Restaurant Finance Monitor
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David Rosenberg: Good afternoon, everybody, and welcome to the first of what is a two-part series that I’m holding on the outlook for the US consumer, both from a top down and bottom up or micro perspective. With that in mind, with me today is Roger Lipton, who I met many years ago, maybe decades ago, at Dick Strong’s fabled annual seminar in Vail. I always found that Roger, when he gave his presentation, had a compelling view in any given year, bullish or bearish. It’s always just a tremendous learning lesson.

Roger is an independent research analyst and investor. He’s been running his own shop, Lipton Financial Services, back in 1993, after a storied career on Wall Street and his own foray into the restaurant industry back in the 1970s, when he ran part of a chain that I actually frequented quite a bit, Arthur Treacher’s Fish & Chips. It was a big hit in Southern Ontario, and Roger, I can still taste that fried halibut to this day.

Roger covers every publicly listed restaurant stock there is out there. When you think about it, as we look at the US consumer, what is more discretionary than eating out? He has a real pulse in the weeds on what’s happening in the consumer space and why I thought it was going to be valuable to have him in on the call early in the year to kick off his 2024 outlook.

Roger has also been kind enough to bring some slides with him. Without further ado, Roger, over to you, my friend. Just one last thing for viewers. Feel free to send in questions on the tab on the right, as usual. Okay, Roger, now over to you.

Roger Lipton: David, thanks so much. I’m going to try to act like it’s just you and I having a conversation here and not be intimidated by your following.… You’ve got too many smart people listening to me. I’m going to try not to embarrass myself here.

My commentary about listening to you through the years is almost exactly the same. I’ve always valued your commentary, bullish or bearish and so forth. It’s really been a privilege to get to know you over the years. We’ve had some good times and laughs together.

I’m going to talk about the restaurant industry for sure, because I know most of you want to hear about that. But I’m also going to do quite a bit upfront about the macro considerations. While the consumer is 70% of the US economy, it used to be if you invested in restaurants, retailers, or a lot of other businesses, you didn’t have to worry about stuff happening in China, or Europe, or India, or the Mid-East.

You bought stock in a company, they were well run, you trusted management, they were keeping or gaining market share, the margins were okay, didn’t matter too much what was happening overseas. But these days, the macro winds are a hurricane. I think it’s shortsighted to ignore it.

Fortunately, I got very involved in gold mining and inflation back in the 70s, before I started in the restaurant industry. When I first started on Wall Street, I did a lot of work relative to inflation, because  early in the 1970s, as you might remember, Richard Nixon closed the gold window, in August 1971, and I got interested in that subject. That preceded my involvement in the restaurant industry. So, we’ll talk about retailing and restaurants, but I’ve got to go through the macro stuff.

I worked on inflation. I met a guy back in the day. His name was Harry Browne. He wrote a book called How You Can Profit from the Coming Devaluation. I’ve got a copy of it right here, Harry Browne. He published this in 1970.While he wrote several books, the first 80 pages of this book are profound.

I would say, if I had to synthesize his view, one of his mantras is just that you can’t have a sound economy without a sound currency. If people don’t know what they’re working for, because they don’t trust the currency, they’re going to expend less effort in terms of trying to earn that currency. So that was his premise.

He foresaw the gold drain from the US Treasury. He wrote this book 18 months before Richard Nixon closed the gold window. Of course, Richard Nixon made an articulate speed, for Richard Nixon, talking about how this is going to be good for everybody in the US and abroad, and it’s going to help the economy, and we’re just closing the window.

What had happened was the US was a surplus nation after Bretton Woods for 25 years, until the spending in the 60s, Lyndon Johnson’s Great Society and the Vietnam War. In any event, in 1971 Nixon made his speech, inflation took off, interest rates took off, and everybody knows a lot about that history.

I want to show you a couple of charts in support of the possibility that the US Dollar is not going to necessarily be the reserve currency forever. But before I do that, slide number six is off my website, where I do cover 60 restaurant and franchising companies.

When I say I cover them, I don’t cover them quite as intensively as analysts do when they cover ten companies. 60 is tougher than ten or 12 or 15. But on my website is a concise financial description of how they’ve done.

A lot of it is from other sources. But the enterprise value versus EBITDA, a trailing 12-month EBITDA calculation is one that I personally do, it’s the first thing I look at when I look at the financials of a company. Aside from the unit level economics, I want to know what the valuation is relative to trailing EBITDA. So, that’s just a very useful tool on my website, the website being or I publish on there two or three times a week. So, with that out of the way, we can go back to the macro on slide number one.

This I got from a presentation by Strategas of a couple of months ago. He pointed out how the reserve currency has changed through the centuries, going back to  Ancient Rome. It took 350 years for the denarius to get diluted sufficiently to destroy the currency, but it did. The Roman Empire collapsed. Whether or not the denarius’s dilution was responsible, we’ll never know. But it was happening while the denarius was being debased by diluting gold and silver coins with base metal.

The term debasement obviously is because the gold content was diluted with base metals.  Well, back in the day if you debased the currency, the penalty was death. So fortunately for Ben Bernanke and Janet Yellen and Jay Powell, death is no longer the penalty for debasement of the currency.

But in any event, the interesting aspect is, almost reliably, the reserve currencies have lasted about 100 years over the last five or six centuries. The Dutch Guilder had its turn, and the French Franc had its turn, and the Pound Sterling had its turn. The last 100 years, the US Dollar has had its turn.

Especially with the world changing faster than ever in all respects, it’s not illogical, I don’t like double negatives, it’s logical to think that the Dollar’s running out of time here. In fact, our biggest adversaries, Russia and China and Iran, are doing more and more trade with the Chinese currencies and even commodities like oil.

So, they’re trying to move away. Still 95% or something like that number is done in US Dollars. To whatever extent they can, our political and military adversaries, are trying to move away from the Dollar. One reason, just most recently, when we sanctioned Russia after their invasion of Ukraine, we  basically weaponized the Dollar.

So, if you’re another country and you’ve got your reserves in Dollars and you can see how we just froze Russia’s Dollar reserves, you have to be pretty shortsighted not to conclude that you ought to diversify away from the Dollar. If you do anything the US doesn’t like, they could freeze your Dollar-denominated assets. Safe to say that this by our current administration has not been constructive in terms of strengthening everybody’s desire for the Dollar.

So, that was slide number one. Slide number two shows the rate of inflation for the last 250 years.

It’s interesting that from the late 1700s, with the coin exchange act, for 150 years, till the early 1900s, the inflation was minimal. We had 4% real growth and minimal inflation.

Chart number two we should put up. Down at the bottom, we see that straight line at the bottom which shows the steady real growth or the lack of inflation. The two jiggles down there on that bottom line are the war of 1812 and the Civil War in the 1860s, when we had to print extra money to pay for the cost of the wars. But we brought the money creation back in line after that, and inflation was again very modest, until…

Dave: Roger, is this US, or is this global?

Roger: This is US. That’s the US.

Dave: Okay.

Roger: Yes, the US. Inflation was very modest, until our government got involved, with the Federal Reserve being established in 1913. Things took off a bit from there. They really took off, obviously, in 1971, when Nixon closed the gold window.

You might notice that at the far right of the chart, it’s almost vertical, and the money keeps getting created. There are other lines that correlate with that, like the debt in the US, the worldwide debt and so forth and so on. There’s a lot of other correlations one could draw.

Dave: Roger, can I ask you a question about that?

Roger: Sure, Dave.

Dave: Does this chart look the same for…? Maybe outside of Japan, but does it look the same for most other countries? Maybe this is just a race to zero as opposed to that this is a US-specific story with.

Roger: Honestly, Dave, that’s above my pay grade to answer you. I don’t want to be too glib on it.

Dave: Okay.

Roger: I could guess, but I don’t know. I don’t know what they would look like individually. There’s been a lot of other volatility in currencies around the world. It depends on what you look at. I’ll say one thing though in the regard of what’s happening around the world. We’re not the first country to inflate our way into oblivion, like we’re doing. It’s happened in other places, Argentina and Zimbabwe, and a couple of hundred other examples.

One big difference this time, though, is that whenever those other countries diluted themselves into oblivion and they reestablished a new exchange rate, the new exchange rate always was related to the King Dollar. It was always a question of, okay, how much is our new currency going to be worth in Dollars?

But when our Dollar goes down, what’s going to be the new basis, when we’re the world’s reserve currency and we’re destroying it? We have basically abused our privilege. It’s a huge privilege, as most of our listeners know, and we’ve abused it at this point, for too long.

Chart number three shows the share of US wealth owned by the top one-tenth per cent of families, the share of wealth by the top portion of the population.

It’s interesting that the lower classes were doing okay, in other words, the line was coming down for the wealthy, until the early 1970s. What happened in the early 1970s? Inflation took off.

Next chart is a similar chart really. Chart number four, I’ve called it, is the top 10% richest Americans,  a similar deal. Top 10% richest Americans’ share of the economy, a very similar chart.

That’s a picture of the wealth gap. That’s the wealth gap that everybody decries and they’re trying to correct. All the trillions of Dollars that have been spent to correct the wealth gap and it’s done nothing but widen, because inflation is the cruelest tax of all. It kills the lower class and the middle class.

The upper class, they’ve got their stocks, they’ve got their bonds, they’ve got their homes, they’ve got their art, they’ve got a little bit of gold, they’ve got assets that rise in value. The poor working stiff in Cleveland who’s playing by all the rules is getting killed with the inflation through the years.

Of course, women have had to go to work. That’s another subject, which I’ll talk about that a little later. So, he doesn’t know why. He’s still working hard, and he’s getting raises, but somehow or other, he’s going into debt for his medications and for his kids’ schooling.

My father was a middle-class CPA, became middle to upper class as he built his business, but he was a CPA in a small firm. my mother didn’t work. She was home. My father paid the bills and put three kids… We went to public schools, and we went to good universities and he paid for our education, and we graduated with no debt.

Now, the women have to work and sometimes either the husband or the wife, is getting another job, an extra job as even the two incomes aren’t sufficient. So, inflation has killed everybody and is a huge burden on the consumer. That’s where we stand today.

We were a surplus nation  until just after Nixon closed the gold window. The deficits actually didn’t start until the early 1970s. We were still a surplus nation, I think, until 1971 or thereabouts. But the Europeans saw it coming, and that’s why they were coming for the gold, and Nixon had no choice.

Inflation kicked into high gear until, of course in the 1970s and then Ronald Reagan came into office. As most of our listeners know, Jimmy Carter hired Paul Volcker. Ronald Reagan had the good sense to keep him on. Volcker, backed by Reagan, kept raising interest rates, kept the rates high until he squeezed out the inflation.

Some people say, well, if Volcker and Reagan corrected the inflationary situation with the tight money, maybe that could happen again. Some smart guys will come into office and get tough, and we’ll take the pain and so forth. Well, a couple of things. First of all, there was serious pain. The US went into a fairly serious recession from 1980 to mid-1983.

I remember the market turned up in August of 82. I remember it clearly, because I had just taken a new job as a sell side analyst. you couldn’t write a ticket, because the market was going down every day for two years. But in August of 82, it changed. The market stock ramped up with volume. Fortunately, I recognized the fact that something had changed, and I started making some phone calls and then writing tickets. But in any event, it was a relatively tough economy.

But the most important thing about it is that, yes, it was a recession. You could imagine the kind of recession we’d have today if our authorities got tough. The total cumulative US debt when Reagan took office was $1 trillion. Everybody knows it’s $34 trillion today. The annual budget deficit was $100 billion. Everybody knows it’s north of $2 trillion today. I think it’s going to be closer to three than two, but what do I know? I’m a restaurant analyst.

So now, the economy is five or six times the size, but the problem is it’s still an order of magnitude of four or five times higher, even adjusting for the size of our economy, in addition to which entitlements in 1980 were nothing like unfunded entitlements of social security and Medicare and Medicaid, which are tens of trillions of dollars extra versus what they were in 1980. You can only imagine the pain that would have to be inflicted to get our situation in shape.

David had the two statesmen from Canada on the show a couple of weeks ago and did a great presentation. I’d really encourage you to listen to it. They talked about how Canada had turned the situation around. You know what they did? One of the guys mentioned that they had 54 programs, 54 government programs.

Normally, if you want to tighten things up, you tell every program head to cut his expenses by 10%. What they did was they cut 45 programs 100% out of 54. That’s how they turned it around. So, can you imagine what we’d go through in this country when…I think most of you know that 75% of the $6 trillion a year that we spend is locked in. The portion of our spending that’s discretionary is…If you take defense and interest on the debt and entitlements, it eats up 75%. So you would have to eliminate all the agencies to get control, all of them, everything. Education and Pete Buttigieg would have a problem. It’d be pretty tough. Pretty tough.

Dave: Hold on. There’s one other thing that they could do, Roger, which is that dirty three-letter word which is called tax.

Roger: Well, yes, they could…

Dave: Because in Canada, taxes went up. They means tested the social security.

Roger: Right, yes.

Dave: They had the employer-employee contributions, and they got out of the unemployment insurance business, of funding that. They did a lot of stuff on the revenue side.

Roger: Right.

Dave: So, it’s nice, everybody complains in the United States, as you are, about the deficits and debt, but nobody’s willing to…

Roger: Well, yes.

Dave: Nobody is willing to pony up to pay for it.

Roger: Well, probably value-added tax of some sort.

Dave: Yes.

Roger: But that would have to be substantial, and it would squeeze everybody. You can imagine the left, how they’d be screaming about how this is, what’s the word, regressive?

Dave: Yes. Remember that they talked about, John Manley and David Dodge talked about that, the goods and services tax.

Roger: Yes.

Dave: But they made it as progressive as possible, past a certain income.

Roger: Right.

Dave: It was income-based, and you got rebates for low-income households. Nothing’s perfect, but they made it… You can make stuff like that progressive.

Roger: Right. Well, there’s certainly no sign. There’s no current sign that any of our politicians on either side have the political will to begin to approach anything serious. The problem is that the crisis has arrived. This is not ten years from now. This is this month.

The interest on the debt, which you talked about two weeks ago on the Canadian discussion, the current interest on our debt is 15% of our income, of the government revenue. On a trailing 12-month basis, right to today, it’s 15% of our income. The guys in Canada said that when it gets to 30%, it’s game over, because everybody knows, especially the bond buyers, that you have no way out. So, 30% is the point of no return.

We’re going to be well into the 20s within 18 months. Every month, we are refinancing almost $1 trillion. We take the short-term stuff that’s rolling over plus the new deficit, and it’s something like, today, $800 billion or $900 billion a month that’s got to be refinanced.

Dave: Well, that 15%, I think, has doubled in the past year.

Roger: Well, it has already, but it’s going to double, it’s going to…

Dave: It doubles again and you’re at the 30%. It’s just like the household balance sheet. Once you get to 30% debt service ratio, that’s when default risk in household debt is first to go up.

Roger: Well, yes, just to use round number, if you’re refinancing $1 trillion, and you’re refinancing it at 4.5% instead of a half of 1%, that’s 400 basis points, that’s $40 billion a month. The deficit is rolling every month. $40 billion a month. So, over the course of 12 months, 12 months from now, the interest is therefore $480 billion a year more.

Now, not all the debt that’s rolling over was 0% or half of 1% debt. Some of it was longer term. But the bulk of it was shorter-term debt. Now, if we were financing the economy with all this paper done at no cost, well, cheap money is very useful for a while, but then you’ve got to pay the piper later. So, in any event, we’re at the tipping point. We’re at the tipping point.

I would say, respectfully, to my friend, David, and other smart persons like Ray Dalio or Gary Shilling, who make a lot of their judgements about inflation and interest rates and what they’re going to do, and I know David’s convinced, of course, that we’re in a disinflationary period right now, but nobody, not even myself, can tell you what the end game really looks like, because the order of magnitude of these problems is larger than the world has ever seen. Nobody.

We don’t know what the politicians are going to do, and therefore, we just don’t know how it plays out. If people ask me, what would you do, I say, stay diversified and liquid, if you can, and healthy financially and emotionally and spiritually, and be ready to react. I am fond of saying, things won’t change until after the revolution, the revolution being economic, social, political.

We may well be living through the revolution as we speak. A lot of things have been going on. People are ransacking stores on Rodeo Drive and Fifth Avenue. Of course, you had January 6th, with the insurrections, that the left likes to call it, and so forth. There’s blood in the streets, man. What’s gone on in cities a couple of summers ago, does this not look like a revolution to some of us? So, Donald Trump is part of a revolution. We don’t know what’s next, but it’s not pretty, and it doesn’t look like it’s going to get a lot prettier.

So, with all of that, I made the point earlier that the consumer has continued to spend money, so now we can talk about the consumer. I’m sorry to… Well, I’m not sorry, but I wanted to talk about the macro. I figured it would probably take about this long. But it’s important, I think, to understand what’s driving the consumer.

The consumer is 70% of the economy, and it’s kept spending. Through all of this, through the last 40-50 years, the malls have been built and the people are going  there… We’ve all equipped ourselves with stuff, TV sets and cars, and electronics and so forth. But what’s allowed that, a large part of what’s allowed that is the fact that the women went to work.

As I said before, my mother didn’t work. But now, there’s two incomes. Sometimes, substantial incomes have to be earned… I know of families with two lawyers making $300,000 a year each, and they’re breaking even. Now maybe that’s in Manhattan, but they’re still breaking even. That’s a pretty good income. You’d think you could live in Manhattan pretty comfortably, right? But it’s tough.

So, the consumers are equipped, and they don’t really need another TV set, they don’t really need another iPhone. They don’t need a Tesla for 80 or 90 grand or whatever it’s going to be.

Interest rate debt is at new highs. Credit card debt is at a new high at $1 trillion, and interest on that is over 20%. Savings rate is back down to 5%. If I’m off a little bit on these numbers, forgive me. This is not my business. It’s David’s business. So, if the savings rate is 5.5% or 6% instead of 5%… So, forgive me, Lord, I might be off. But on a broad-brush basis, the savings rate is back down to a relatively low level.

Dave: That outstanding credit card balances is at $1.3 trillion now.

Roger: Is it 1.3? Yes, so…

Dave: Then we’ve got to tack on…  I wouldn’t mind if you commented on the buy now, pay later? Buy now, pay later?

Roger: Well, there are businesses like that that… They’ve been some of the hottest stocks in the marketplace, the buy now. I think there’s Affirm. I don’t know the company very well. Affirm, I think, is a buy now, pay later company. The stock just rallied from $10 to $50 during the short squeeze recently.

So, people increased their credit card debt, used up their savings, and they’re still going to Las Vegas to lose money in the slot machines. Don’t ask, I don’t know why and how they do it, but some people do it. But by and large, the consumer is strapped.

One on-the-ground way you can tell is that credit card usage in restaurants is up. People are using their credit cards. Then, by the way, they’re not coming out during the week as much. Weekend sales have held up a lot better than weekday sales, because people are strung out, and they don’t have time or money to go out during the week as much. We all know traffic and sales have been challenged, shall we say, in the restaurant and retail space. Not so much on the weekends. They’ll save their money and then finally get out of the house on the weekends.

But in any event, I’m going to talk about my time in the restaurant industry in the late 1970s, having gone through a good portion of the inflationary 1970s.

I got seduced by the restaurant industry. I started covering it. Then I met the people that owned the Arthur Treacher’s brand. A guy I knew in the States had a brother in Canada who was in the food business. I raised a few hundred thousand dollars, and I started commuting to Toronto to find the first site. I had been making a modest living on Wall Street and I was still single when all this started. I wasn’t married yet. Got married in the middle of the four years of involvement in Canada.

But in any event, I started commuting up there to find the first site. by the time we opened our third site… It was early 1978, and we had the third store opened. I figured out that my operating partner was dishonest and lazy and incompetent, and probably the first was the worst, and so my father and I bought him out. He was the only one to get out whole, for 40 grand. We bought him out for 40 grand, and he got out whole. I spent four years and lost all my money at the end of the day.

But I’d built 15 stores….This was before Excel spreadsheets, but I was pretty good with numbers. With my 300 grand of equity, I managed to build 15 stores. That’s an accomplishment, because even in those days, they cost a lot more than $20,000 a store to build a store.

I managed to finance the leasehold improvements and the equipment. I don’t have time to tell you exactly how, but it was creative finance, shall we say. I had high occupancy expenses because of my financial skill. Again, as I say, this was before Excel spreadsheets.

I wanted to get to 15 stores so that I could afford to be on TV. Back in the day, if you got on TV… This was, again, 42 years ago, 43 years ago, if you got on TV with fast food pictures and video, your sales would go up 25%. So, I opened my 15th store in December of 1979. I was looking forward to getting on TV when the sun came out in March in Toronto.

That was the winter, under Jimmy Carter, when the interest rates went to 18-20%. The whole North American economy froze, and my sales never rebounded much in the spring. I spent the next six months scrambling. I owed a lot of monies to the vendors and so forth.

Some of my landlords had a consultant that had helped them turn around a Long John Silver’s up somewhere in the boondocks, and they thought their consultant might be able to run my business better than I could. So, they wanted him to run it. I handed them the keys, and I flew back to New York on August 7, 1980. I was free at last.

I had really enjoyed the business until the last six months, when it was a scramble. I did a good job, and I enjoyed it. It was very satisfying until the financial burden weighed heavily. At that point, I returned to Wall Street, and I got a job at Ladenburg, Thalmann. I asked, and all I wanted…though I as broke, was a desk and a phone. My wife was working for IBM, and so we had some income from IBM. We’d gotten married in the middle of that four-year period. So, she had a job. I didn’t.

She was worried when I came home because though we lived together, but we didn’t, I was commuting. So, she was worried when I came home full time that she might not like it so much. Well, it’s 46 years we’re married, so it’s 43 years since I returned home from Toronto, and we’re still managing to get along.

The first thing I did in terms of analysis was because I learned firsthand that no matter how good you are at finance, you have to carry the land, building and equipment. You have to do enough sales to carry the occupancy expenses.

Because if you get somebody else to finance the facility, you’re going to have either a higher rent or interest to pay somewhere. So, one way or another, you’re paying. I went through all the concepts that were publicly held and figured out their sales to gross investment, land, building and equipment ratio. If they had a lease, I capitalized the lease at maybe eight to ten times.

Back in the day, there were some companies that were buying land. Bob Evans Farms was buying land, Chi-Chi’s was buying land, and others. Interest rates were normal then, so people didn’t want to borrow too much. They had some equity, and then they bought the land. Land is good, long term. It reduces your occupancy debt if you can own it.

Back in the days, back in 1980, Chi-Chi’s was a very hot chain. Their average volume was 2.5 million, land, building and equipment all in, fee simple, was 1.25 million. It was gold. Ryan’s Family Steak Houses came out with an IPO, from Greenville, South Carolina. Their land, building and equipment was 650 and their sales were 1.3 million. It was gold.

On that basis, I got my PhD in food service in Toronto the hard way. To this day, that has served me well, because I learned what cash flow means, and I learned what excessive debt means, and I learned what to be concerned about in terms of operations. I don’t want you to think I haven’t made some mistakes through the years in terms of picking restaurant stocks. I have, plenty. However, it gave me a basis.

Another lesson I learned back in those early days, aside from the sales to investment ratio, was when I had the privilege of meeting Norman Brinker. Of course, he’s gone now, but Brinker International was his baby. Norman Brinker was famous and rich from his time at Steak and Ale and Burger King.

Then he bought Chili’s from a guy by the name of Larry Lavine in Dallas, who had built 20 stores.  Norman Brinker was Babe Ruth of the casual dining industry. Not only he was a great guy himself, but he also developed and mentored a raft of casual dining top executives who are still all over the industry, doing great work.

Norman, he bought Chili’s. The first thing he did was…..they had 20 stores, but they had a bunch of leases that Lavine had signed. Norman cancelled as many of the leases as he could. He closed down as many of those deals as he could. Well, I had dinner with Norman.

Because back in those days, in the 1980s, I was running an investment conference in New York. I was inviting 25 or 30 mid-cap companies to New York City, and they’d tell their stories, and I had a few hundred people attend. I had keynote speakers like Norman, Dave Thomas from Wendy’s, Jim Patterson, who founded Long John Silver’s, and others.

Brinker comes to town to speak, I was a young, aspiring… I’d just been back two or three years from Toronto. But Brinker treated me so nicely. He was a prince. We had dinner, just he and I, and he described running a restaurant chain is like a military campaign.

You want to mass your troops, because if your troops are condensed and close together, you can react. You’ve got strength, and you’ve got flexibility and versatility and power, and you can keep your expenses low and so forth. You disperse your troops, and you lose all of that, and you’re just looking for problems.

That was a lesson he stood by. It’s been one of my mantras always when companies want to… When I advise companies, if they’ll listen. There have been some that have listened and some that I got there too late and some that don’t want to listen. But by and large if you run your restaurants well and keep control day to day… It’s blocking and tackling, and it’s a tough business.

If I had time to think about it, I could probably list 40 or 50 chains that were around over the last 20 or 30 or 40 years that are gone today. A great number are gone. But in every single case, it was a self-inflicted wound or wounds, that they expanded too fast, they put products in that weren’t tested, they went too far afield geographically.

Shoney’s was a great example. Shoney’s out of Nashville, Tennessee always expanded in circles, concentric circles from their base. So, there was always an awareness of the brand. Every step they took, the people already knew, because there were Shoney’s within ten miles. It was ten miles further out, but not far away, they had been to Shoney’s. That served them very, very well.

The only reason Shoney’s faded finally was that Ray Danner, who built it, got old and retired and died. But Shoney’s was a great example of a company that just put the numbers on the board, quarter in and quarter out, and was a relatively high multiple stock. That was probably one of the other important lessons I learned about geographical concentration.

The first report I wrote, having come back, I somewhere have a copy of it, I said, it’s a market share game. It was 1980. It’s a market share game. It’s very competitive. There are new entrants. It’s getting more expensive to build, and it’s all about blocking and tackling and store-level economics and sales to investment ratio. That report I wrote 42 years ago I could republish today, and 95% of it would apply. It’s the same challenge.

Dave: So, speaking of which, Roger, moving to today, let’s get into two segments. One is, what is your outlook for consumer spending for this year, whether or not you think we’re going to have a recession or we’re going to muddle through. There are people that talk about a no landing, a hard landing. People are thinking there’s going to be a reacceleration. Where do you stand on the economy? Where do you stand on the consumer for this year? What aspects of consumer spending are you bullish on and bearish on?

Roger: Right, okay, I was about to get to that. So, I believe consumers are basically strung out. The good news is, in terms of the restaurant industry, people have to eat. They’re going to eat. The only thing is they’re going to consume the food in a different fashion or perhaps in different venues. So, they’re already showing that they’re…

Of course, during COVID, takeout and delivery exploded, and it’s still much higher than it used to be. Dining rooms, McDonald’s doesn’t want to open their dining rooms. They don’t need to open their dining rooms. It costs them labor, and it’s less efficient, and they’d just as soon do all the business through the window. The window’s busy all day long.

The full-service restaurants, they’re doing all their business on Friday and Saturday and Sundays, mostly Friday and Saturday, in some chains on Sundays. People don’t have the time or money to spend there in the week. Women don’t know how to cook anymore. They’ve got to go out and get the food somewhere.

Because my daughter, 37, couldn’t boil an egg, I don’t think, if her life depended on it. So, it’s just a question of where you are going to get the food. So, to go back to your question, I believe we’re already in a recession.

I don’t believe the government numbers. I think they cook the numbers every chance they get. They know what we want to hear. They’re driven by the next election. That’s all the politicians are ever driven by. The restaurant executives are driven by what they know restaurant analysts want to hear. Restaurant analysts want same-store sales and traffic numbers, and you could ask a lot of questions about how these numbers are calculated in terms of same-store sales.

So, I believe we’re in a recession, the consumers are strung out, and I’m looking for continued challenged sales. Anybody who’s got positive traffic right now is a hero. Same-store sales may be up a little bit. It’s all price. As I say, only one out of ten established chains have positive traffic, you can count them on the fingers of one hand, out of 50 publicly owned companies.

Dave: I don’t want to keep… I’m just bubbling over with questions. That’s very interesting. It’s the first time I’ve heard that, that Monday to Thursday, things have weakened off.

Roger: No question.

Dave: I’m always looking at what is happening beneath the surface. Are you noticing any other shifts in consumer patterns? It’s a nice comment, oh, well, people still have to eat. Of course, they can always buy groceries. But even in restaurants, are you noticing? I’m sure I’ve heard this only anecdotally, but this is your space. I’m hearing that, for example, people are not ordering a bottle of wine. They’ll get a glass. Couples are splitting a salad instead of getting their own salad. They’re splitting dessert.

Roger: Right.

Dave: Yes, they’re eating, but they’re sharing plates.

Roger: No question. That’s definitely happening. I think just anecdotally, just from my personal standpoint, the population is getting older. As we get older, I happen to notice, even I am getting older, my wife and I will split a salad, not necessarily because we’re trying to reduce the check, but the portions are too big.

So, the aging population doesn’t need portions that are as large. Many chains have built their business on large portions, price value, and you get too much food. So, I think that’d be a part. But definitely, there are adjustments being made in how people order. That’s happening.

But I think the bigger thing that we should talk about is if people are going to finally go out with their family or with the boys, it’s got to be more experiential. They’ve got to have a real dining experience. The companies you want to invest in, if you’re going to invest in anything in the industry, you have to have some sort of an edge.

The edge has to come either from extraordinary price value or… I’m not going to mention taste so much, maybe technology. Domino’s and Wingstop and Chipotle have led the way in terms of the technology to make it convenient. So, with technology, they have established better convenience, and that’s driven sales in a big way.

Scale. Just the buying power of McDonald’s and Darden and Domino’s in the pizza business, let’s just say,…… With the huge quantities they buy, they can provide better value to their customers because they paid less for the food, because they’re just so much larger than everybody else.

So, you’ve got to get an edge…it’s also the hospitality culture, in other words, if you can somehow make that customer feel like he’s family. Starbucks have done an unbelievable job. Starbucks has been incredible….. 30,000 stores around the world.

Not quite what it was, but Howard Schultz and his people carried it a long way in terms of the staff at the stores around 30,000 locations. If you’re a regular, they recognize you, and they remember your drink. As I say, it’s not quite what it was, but it’s better than most still. Danny Meyer calls it the hospitality quotient. Absolutely hard to create that culture, but if you can do it, it’s a huge hit. First Watch is a company in the restaurant space that does it… It’s a chain, breakfast, and lunch, and they do it very well.

Dave: The one thing that really caught my eye in the past several Fed Beige Books, and you know that I read that as if it’s gospel, that companies and retailers in general are having an increasingly difficult time in passing on their costs, much tougher than a year ago or two years ago. Are you seeing that too?

I guess, firstly, are consumers starting to baulk at the prices? As far as the business owners are concerned, we just saw this, first time in a long time, that Carrefour said to Pepsi, no, we’re not taking that price increase. So, are the restaurants that you’re seeing, are they doing the same thing, saying to suppliers, you’re going to have to do better than that? Are you seeing that?

Roger: Honestly, I don’t personally run across those conversations, to tell you the truth. I can tell you this though. There is price resistance. Traffic is challenged. One reason is that the chains, even though we’re in a so-called disinflationary period, the reported numbers are not moving up at the same rate they were, restaurant prices were late moving up.

Because any good restaurateur knows that he doesn’t want to be the first to raise prices. They all know the customers don’t like it. The customers may not complain, but they notice. So, a good restaurateur is ready to raise prices, but down the road and as best he can and try to do it in ways that it’s not so noticeable. nobody wants to be the first. But prices have come up.

They resisted for a while, because don’t forget, Jay Powell was screaming transitory. It was transitory, transitory, transitory. It wasn’t so transitory, so everybody finally had to bite the bullet. They finally caught up. But because they’ve caught up, prices now are 15-20% higher than they were three years ago. The customers are resistant.

That’s why, in this most recent holiday period, November/December, there was more promotion than I’ve ever seen in a holiday period. A friend of mine, over the weekend, was telling me he, on McDonald’s app… Through their app, they’re making their especially good deals. He’s got two cheeseburgers, a large fry, and two drinks for 11.5 bucks at McDonald’s.

So, now you see….everybody’s got a BOGO, buy one, get one free….. Right now, McDonald’s has got one, one of the big chains, buy one, get one for $1. I think it was McDonald’s. So, there was more of that kind of stuff on all those sports programs over the holidays, all over the place. Holiday time, generally people are out, they’re driving around, they’re feeling pretty good, they’re shopping, they’ll stop for a bite to eat. Normally, it’s a pretty good quarter for people.

Dave: So, it’s that sort of behavior that makes you believe that a consumer recession may already be starting, that sort of behavior beneath the veneer.

Roger: Yes, and all these aggressive pricing promotions isn’t for no reason. These companies, they get their sales hourly. Minute by minute, they’ve got the sales available. They know what should be happening, minute to minute, at their locations. If the customer’s not coming, they react. They know, of course, Wall Street’s desperate to see positive sales. God, forbid you have a down quarter. Your stock gets killed and your options are worth less.

Dave: This is a weird question, Roger. Forgive me. All of your contacts at the restaurants, the eat-in establishments, is there anything on has tipping that has changed from the patrons?

Roger: Well, a lot of the fast-food restaurants put in a tipping option, at Chipotle or the others.

Dave: But what about in dining establishments, from what you’ve been seeing? I’d find that interesting if people… You start noticing, going into recessions, all of a sudden, charitable… A lot of stuff starts to get squeezed.

Roger: It may be happening, but honestly, I have not heard that people are tipping less. They’re more likely to just try to spend a little less but tip the same 15% or 20% or whatever they’re inclined to tip. I think it’s worth noting that labor is a lot easier to find now. It was very hard a couple of years ago.

When everybody got the subsidies relative to COVID people were sitting home, playing video games, and not working and didn’t want to go to work. Crew labor is now more available but restaurant managers are harder to find, because they learned while they were sitting around in COVID that they used to be in a tough industry, and they’re not so anxious to go back to it.

Dave: Hold on. That’s very interesting, because it’s in the cyclical service industry. That’s why Powell created this new index he’s looking at, the super-core services.

Roger: Right.

Dave: It’s principally because the restaurant industry is part of that. It was all aimed at looking at tying it to the labor mismatch. So, you’re saying that labor mismatch is being resolved, that excess labor demand is pretty well gone in the restaurant industry?

Roger: You can find crew these days. Of course, you have to retrain them. It’s very important. If you can manage to keep people, reduce turnover, it’s crucially important, because it’s expensive to train people. The turnover is very high in the restaurant industry. People brag when they’re saying they’re less than 100% a year. To whatever extent you can keep the crew happy, pay them a little more, but keep them, because it’s going to cost you more than the increase you give to keep someone than what you will spend training the new person who may or may not do a good job.

Customers like to see the same faces too. You definitely prefer to see the same staff, hopefully smiling face when you walk into a place, maybe even acknowledge the kids or whatever it’s going to be. But … It’s the culture. It’s very important to try to provide that hospitality culture. It is hard to come by, but it’s evident when it’s there, and it’s costly when it’s not.

When I walk into a restaurant and I see a smiling face and I get greeted well and there’s courtesy, it does not happen by accident. A chain that’s done a great job with that is, of course, Starbucks, but Chick-fil-A also. They happen to do twice the volume of McDonald’s, by the way, and they’ve done a great job with their hospitality culture.

Dave: It leads me to a critical question here, Roger, especially as we’re getting closer to the top of the hour, which is the coup de grace, which is a buy list and sell list for the viewers, the equity investors…

Roger: Yes.

Dave: On the line, what do you like? What do you think has upside potential in terms of their stock price this year? which ones would you avoid?

Roger: Well, it could be a long list of stocks you avoid. It’s a tough industry, so let’s start with that. It’s not something you want to be overweighted in, probably, if you’re running a big portfolio. But if you want a long-term, safe way to participate in long-term growth, McDonald’s and Darden are as good as anything. They’re both well run, dominant companies in their niche, and their stocks are priced reasonably relative to historically and relative to their prospects.

Companies like Wingstop and Chipotle and Domino’s are fine companies, but they’re pretty fully priced. You can own them, but be prepared for some volatility, because they’re high beta stocks. There’s no reason to think they’re going to stumble badly. So, call them high volatility picks, if you want to own some… If you want some juice in your portfolio.

I recently recommended, in terms of attractive reward-risk situations, four names. The two largest, maybe safest ones that I think are inexpensive would-be Bloomin’ Brands, they own Outback and several other brands, and Dave & Buster’s, very experiential. It fits the experiential desire to get the people out of the house. Both of those trade for five times trailing EBITDA. So, five times trailing EBITDA with a good balance sheet, it gives you a chance to win.

A couple of smaller names that seem to be also very inexpensive, four to five times trailing EBITDA. Red Robin is checking a lot of boxes. The turnaround hasn’t happened yet, but they’ve improved their balance sheet a great deal. Their debt is only two times trailing EBITDA. A year ago, it was four times. They did the sale-leaseback, and that helped a lot. So, they’re here to stay for a while. I like the moves the management’s making. If they can make some progress, there could be a lot of money made in Red Robin.

A company called Noodles is a similar potential turnaround. There’s some new management in there. Five times trailing EBITDA. Balance sheet’s strong enough for the time being. There’s some low-hanging fruit.

Dave: Noodles?

Roger: Noodles, yes.

Dave: Where is it listed?

Roger: It’s over the counter, NDLS. A fifth name that I just met with the last couple of days here in Orlando, at the ICR conference, is Potbelly, Potbelly Corp, which run Potbelly Sandwich Shops. They’re doing a lot of good things, further along in their turnaround than Red Robin or Noodles. It’s not quite as inexpensive. Potbelly is selling for nine or ten times trailing 12-month EBITDA.

Dave:  Great. But there is one last question which is for you, connecting with the viewers, is how can people find you and your research?

Roger: Well, yes, just go to or, the same site. yes, it’s $100 annual subscription, not backbreaking for anybody. But it’s my platform. I publish it not so much to collect $100 from my friends… But it’s my platform to stay in touch with the industry, and it’s been very useful. It’s one of the smarter professional things I did, starting about eight years ago.

You should use it as a resource. The 60 names, all those financial summaries are current. It takes me some time. I do them all personally. It’s what I use for my investment purposes.

When somebody reports earnings, I go right to my own numbers to see what the valuation is. Then I weigh that against the news and decide whether I want to take a shot or not. So, if you haven’t discovered, it’s a yellow box on my homepage. Just click through. you’ve got 60 write-ups there.

Dave: Well, look, if you are in Dick Strong’s orbit, which you have been for decades, and considering Dick’s investment acumen and success, you’ve got to be doing something right, my friend.

Roger: Well, you hit some and you miss some.

Dave: Right?

Roger: You hit some and you miss some. But I’ve hit a few.

Dave: Yes, okay. But Yogi Berra was still a Hall of Famer with a 285 batting average, so I aspire to that. Anyway, Roger, top of the hour. Thanks a ton for these great insights and historical anecdotes. It was great for a chance for all the viewers to get to know you. I hope I see you soon, as I said, if not in Vail, then my next trip to the Big Apple. Okay?

Roger: My pleasure, David. When you’re in New York, don’t forget to call.

Dave: You’re going to make me some of the old-fashioned fish and chips, like the old days.

Roger: Yes, fish in peanut oil.

Dave: Okay, that’s the key from the peanut gallery.

Okay. A reminder for everybody on the call. Round two of this series on the consumer takes place on January 23rd at 4:00 PM EST. Mark that in your calendar. I’m going to be hosting Dana Telsey, the dean of all things retail. She’ll be on the call.

So, talk to you all then. That concludes today’s webcast.