumer expectations," he says.

Meanwhile, Burger King "has been trying for a decade to replicate the McDonald's playbook and has failed to do so."

But the IPO could mean a reversal of fortunes for Burger King. "Their new restructuring plan, the use of joint ventures and the procurement of financing through the IPO could spell good times ahead for the 'king of the Whopper,'" West says.

First, Burger King will use its newly public status to get its financial house in order, West says.

"In this case, the proceeds will be used to pay down debt, thus lowering interest expense, and helping with net earnings."

Then comes reinvesting in the business and stepping up expansion -- especially overseas. "Over the next few months, Burger King will see accelerated re-franchising of company-owned stores ... then accelerate unit growth both domestically and internationally, though about 80% to 90% of unit growth will likely be international," he predicts.

Burger King will "continue to bolster their menu offerings in the U.S." -- but new items must be "innovative" if the chain wants to win over more fast-foodies, West says.

That push should go hand-in-hand with beefing up customer service, he says. Indeed, new and more complex menu items, like smoothies, frappes and wraps, have slowed down its service because they reflect "new ingredients, new processes, etc., and thus take [workers'] time to become efficient at making them fast-enough for a drive through operation."

McDonald's has fancied up its units with store remodels that include new half-moon-shaped booths, wooden blinds and even flat-screen TVs, which have changed the popular idea of how a fast-food chain should look these days.

Hence, Burger King needs to spruce up its digs, too. "They need to remodel the store base," West says. "As McDonald's CEO says, 'You can't sell a $6 burger out of a $3 store.' "

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The company itself realizes that it has plenty of expansion room for all three of its concepts. There are still plenty of major cities that don't have any of the company's eateries. Del Frisco's plans to open three to five new locations annually, giving it years of growth if it's able to successfully introduce its iconic steakhouses in new territories.

Del Frisco's wasn't the only restaurant chain to go public last week. Chuy's (CHUY) -- a chain of casual Tex-Mex restaurants that stand out because of their hourly made salsa and Elvis Presley shrines -- also went public at $13 last week.

The market seems hungry for restaurant stocks. Let's see if indigestion kicks in again this time.


Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook.

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