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.

Catalyst

-Stabilization of SSS comps

-De-levering

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