Fifty Years Flies By: – August 15th, is the fiftieth anniversary of Richard Nixon “closing the gold window”, eliminating the convertibility of the US Dollar into gold at $35/oz. This kicked off the stagflation of the nineteen seventies, with inflation peaking at about 12% annually and the Fed Funds rate at 18%. The lack of a spending discipline by politicians has run the annual deficit from $100B in 1980 to $3-4T today and the accumulated deficit from $1T to $28T (without considering unfunded entitlements). The economy is six times larger but the deficits are still 5-6 times bigger in constant dollars. If you don’t consider that this lack of monetary discipline is important, consider that, in the last fifty years, the cost of a first-class stamp has gone from $.08 to$.55, a loaf of bread from $0.25 to $2.50, a gallon of regular gas from $0.36 to $3.05, an average car from $2,700 to $40,206, annual healthcare spending from $353 per person to over $10,000, and Harvard tuition from $2,600 to $54,000. It is equally interesting that the Harvard tuition in 1971 was 13 weeks’ worth of the median household’s annual income of $10,285. The 2020 tuition is 36 weeks of the median household income of $78,500, demonstrating how wages have not kept up with the Dollar’s loss of purchasing power.
Gold bullion has gone from $35/oz. in 1971 to over $1800/oz. today, up 51x in value. You would have increased your purchasing power to whatever extent you had capital invested in gold bullion, even more so in the gold miners (which my readership knows I have favored for some time).
The good news for restaurant operators is that people have to eat and menu board pricing can change, carefully, as often as necessary. One piece of advice to growing restaurant chains is to make sure your rent escalation clause allows for no more than the rise in the government’s Consumer Price Index, CPI, (hopefully somewhat less). The CPI is consistently understating the real inflation (and the rise in menu prices) so your operating margin should “leverage” your sales increase by way of lower occupancy expenses, if nothing else.
FST/FERTITTA – WITH TILMAN IT’S NEVER BORING!
We wrote here last month about “the room where it happened”, why and how Tilman Fertitta sweetened the deal for investors in his hospitality empire, soon to merge with FAST Acquisition Corp (FST).
A few days ago, it was announced that DraftKing (DKNG) is going to buy/merge with Golden Nugget Online Gaming (GNOG) (46% of which is owned by FEI). DKNG has been one of the very successful SPACs offered over the last several years, and Fertitta sponsored GNOG has done well also. DKNG is much bigger in terms of its equity capitalization, $21.1B vs. $1.4B for GNOG, with higher sales as well, $297M in its most recent quarter, almost 13x the $23.1M of GNOG. DKNG has not been profitable yet, and is estimated to remain unprofitable through 2022. GNOG has been profitable the last two quarters but is currently expected to be unprofitable through 2022.
Both parties are predictably excited about the combination, guiding to $300M of synergies. We will likely be writing more about this situation because the FST/FEI combination, when and if completed, will create a hospitality company with revenues approaching $10B and $800B of annual EBITDA.
Our interest at the moment is how this DKNG/GNOG transaction affects the still pending business combination of FST and FEI. While FEI has agreed not to sell their $700B worth of DKNG for at least a year, the premium added to GNOG shares and the enhanced liquidity is clearly a positive. Recall that the recently sweetened deal, as we described here last month, increased the current annualized EBITDA run rate to $800M, up from the previously expected $648M for 2022. This additive adjustment was no doubt provided by Fertitta to create more investor comfort with the $3B of debt and the DKNG/GNOG merger should further alleviate concerns. Tilman Fertitta rarely sits still.
Chuy’s Holdings – 2nd Quarter Report is Instructive –
Chuy’s Holdings, Inc. (CHUY) recently reported results for the quarter ending 6/30/21, at which point all stores were open again. As background, CHUY continues to be a well-run, debt free Company, though their results have flattened since 2016. Absent a tax credit in 2017, EPS has been around $1.00 per share as comps weakened and margins sagged, offsetting new store openings. At this point, setting aside YTY comparisons, we were struck by the dramatic improvement in Q2’21 vs. Q2’19 and scrutiny illustrated the ongoing uncertainty within the restaurant industry. The dramatic two-year comparisons actually started in Q3’20 with EPS coming in at $0.31/share vs. $0.21. That improving trend has continued and $0.62 in Q2’21 compared to $0.37 in Q2’19. Sales, BTW, were $108M, down from $113M so what the heck is going on? Answer: Cost of goods was down 200 bp. Labor was down 650 bp. Income before taxes was therefore up 720 bp, with after tax net income almost doubling. It’s all about the slimmed down menu and less labor necessary to serve off-premise consumption. BTW, prices are 4.8% higher YTY, which helps also. The instructive part is that management, on the conference call, expressed uncertainty as to how everything sorts out over time. They guided to a less dramatic 300-350 bp of improvement over 2019, but admitted uncertainty and were not providing formal guidance. Off Premise sales in Q2 were 27%, down from 61% in 2020, and up from 13% in 2019. The Street consensus is for $1.75/sh In ’21, up from $0.84 in ’20, then a decline in ’22 to $1.56, still well above that five year $1.00 plateau. Aside from uncertain sales, an unpredictable mix between dine-in and off-premise, a labor crisis, and possibly volatile commodity prices, it’s all very clear.