All posts by Roger Lipton



The general market was firm all month, and finished up for the month in spite of substantial weakness the last two days of the month. Gold bullion and the miners were down modestly most of the month (the miners down about 3% until last Thursday) but then got hit as well. Gold bullion finished the month down a little over 6% and the miners more like 10%. There are always a lot of moving parts but it seems like the major force driving gold and the miners lower was the dramatic increase in interest rates, to be discussed just below.

As most of our readers know, while we continue to be actively engaged within the restaurant industry, the majority of our personal liquid assets are invested in gold mining shares. That takes place within our twenty seven year old Limited Partnership, in which we are both the General Partner and the largest investing Limited Partner. Our writing within this website therefore reflects our two most active financial interests, the restaurant industry and the fiscal/monetary scene.


It seems to us that by far the most significant recent influence on the price of gold and the gold mining stocks has been the steady rise in intermediate to longer term interest rates. The charts just below show how the price of gold started trending down, almost to the day back in early August, when rates started moving up. As shown in the charts below, while the 2 yr Treasury has moved hardly at all, interest rates from 5 yrs  to 30 yrs have moved steadily higher.

It is important to note that the ownership of gold (which itself pays no dividend or interest) competes in terms of current yield with short term rates (especially up to 5 yrs, 10 at the most), which have moved hardly at all. The two year still yields next to nothing. While the five year Treasury has moved from 20 bp to 60 bp is, this is only a nominal 0.4%, still almost nothing in terms of an annual return though it is a dramatic tripling of that rate. Even the ten year Treasury only yields about 1.5%, a lot less than the inflation rate, so the ownership of gold still has a “real return” over ten years.

There are two major potential drivers of higher interest rates. The first possibility is that the economy is getting a lot stronger and we don’t believe that is the case. The 4% increase in Q4 GDP was heavily influenced by the new stimulus checks, as well as pent up demand as the pandemic begins to wind down. The second possibility is the bond market’s anticipation of higher inflation, and we believe that is more likely the case. The most recent readings indicate a rate closer to 3% than 2% and the Fed is encouraging it. The Fed balance sheet continues to expand with their bond buying, $1.9 trillion of government spending is about to begin (with more to come), a new currency called Bitcoin has created a trillion dollars out of thin air and there are others such as Etherium. Commodity prices have moved sharply higher and a new $15 national minimum wage will contribute to higher retail prices. Lastly, as shown by the last chart below, the US Dollar has been weak, another harbinger of US inflation.

We should remind you at this point that higher interest rates would be very expensive for the US Treasury, since one extra point of interest on $28 trillion is $280 billion, blowing up the annual deficit even further. Though interest “earned” by Fed T’bill holdings is rebated back to the Treasury (after expenses), there are still many trillions of debt owned by individuals and foreign countries. Volker took interest rates higher from 1979 to 1982 to control inflation but the total US Debt was about $1 trillion then versus $28 trillion today, and the annual defict was about $100 billion versus $3- 4 trillion today. Unfunded entitlements was also a non-factor forty years ago while it is a hanging “sword of Damocles” today. Today’s economy is 7.5x the size of that in 1980, but the debt and the deficits are almost thirty times the size, excluding unfunded entitlements.

We’ve had higher interest rates (both short and longer term) reflecting higher expected inflation along with a sluggish economy before. In the 1970s gold went from $35/oz to $850/oz while stagflation took the Fed funds rate to 18%. Therefore, for all but the shortest term stock traders, negative real returns on short term US Treasuries (up to at least 10 yrs) remain a fact of life and gold related securities retain their allure. Our thesis remains very much intact.


Following the money in and out of Washington, DC: At this point, with foreign purchasers of US debt issuance backing off, our Fed Reserve is purchasing over 60% of newly issued US Treasury securities with new money printed out of thin air. The US Treasury sells the bonds to the Fed, pays interest (at low rates) and the Fed rebates their annual “profit”, derived from interest “earned”, after expenses, to the Treasury. The net effect is virtually a zero-interest cost on unlimited new capital and the Treasury doesn’t even have to issue colored paper. We listened last Wednesday to a congressman congratulating Fed chairman, Jerome Powell, on the Fed’s rebate of $88.8 billion for the year ending 9/30/20, which reflected the Fed’s “profit” after deducting $4.5 billion of operating expenses. This is noteworthy because (1) the $88.8 billion was generated from interest earned on the now $7.5 trillion balance sheet (created out of thin air), consisting largely of US treasury securities and (2) The annual US operating deficit is reduced by this $88 billion. (3) It costs US taxpayers four and a half billion dollars to manage this scheme. And there is no graceful way out of this mess.


As we wrote on this website two weeks ago, suppressed interest rates are a form of price fixing, and price fixing inevitably leads to the misallocation of resources. After the “revolution”, which will likely be financial, political and social, the sun will still rise in the east and set in the west. Life will go on, but the assets will have been reallocated among owners.

We have been fundamental value investors for over four decades and it has served us well over time. There have been successful investors that invest based on chart patterns rather than the corporate fundamentals, and that can work well for short term nimble traders. We believe, however, that, while charts can sometimes alert investors early to changing fundamentals, the charts reflect the fundamentals, not the reverse. We try to follow the advice of legendary investors like John Templeton, who suggested that you should buy “when there is blood in the street” and sell into broad euphoria.


We cannot predict when the general stock market enthusiasm for SPACs and Bitcoin and technology companies selling for 50x SALES will run its course. With that backdrop, the gold miners trade at an Enterprise Value versus EBITDA (operating cash flow) of under 8x versus the S&P 500 index of double that and the spread is the widest in at least 10 years. Gold is the “real money” and the gold miners are storing it for us within their underground vaults (called gold mines). They will bring that currency north to exchange it for the colored paper of the day over time, and that will be reflected in the dividends paid and the price the shares trade for. There are lots of ways to protect oneself from the financial turmoil we foresee. In that context, mining stocks are the most undervalued asset class we know of and should therefore be a meaningful portion of an investor’s liquid assets.

Roger Lipton

ADDENDUM TO DANNY MEYER SPAC article published earlier today


In our haste to very concisely summarize a 200 page proxy document, we were  a little too concise. There are no doubt many other aspects we did not provide, but we have added two important points. The points are:

(1) HUGS has twenty four months to complete a Business Combination, though that can be extended by a shareholder vote.

(2) The public shareholders of HUGS have the right to redeem, for approximately $10/share,  prior to the Business Combination if they disapprove of the outlook from that point forward. This is typical of SPAC offerings and a major source of comfort to the SPAC buyers, along with the warrants (costing nothing) they can keep if they  bought the Units at the IPO. If time runs out to find  a Business Combination or if the majority of all the shares (37.5% of those publicly held) disapprove of the deal, the SPAC would be liquidated and the full $2,024,000 provided by the Sponsor would be lost.

Forgive us, if you can 🙂





Danny Meyer and Co. raised $250M yesterday. Now the hunt begins to find a high quality company that can be bought without overpaying by too much. The time allowed to complete the transaction is twenty four months, though that could be extended by way of a shareholder vote.

Something like $100 billion has been raised by way of SPACs (Special Purpose Acquisition Companies) in the last twelve months, which can be leveraged four or five times. If half of that is still in the hunt, that would mean that $250 Billion is looking for a home. Foreshadowing our conclusion:  it will be hard to find a bargain.


Each Unit of USHG AcquisitIon Corp. (HUGS/U), sold to the public at $10.00, consists of a share of Class A common stock plus one third of a five year warrant to purchase a share of class A common at $11.50. The $11.50/sh warrants are exercisable on the later of 30 days after the business combination or 12 months from the IPO. The Sponsor of HUGS  is an affiliate of Union Square Hospitality Group, LLC, (USHG, the same letters, different order).

We need not detail the credentials of Chairman of the Board, Danny Meyer, literally a legend within the hospitality industry.

In addition to Randy Garutti, well known to investors as CEO of Shake Shack, Directors probably less well known to restaurant industry investors, are: CEO, Adam Sokoloff; CFO, Tiffany Daniele; J. Kristofer Galashan;  Lisa Tatum; Mark Leavitt; Walter Robb; Heidi Messer; and Robert Steele.

Daniele, Galashan, Tatum, Leavitt and Robb have long been affiliated with USHG. Sokoloff and Steel are highly qualified in terms of their background within investment banking and private equity circles. Messer has been a prominent, successful  entrepreneur and investor in the digital economy since the commercialization of the internet.

There is also an Advisory Council, consisting of Clarence Otis, Jr., Avisheh Avini, Patti Simpson, Kelly MacPherson, Richard Coraine, Darryl “Chip” Wade, Jonathan Sokoloff and Peter Mavrovitis, all of whom are affiliated with USHG.

Meyer has clearly done his best to include many of his key associates  from Union Square Hospitality Group, no doubt in his desire  to bring his associates along for  “the ride”.

The stated acquisition strategy, in the same mold as USHG and publicly held Shake Shack,  is “to identify and acquire a company with a people-first culture”. HUGS is not, however, limiting their search to the restaurant industry.


There were 6,934,500 Class B shares outstanding before the offering ,bought by the Sponsor for $24,120 (That’s twenty four thousand, one hundred twenty dollars.).  The Sponsor contributed 115,0000 shares  to Share Our Strength, a nonprofit working to end childhood hunger. Following the planned Business Combination, an additional  253,000 shares of class B common may be issued to advisors, presumably largely from the group mentioned above. The Founders’ B shares will elect Board members prior to the Business Combination, then be converted to A shares.

The Sponsor agreed to lend up to $300,000 to HUGS, to cover organizational expenses, to be repaid from the proceeds of the offering. The sponsor has agreed to purchase 1,333,333 warrants similar to those publicly held, for $2M, or $1.50/wt.

The Founder’s shares can be sold at the earliest of (A) one year after the Business Combination and (B) subsequent to the business combination, if the closing price of the public shares is at or above $12.00/sh for 20 trading days commencing 150 days after the business combination.


The Sponsor is risking about $24,000 to buy the Founder’s shares, plus loaning $300,000 for organizational expenses if the SPAC doesn’t become publicly held. Worst case, the Sponsor loses $324,000. When the deal comes public, another $2M is spent to purchase $1.33M warrants, so the Founder is then out of pocket by $2,024,000.

The public shareholders of HUGS have the right to redeem, for approximately $10/share,  prior to the Business Combination if they disapprove of the outlook from that point forward. This is typical of SPAC offerings and a major source of comfort to the SPAC buyers, along with the warrants (costing nothing) they can keep if they  bought the Units at the IPO. If time runs out to find  a Business Combination or if the majority of all the shares (37.5% of those publicly held) disapprove of the deal, the SPAC would be liquidated and the full $2,024,000 provided by the Sponsor would be lost.

The Founder’s shares, not liquid for a while, at the $10/share offering price of the unit before the public has won or lost anything,  are worth $69 million, almost 35 times the total invested.

However, it may not be easy to sell a lot of shares very soon.  There are lots of reasons that HUGS might not do so well for a couple of years after the Business Combination.  The Sponsor can sleep pretty well, though, because there is a big cushion. It only requires about  $0.30/share for the Founders to get back their $2.024M. On the upside, if the HUGS common should trade north of $12, to perhaps $15/sh., six months after the Business Combination, for whatever combination of reasons (strong market, exciting story, etc.etc.) the value of the liquid shares at that point, would be worth over $100M.

So….if management has any reasonable success, the return to the sponsors would be very large. If the stock only trades at $5 (so the IPO purchasers have lost half their investment) the Sponsors own over $30M worth of stock, fifteen times their money. At $15/share, the public makes a 50% return (plus the value of their warrants) and the Sponsor makes over  fifty times its investment..

And that’s why smart  entrepreneurs who can find an underwriter, are sponsoring SPACs. That’s also why there is going to be very active M&A activity, a great deal of it at inflated prices.


HUGS is going to find a very attractive opportunity, an open ended growth situation,  including a great “culture”. HUGS’ management will follow Warren Buffet’s approach in terms of paying a full price for a high quality property.  Meyer and Co. will have  outbid other purchasers in this overfunded environment, but the investment community will give HUGS’ management every benefit of the doubt. Investors will have a reasonable  chance to make an acceptable return over the long term and the Sponsor will make a fortune.

Roger Lipton




Starbucks continues to be the premier roaster, marketer and retailer of specialty coffee in the world. The company operates in 83 markets, up from 81 a year ago. Historically, the sales mix has been 74-75% beverages, 20% food, 4% ready-to-drink beverages (classified as Channel Development income and includes royalties from Nestle under the Global Coffee Alliance) and 1% packaged and single-served coffees and teas.

As of the end of last year, the company operates and licenses approximately 32,500 stores globally.  The company operates 10,109 stores and has licensed another 8,245 in the Americas segment (North and South America). Internationally, the company operates 6,461 (4,700 in China) and licenses another 7,779 (Korea leads with 1,468 stores).  Over the next 18 months, the company plans to close upwards of 800 stores, so net store growth in the coming year will be lower than prior years.

Not surprisingly, the company’s sales and operating profits continue to be dominated by the Americas segment. The spike in operating income attributed to the Channel Development segment in FY20 was due to large declines in the profitability of the other two segments and not an increase in margins. As trends normalize in FY21, the operating income contribution from this segment will revert back to its historical percentage (but is still growing).

Since our last update, Starbucks has issued FY21 guidance as well as hosted its Biennial  Investor Day, which provided long-term guidance through FY24. In this update we will look at the recent guidance and discuss changes in customer behavior in the context of this guidance.

Summary of Fiscal 2021 Guidance

  • Consolidated revenue $28-$29B
    • Global comp sales growth 18-23%
      • Americas comp sales growth 17-22%
      • International comp sales growth 25-30%
        • China comp sales growth 27-32%
      • Consolidated GAAP operating margin 14-15%
      • Non-GAAP EPS $2.70-$2.90 per share
      • Cap Ex $1.9B
      • Guidance for FY22-FY24
      • Non-GAAP EPS growth of 10-12%
      • Revenue growth
        • Company 8-10%
        • Retail Business 8-10%
        • Channel Development 5-6%
          • 2018 Global Alliance with Nestle has performed better than expected.
        • Non-GAAP Operating Income Margin 18-19%
        • Capital Allocation
          • 50% of Earnings Payout Ratio
          • 2% yield
          • 1% Share Repurchase per year
          • 3X leverage
          • Addressable Coffee Market
            • Euromonitor estimates the global coffee market at roughly $360B in 2019.
              • Expects CAGR of 5-6% through 2023.                      This means that the global addressable coffee market in 2023 would be approximately $450B.
    • This growth provides a significant tailwind for Starbucks. As a result of these estimates, the company boosted its global comp growth to 4-5% in FY23 and FY24. This compares favorably to its previous estimate of 3-4% at the 2018 Biennial Investor Day. The estimate for the US was also increased slightly to 4-5% over the same timeframe. Later we will discuss some of the factors in the US that are driving the change.
  • Store format changes
    • Starbucks is starting to shift to focus more on convenience and the store base is expected to change to reflect this.
    • Over the next three years, pickup, drive-thru and other new formats will expand to 45% of U.S portfolio, up 1000 percentage points since 2020.
    • Margin expansion 100-200bps
      • Sales rebound creates natural operating leverage.
        • Mix to more high-volume, high margin drive-thrus leverages labor costs.

    Digital memberships

    • Starbucks has 19.3M 90-day active members in its digital ecosystems.
      • These members drive 50% of total revenue
      • One in every four transactions coming from mobile order and mobile pay.
    • Addressable customer base is close to 75M.
      • Lots of growth potential if the company can add these customers to digital platform.
      • Fiscal    ’16    ’17       ’18     ’19      ’20      Q1’21    FY’21        Long Term
  • Historically, Starbucks has seen modest changes in the total average ticket, driven mostly by price increases and occasionally an increase in food attach rates. However, starting in Q3 FY20, there has been a significant shift in the size of the average ticket. The pandemic has caused a shift in customer behavior. Some of these factors may provide a boost to long-term growth and improved margins. However, we see some potential negatives that are important to consider as well.
  • Factors Driving Lower Transactions, but Higher Overall Ticket.
    • Shift from urban cafes to suburban drive-thrus.
      • Driving the shift is more customers working from home.
      • Urban locations have a higher mix of hot coffee only orders which is a lower average ticket.
      • In suburban locations, customers are purchasing multiple beverages and food items. Customers are ordering for other family members and neighbors that are either working or studying at home.
      • Customers ordering later in the morning. This has helped spread out workflow for baristas and improved operations.
    • Customers are ordering more cold drinks.
      • Cold beverages now account for over $1B in sales and growing.
      • Millennials and Gen Z-ers under 30 year old are twice as likely to drink cold coffee than the average customer.
      • Cold beverages sell at premium prices.
        • For example, customers are ordering more frappucinos and modifiers (ingredients that are added to a basic coffee).
      • Cold beverages are being bought in larger sizes than hot coffee.
    • Customers are ordering more food items.
      • 26% of customers looking for healthy options in both food and beverage.
      • Starbucks continues to innovate with healthy food choices such as the Impossible breakfast sandwich, breakfast wraps and plant-based milk substitute offerings like soy and oat products.
      • As management has often said, “trialing is the start of a routine.” Even as customers return to work in urban areas, we would expect that some customers will continue to order these higher priced items food and beverage items.

    At Biennial Day, the company included this slide to illustrate how the trend towards more pickup and to-go orders will impact the store base. While the number of stores in Midtown Manhattan is expected to remain flat, there is a significant change in the mix to smaller pickup stores. These stores will be less expensive to staff and operate and still generated significant sales, which will increase the company’s long-term return on investment.

These changing trends, if sustainable, could help support the company’s long-term guidance of 4-5% comparable sales growth. Historically, transactions have been relatively and changes in the average ticket have been mostly driven by modest price increases. If the current trends in consumer behavior continue, it should be easier for the company to drive both frequency of visits and higher ticket prices with more food being purchased per order. This will also help leverage labor and operating costs.


Starbucks long-term success is more than just the result of selling an addictive product. It created a culture where customers and baristas interacted with each other on a personal level and customers lingered in the stores for hours. These relationships and the in-store experience is one of Starbucks’ greatest competitive advantages. It is possible that the  combination of an increase in drive-thru/pickup, smaller stores and increased digital marketing could hurt brand long term by affecting the relationship between customer and employee.

On the other hand, the higher utilization of the digital app can lower marketing costs and improve the “personalization” of the products, satisfying customers more from that standpoint. A customer’s relationship with the barista may not be what it was, but “the times they are ‘a changin’ and this may be the best approach, all things considered.


What other restaurant company would you rather put away for the next five to ten years, with confidence that  earnings and dividends are likely to grow faster than the general economy. The growth as described above will be provided by a combination of (1) reopening of stores and normalization of routines (2) transformation of the asset base (3) accelerating digital momentum (4) easing competitive dynamics, notably in China   (5) franchising or licensing of company stores outside of US (6) continued progress with industry leading Rewards program (7) modest exposure to nationwide $15 minimum wage.

In spite of the pandemic SBUX raised its dividend in 2020 by almost 10%, management has stated that it will pay out 50% of earnings in dividends going forward, and all indications are that this kind of growth can be sustained. A good case can be made that Starbucks equity is a better investment, currently yielding 1.7% and likely to grow over time, than US Treasuries, where you get a fixed 1.4% over ten years but no chance to grow your principal. If SBUX can reach its long-term goal of 10-12% EPS growth, then the dividend should grow at that rate as well and provide investors with an 11-13% annual total return. By our estimate, SBUX could be paying $2.35 per share by fiscal ’23, yielding about 2.3% on today’s purchase. The 10 year US Treasury (today yielding 1.4%) wouldn’t be yielding 2.3% unless the principal was down by about 45%, and there is a good chance SBUX equity could be up in price at that point. That’s a double barreled possible win for SBUX.

For the growth stock jockeys among our readers, Starbucks equity is selling now at the high end of its historical range,  relative to EPS and EBITDA. However, we contend that many other restaurant companies, far less attractive than SBUX  in terms of predictable growth and strong balance sheets are selling even more above  their respective ranges.  We don’t provide relative ratings for restaurant names, and we would rather not single out the least attractive situations. Let’s just say that: other than a few premier companies such as Darden and McDonald’s, adding in perhaps Cheesecake Factory and Texas Roadhouse, there are very few companies that represent comparable value to Starbucks.

Roger Lipton











Julio Ramirez – CEO

Prior to the business combination, OPES named Julio Ramirez Chief Executive Officer.

During his three decades at Burger King, which he left in 2011, Ramirez served as president of the Latin America/Mexico/Caribbean division, Senior Executive of Franchise Operations and Development in North America, and Executive Vice President/Chief Operations Officer.

As described in BFI’s summary of his qualifications, he is “highly regarded for his ability to build franchise relationships, having led Burger King’s field marketing across North America throughout the mid-1990s as part of Burger King’s successful “Back to Basics” campaign, which attained positive comparable sales for several years. In the early 2000s, he effectively managed over 1,100 franchisees in North American operations and led several key working committees, including franchise relations, operations technology and restaurant finance. He introduced the Burger King brand in over 10 countries throughout Latin America, effectively establishing the supply chain, selecting outstanding franchisees, and building a team that opened more restaurants than McDonald’s in 16 of 25 countries. In Brazil, for example, he developed a local team that assembled an effective supply source, signed ten franchisees in a regional network, opened an office in Sao Paulo and successfully launched the brand with an impactful marketing campaign—all of which resulted in Burger King’s first 60 Brazilian locations yielding annual sales substantially greater than the US average, in the face of tough local competition. In Mexico, he built a team that surpassed both MCD’s and KFC’s unit development, opening over 400 restaurants throughout the country.“

After three decades at Burger King (which is described below), in 2011 Ramirez founded JEM Global, Inc., a company that specializes in assisting quick-service and fast-casual brands with franchising and development efforts domestically and internationally. Ramirez consulted Dunkin’ Brands on its Brazil entry strategy and Buffalo Wings & Rings on its Mexico development strategy. He set up four new franchise groups in Mexico and Colombia for “100 Montaditos,” a Madrid-based Andalusian restaurant expanding into the Americas. He was also co-owner of Giardino Gourmet Salads, South Florida’s premier fast-casual concept, helping to grow the brand in Miami, Fort Lauderdale and Naples, Florida.

Jim Esposito – COO

Just yesterday, BFI announced the addition of Jim Esposito as chief operating officer, succeeding Nick Raucci who has left the company. In summary, Esposito has worked with Planet Fitness, Panera Bread, Papa Gino’s and Burger King.

Most recently, since 2016, he was Senior VP, in charge of corporate club locations at Planet Fitness. Prior to that, he spent a year at Panera Bread, working with a cross-functional team developing key initiatives. Prior to that he served as chief operating officer at Papa Gino’s and D’Angelo, and spent 11 years in a variety of operations positions with Burger King Corporation, including leading Burger King’s Global Restaurant Systems group.

We don’t know the exact years that Esposito was with Burger King, but it seems likely that he worked, in the overseas effort, there with new CEO, Ramirez, and that would speak well for their ability to get the job done at BurgerFi.

OUR VIEW of the management situation

We know neither of the gentlemen, and have no reason to question their credentials. We have a couple of natural concerns, however. First, BurgerFi is an earlier stage publicly held company than their experience has included so they have the typical challenge of matching investors’ short term requirements while not sacrificing longer term considerations. Secondly, a great deal of their time has been spent overseas. While expansion abroad is obviously an important long term opportunity, the priority at this point is expansion closer to home. On the positive side, it ought to be a lot easier to choose locations and supervise operations up and down I95, especially with the brand awareness in Florida, than all over the globe.


We have written about BurgerFi  (and the IPO/SPAC process) a number of times over the last six months and readers can access those articles using the SEARCH function on our Home Page.

BFI stock has moved up to the $15 level recently, no doubt because the Company has announced the 30% surge in new openings expected in 2021, the continued sequential improvement in same store sales, the management additions, and the ongoing marketplace love affair with SPAC business combinations.

As we have described in our previous reporting, the valuation of BFI, based on the currently outstanding 17.6M shares, and subtracting the $39 million of cash on the most recently reported balance sheet is about $217M. This is obviously a very high valuation for a Company with minimal historical EBITDA and big plans. More specifically, Adjusted EBITDA was $3.3M in ’19, projected to be $4.3M in ’20 (not going to happen, IMO, but not relevant at this point), projected in the last Investor Presentation to be $10.5M in’21. With the pandemic dragging on into ’21, we view it doubtful that $10.5M will be done this year, but, once again, investors don’t mind as long as it is going to happen at some point soon. Whenever the $10.5M of EBITDA develops, the $217M of current Enterprise Value seems to adequately value this emerging brand.

In terms of stock performance from here, investors should be aware that, with 17.6M shares outstanding and a current public float of about 6M shares, 27M more shares are in the process of being registered for sale, which includes founders’ shares and shares to be issued from exercise of private placement warrants. The warrants will bring in cash at $11.50 per share so we are not especially concerned about that dilution of the Enterprise Value. However, relative to supply and demand for the public shares, 27M newly registered shares is over four times the current float.

Most important of all, substantial dilution of current shareholders will occur from the contingent shares that will be issued to the original BFI shareholders when the stock hits $19, $22, and $25, and that is not very much higher than the current $15 price level. These  are not “earnout” shares because they have nothing to do with sales or earnings or cash flow, and the stock price might do amazing things, regardless of fundamentals. There are a total of 9.4M contingent shares potentially to be issued, obviously very substantial.


The possibility exists that the stock, in this speculative environment, could go above $25/share and there would be an additional $240M of Enterprise Value issued with no concurrent increase in current or future EBITDA. An optimist would suggest the possibility that operating results could improve substantially, perhaps exceed the $10.5M projected near term EBITDA by a lot. However, above $25/share with well over 25M shares to be outstanding in total, the expanded Enterprise Value would be approaching $700M. Investors would therefore need $35M to support a hefty 20x EBITDA multiple. That is…a long way from the current situation.

Roger Lipton


FOLLOW THE MONEY with Roger Lipton, reprint from 2-15-21 edition of RESTAURANT FINANCE MONITOR  

Roger Lipton is writing a regular column for the monthly publication of the “must read” Restaurant Finance Monitor – provided below:


The answer is: not by much and not for long. It is naïve to think that the consumers’ pandemic induced financial trauma, just as with our parents after the 1930s depression, will not lead to a downward adjustment in longer term spending patterns. Surveyors at the NY Fed found that 2/3 of the 2020 stimulus went into savings or debt paydown. According to economist, (the best) David Rosenberg, bank credit to individuals is down more than 3% from a year ago, which hardly ever happens, and credit card balances are down 10%.  The household savings rate, as a percentage of discretionary income, spiked from 7% pre-pandemic to over 30% in late March and April. It is now running about 13%. Rosenberg says that if it settles at 10%, up from the 7% norm, that 3 point difference would trim retail sales in general by 10% and slice a full point off aggregate consumer demand in the future. Some restaurant segments will obviously be affected more than others, but this may be one reason that, even with the first new stimulus checks in the mail, BOGO and $1 menu items are being promoted again. There will likely be a short term relief driven uptick in consumer spending as vaccines and herd immunity take hold, but strong sales comparisons compared to a year ago should not distract us from longer term concerns.


Meatless burgers and other proteins went mainstream about 20 months ago. Several suppliers, most prominently Beyond Meats (BYND), received enormous publicity and many restaurant chains spent a great deal of money introducing new burgers, sausage and chicken substitutes. BYND came public at $25/share in May, ’19, and ran to $230 in just a few months (almost as good as Gamestop recently). BYND settled down and traded in a broad range between $75 and $150/share until just recently when deals with Taco Bell and Pepsico were announced. All you need to know these days, about the importance of meatless products to the restaurant industry, is that everyone is developing natural, not “meatless”, chicken sandwiches (thank you, Popeye’s, for leading the way). On our website 18 months ago, relative to the meatless craze, we suggested “this too shall pass”. This is not to say that a market does not exist for meatless proteins. It’s just that no particular restaurant will have an edge and there will be plenty of competition among manufacturers. The bright side is that the cost/unit is coming down as production ramps up, so restaurants do not need to price the product at a premium. Fundamentals aside, BYND trades, on February 8th, at $168/share with an $10.6 billion market value, at almost 13x ’22 SALES and over 200x ’22 estimated EPS. The music is playing so the dance continues.


A predictable question at every restaurant conference workshop is “how big do I have to be to attract private equity capital?” The panelists representing the various private equity firms dutifully describe the need for (1) well regarded management (2) excellent unit level economics (3) a concept proven in various markets (4) a well positioned concept, these days such as fast casual, rather than big box entertainment (5) a store level EBITDA of 20% of sales, amounting to at least $5M systemwide. On the other hand, my response would be: “It is not about size. Beauty is in the eye of the beholder “. Capital can be raised, perhaps not from Roark or L Catterton who are looking for “size” these days, but there are plenty of smaller private equity firms that can be seduced by a proven operator with a couple of units that are doing very well. I have suggested that, a while back Norman Brinker could have raised money with a concept alone, just as today’s “Norman”,  namely Danny Meyer. Enter the world of SPACs, where over ONE HUNDRED BILLION has been raised in the last thirteen months. BurgerFi (BFI) has been brought public. FAST is recapitalizing Tilman Fertitta’s empire. Tastemaker (TMKRU) is searching for an attractive restaurant chain, and Danny Meyer has just filed to raise $250M. It is not even necessary to have a specific concept in mind these days. The “beauty” of the sponsor is adequate. According to the release, Meyer’s SPAC, USHG Acquisition Corp. “plans to target ‘culture driven businesses……focus on industries including technology, e-commerce, food & beverage, health and retail and consumer goods.’ Relative to the current SPAC craze: this, too, shall pass, but, in the meantime, buckle up!


We are literally following the money by tracking insider buying. There are lots of reason for insiders to sell: portfolio diversification, taxes, kids’ education, divorce, etc. I knew a publicly held restaurant CEO who told me “the only reason I keep working is to afford a third divorce.” On the other hand, insider buying has only one objective and that is to profit from a rise in the stock. Over the last six months, among all the publicly held restaurant companies, I found the following: At Carrol’s (TAST) insiders bought 56,300 shares at $5.25 in November. At Del Taco (TACO) insiders bought about 130k shares in July-August and another 130k shares in October, all at about $7.50. At Potbelly (PBPB) insiders bought 150k shares at about $4.00 in August. At One Hospitality (STKS) insiders bought 15k shares at $2.98 in November. Perhaps the largest insider buying, relative to the capitalization, was at Good Times Restaurants (GTIM) where insiders bought 65k shares at $1.50/sh in Aug-Sep and another 80k shares at $2.25-$2.50/sh in December.  As of February 8th, the first four are up 33%, 31%, 37% and 35%, respectively, and (GTIM) is up about 90%. History has shown that, while nobody knows the company better than the insiders, the timing can be suspect. That’s true, but not lately, and insider buying remains a good starting point for further research.





Most capitalists believe that the natural laws of supply and demand encourage the most efficient production of goods and services that will benefit the largest number of consumers. Certain societal needs, such as medical care for those that cannot help themselves, educational needs for the underprivileged, safety precautions for individuals and local communities and the nation as a whole, infrastructure maintenance, etc. require governmental involvement. However, the natural tendency of politicians to overreach in an effort to satisfy their constituencies is a constant danger.

Which leads us to price fixing, our particular concern being price suppression, the control of price to a lower level than the marketplace calls for. This has been done now for almost a decade, as Central Banks, worldwide, attempt to support their business community with abnormally low interest rates.  An inevitable economic distortion takes place when politicians decide that the natural laws of supply and demand have to be overridden and prices are not allowed to rise. It has been proven time and again that this approach will ultimately fail and the unintended consequences make for the cure being worse than the disease. A black market gets established in the goods and services whose prices are being controlled. The controlled price discourages production and competition among suppliers, driving prices within the controlled marketplace higher. The end result is that prices move in precisely the direction that the politicians were trying to avoid.

The best example that some of us can recall was in the 1970s. Richard Nixon, along with “closing the gold window” in August, 1971, for the first time since WWII imposed a 90 day freeze on wages and prices as well as establishing a 10% surcharge on foreign imports. Nixon suggested that these adjustments would stabilize the value of the US Dollar, protect American manufacturers from foreign opportunists and control the inflationary trend which at that point was running just under 6%. The Dow Jones Average rose 33 points the next day, its biggest gain ever at that point, and a New York Times editorial applauded Nixon’s “boldness”. The early 1970s version of today’s SPACs, Bitcoin and Gamestop was the “one decision nifty fifty”, which crashed in 1974.

While the Nixon approach may have been a short term political success, it brought on the stagflation of 1970s, led to the instability of floating currencies with the US Dollar plunging by a third, and inflation peaked in the late 1970s at 12%, accompanied by a Fed Funds Rate of 18%.


Interest rates are the economic equivalent of our body’s pituitary gland. As described in Wikipedia, the pituitary gland secretes hormones that help to control growth, blood pressure, metabolic processes, temperature regulation, pain relief, and many other functions.

In a similar fashion, interest rates control deployment of capital. In a normal marketplace, capital investment, consumer savings, stock market and bond market capital allocation, and all manner of investment are applied to opportunity based on reward and risk. The higher the perceived risk, the greater will be the required rate of return in a natural marketplace. Short circuiting the monetary metabolism allows for misallocation of capital. If money can be raised at minimal cost, why not “take a shot”.

In recorded history, there has never been anything remotely approaching the $17 trillion of sovereign debt that is trading with negative interest rates. Central banks, worldwide, in an effort to support their local economies and keep interest rates at affordable levels relative to their respective debt loads, are holding down interest rates. Governments around the world, along with their Central Bankers, are kicking the can down the road, as savers get screwed with the non-existent returns on safe deployment of their capital.


In short, we are experiencing “misallocation of capital” to a degree never seen before. Savers are forced to “reach for yield”, desperately try to get some sort of return in stocks, in bonds, in alternative investments, in Bitcoin, anything to replace the much safer 4%, 5% or 6% they used to get in their five to ten year US Treasury securities. Unfortunately, investors, including institutional portfolio managers that should know better, are pursuing strategies based on FOMO (Fear Of Missing Out of a market that only goes up), TINA (There is No Alternative to the apparently fully valued stock market) and MMT (Modern Monetary Theory, which says the amount of debt doesn’t matter because interest rates are minimal).

Yesterday’s front page Wall Street Journal article is headlined: “Riskiest Firms Binge on Low Cost Borrowing, Struggling Companies obtain funding at rates once reserved for the safest businesses”. The High Yield Index, including embattled retailers and fracking companies, shows a current yield of just 3.97%. Compared to the 1.2% in 10 year US Treasury Bonds, this spread of just 2.77% is at a historic low.

Corporations with questionable prospects are therefore allowed to hang on far longer than they should. Some of the biggest short term gains in the stock and bond markets are among the companies that get one last “misallocated” bite of investment capital. The end will come at some point because, while the interest rate can be managed, the debt has to be finally repaid, and the company was never well positioned. Of course, some companies, such as the $100 BILLION worth of SPACs that have been financed in the last year, can sputter along for years because they have raised so much “free” capital.


This interest rate price control scheme will predictably end badly at some point, the operative phrase obviously being at some point. The natural laws of supply and demand will take over, interest rates will start going up because capital providers will finally say “basta”. The risks will be just too obvious for capital to be provided with the same minimal rate of return. Inflation will follow bond yields higher. The Central Bankers have indicated that 2% plus, as an inflation rate, is acceptable, so 2.5-3.0% won’t be too bothersome. Inflation, however, will keep moving up and the Central Bankers will have no remaining tools to maintain the interest rate suppression scheme.

At some point, someone like Paul Volker will come along to implement corrective policy, but the resultant pain will be substantial. There was a recession from 1979 (when Volker arrived) until 1982 when Volker’s adjustments took effect. Though today’s US GDP is six times that of 1980, the debt now is $28 trillion instead of $1 trillion, and the annual deficit is $3-4 trillion versus $100 billion. The resultant detoxification of the financially addicted worldwide society will be painful. The good news is that, after the ”revolution”, the sun will continue to rise in the east and set in the west. The financial assets will, however, be largely reallocated.

Roger Lipton



The restaurant industry is in a state of flux, far more than usual, as the light at the end of the pandemic tunnel begins to appear. Menus have been adjusted, simplified in many cases, to better serve drive-thru and other off-premise dining options. Employees have been retrained, to deal with new cleanliness procedures and also to better service the new mix of in-store vs. off-premise dining.

NEW PRODUCTS – aside from chicken sandwiches

Popeye’s is testing chicken nuggets.

Bj’s Restaurants is testing slow-roasted meats for off-premise consumption.

Wingstop is testing bone-in chicken thighs.

Smashburger is testing all day breakfast.

Chipotle is testing quesadillas and smoked brisket.

Breakfast is renewed focus, as post-pandemic early morning travel picks up, at McDonald’s (25% of sales), Burger King (15%), Jack in the Box (23%), Wendy’s (8%), Taco Bell (6-7%), Sonic (12%).


Chipotle, in the wake of highly successful Chipotlane, is testing a carside pickup option.

Olive Garden is testing an “I’m here” app for announcing curbside arrival.

McAlister’s Deli is testing tableside ordering.

Burger King is testing Royal Perks, a new loyalty program.

McDonald’s planning a new loyalty program.

Starbucks’ Stars for Everyone rewards program does not require preloaded Starbucks Card.

THE VIRTUAL APPROACH – who has a defensible edge ?

Denny’s is testing a new delivery-only virtual brand, the Burger Den, featuring hand crafted grilled sandwiches.

Bloomin’ Brands is testing Tender Shack,  a virtual version of its Aussie Grill.

Applebee’s has a new virtual concept, Neighborhood Wings.

Brinker’s new virtual It’s Just Wings, is expected to do $150M annually.

BUNDLED MEALS – makes sense

Taco Bell has the At Home Taco Bar.

McDonald’s has Shareables.

Bonefish has Bundled Meals.

Texas Roadhouse has Family Packs.

Darden has Family Packs and Fine Dining Bundles.


McDonald’s is launching a Crispy Chicken Sandwich.

KFC is rolling out a new Crispy Chicken Sandwich.

Burger King is testing a new hand breaded Crispy Chicken Sandwich.

Wendy’s rolled out their Classic Chicken Sandwich in October 2020.

Jack in the Box rolled out their Cluck Sandwich in mid-December 2020.

Zaxby’s is planning a new chicken sandwich in early 2021.

Chick-Fil-A  announced in 9/20 test of a Honey Pepper Pimento Chicken. Sandwich.

Shake Shack continues to innovate with chicken.

Editorial Note: Is it any wonder that Popeye’s SSS have finally flattened out. Had a heck of a run !

Breakfast is renewed focus, at McDonald’s (25% of sales), Burger King (15%), Jack in the Box (23%), Wendy’s (8%), Taco Bell (6-7%), Sonic (12%), as post-pandemic early morning travel picks up.


                      MEATLESS PROTEINS – they are still out there, somewhere

Our last article on this subject was written in January, 2020. Below is a reprint of our Conclusion as of that date, as well as the Conclusion to the earlier article we wrote in June of 2019.

JANUARY 7, 2020:

The excitement today, again all over the news, is that Impossible Foods is introducing “meatless” pork and chicken, and working on bacon.

Developments over the last seven months include:

  • Introduction of meatless burger and chicken products at a great many restaurant chains. Heavy marketing focus has typically been the case, most prominently at Burger King. While a sales increase, in test, at Burger King in St. Louis was indicated as high as 18%, it seems as if the sales increase is no more than 2-3 basis points at Burger King after the systemwide rollout. In a much smaller example, Del Taco sales have seemed to grow by 3-4% with a marketing focus on meatless products. There have been many other introductions, including breakfast sausage at Dunkin’ but specific sales results have not been provided, and that is likely indicative of less than spectacular results.
  • There has been a serious amount of negative publicity, including a Sixty Minutes piece talking about the fact that meatless products are far from a healthful option. As we described in our article, consumers of the new products are replacing cholesterol, as well as a some calories and fat content, with five times as much sodium.
  • An anti-anti-meat (that means pro-meat) lobbying effort has emerged which, among other things, is advertising the healthful aspects of balanced nutrition, including meat products.


Meatless products will have the greatest impact in the burger business, because that’s what the consuming public, especially at lunch, orders the most frequently, and beef has more cholesterol and fat, depending on the cut, than pork, chicken, or fish. Still, no chain will have an edge, because an entry will be everywhere. The producers, Beyond Meat, Impossible Burgers, and the rest, will sell quite a bit of product but at lower margins than they now predict because they, too, will be competing for market share.

We think the quantity of product converted from “natural” to “processed” will be far less with the pork, chicken or fish versions. The presumed health benefits of switching will not be as pronounced as with beef . Maybe we are not sufficiently enlightened, but we don’t believe that environmental concerns relative to production of beef, pork, chicken, or fish, are broad enough to be material to this equation.

We are particularly struck by the talk of a “meatless” sausage product. The lyrics from the broadway show “Hamilton” come to mind  (and you  must see the showif you haven’t) :

I could sing it for you…..but it goes:

No one really knows how the game is played, the art of the trade, how the sausage gets made. We just assume that it happens, but no one else is in the room where it happens.”

I didn’t want to know how the “natural” sausage gets made, and I want to know even less about the “processed” version.

We continue to think that, over perhaps a couple of years, the excitement will abate. Those restaurants and food markets that have sufficient customers that care will have some meatless offerings. No particular company will have a serious edge, however, so sales will not be materially higher than they would have otherwise been, nor will profit margins. The producers of the meatless products will also be in a competitive situation, competing for market share, and with profit margins lower than they, or their investors, would have hoped. The equity in Beyond Meats (publicly held), Impossible Foods (privately held) and others will reflect much more conservative valuations than is currently the case.


The unanswered question is: how large is the demand, at restaurants, for a product that costs more, has the same calorie count and fat content, has a lot more sodium (which creates high blood pressure), but has no cholesterol and contains useful elements such as Thiamin (which helps with nerve, muscle and heart function), B12 (helps with fatigue) and Zinc (for prostate health)?

We do not expect the introduction of meatless products to restaurant menus to improve sales in any meaningful way. The new meatless products taste fine, by all reports, but we haven’t heard anyone say that they taste “better”, and help to justify a higher price. The long term health benefits as described just above are too subtle for most restaurant customers to care much about. Just look at the size, and the nutritional values, of the portions at Cheesecake Factory, Cracker Barrel, and almost everyone else. This, too, in terms of stock market excitement and restaurant industry focus, shall pass.

Roger Lipton



As of December 23, 2020 Brinker owned, operated and franchised a total of 1,655 restaurants, of which 1601 were Chili’s and 54 were Maggiano’s Little Italy. Company operated: there were 1,061 domestic and 5 int’l Chili’s, plus 52 domestic Maggiano’s. Franchised: there were 171 domestic and 364 int’l Chili’s plus 2 domestic Maggiano’s.


Brinker’s most important Chili’s brand has been managed well in recent years, including the last twelve months,  and results should improve further,  but the longer term expectations at Maggiano’s remain uncertain. The introduction of It’s Just Wings as a virtual concept is promising. However, Brinker’s ability to defend its competitive position over time in this niche is not assured. Other large full service, or even QSR, chains with excess kitchen capacity could presumably compete just as well and Wingstop is not going away. Activists could be attracted by the cash flow and the re-franchising potential but the balance sheet, even with debt coming down, is already leveraged to a large degree. Net Lease Adjusted Debt, currently,  at about 4x the run rate of Adjusted EBITDA is not excessive  for a pure franchisor but is adequately high for a company operated chain.

FIscal ’21, ending June 30th, has become a “transition” year, and FY 6/30/22 is increasingly uncertain. The estimates of EPS for the FY ending 6/22 range from $3.60/share to almost $5.00, with the top end of the EBITDA guess at about $450M. The current stock price, at about 13x the high end of EPS with an Enterprise Value of about 9x EBITDA allows for some modest upside if the high end of performance expectations actually happen, but we have our doubts.  On balance we feel that Brinker (EAT) is fairly valued, with a great deal of the post pandemic recovery potential adequately discounted.


 According to a National Restaurant Association survey, more than 17% of all US restaurants are now permanently or temporarily closed. That is more than 110,000 businesses and Chili’s seems to have been one of the  beneficiaries. On the recent second quarter conference call, management stated that Chili’s had increased its two-year trend of taking market share with a category leading 18% beat in sales and a 25% beat in traffic according to KNAPP-TRACK. The company’s broad menu and specials such as 3 for $10 and $25 Dinner for Two resonated with diners looking to dine out without spending a great deal of money.

 In the second quarter, ending 12/23/20, Chili’s reported that same store sales only declined 6.3%. This compares favorably to other national chains that have announced results so far such as Olive Garden (-19.9%) and Longhorn Steakhouse (-11.1%). We expect that these results will also compare favorably to results at companies such as Bloomin’ Brands, Cheesecake Factory, Dine Brands and BJ’s when they report in the coming weeks.


While sales have held up fairly well, cost control at Chili’s has been even more impressive. Food and beverage and labor costs as a percentage of revenue were flat year over year. Occupancy and other expenses are up about 90bps due mostly to the costs associated with delivery fees. As a result of this cost control, operating income declined only $1.6M to $50M on a $45M decline in sales.

Because of the occupancy restrictions due to the pandemic, there has been a dramatic shift in the percentage of sales that are coming from to-go and delivery orders. The off-premise business at Chili’s has grown over 225% since 2018 and the pandemic has accelerated this trend. Historically, Chili’s, to-go and delivery sales were 14-17% of sales with 74% coming from to-go and 26% from delivery. However, in the first two quarters of FY21 off-premise sales were approximately 46% of sales, with 60% coming from to-go and 40% coming from delivery. Some of the shift has come from the addition of the virtual brand It’s Just Wings, to be discussed later.  For comparison, Olive Garden to-go sales as a percent of revenue is 37%. This ratio will decline for all full service casual dining chains as dining room capacity increases, but demonstrates that Chili’s food is apparently holding up relatively well when delivered.


Not well positioned to deal with social distancing, Maggiano’s emphasis is on family style dining and has a large banquet and group meeting business. For example, 17% of sales come from banquets and group meetings. The second quarter is the busiest time of year for this part of their business and sales were essentially zero this past quarter. The restaurants are much larger than a Chili’s restaurant, with 3X the square footage of a Chili’s and average unit volumes before the pandemic were $7.9M compared to $2.8M for a Chili’s. A sales decline such as almost 50% in Q2 predictably creates a huge deleveraging of occupancy costs. Restaurant expenses other than labor and CGS rose 1000bps to 35% of sales. Chili’s comparable expenses were only 28% of sales.

Another disturbing trend is that the average check declined significantly. Before the pandemic, the average check at Maggiano’s was about $28 (compared to $15 at Chili’s). The average check is now running around $22. This decline caused deleveraging on food and labor costs as well. All these factors are manifested in the huge decline in both sales and operating income. In spite of having sales that are $600M per quarter less than Chili’s, Maggiano’s saw a loss of $56M in sales compared to a $45M loss in sales at Chili’s. Operating income dropped $22M to a loss of $1M. As we discussed earlier, Chili’s operating income only dropped $1.6M.


In June 2020, Brinker International announced that it was rolling out a new virtual brand called It’s Just Wings (IJW). IJW offers wings featuring 11 sauces and comes with curly fries and a dessert option of fried Oreos. At this time, customers can only order through DoorDash or the website When the announcement was made, Brinker stated that there were three reasons for deciding to move forward with the concept:

  • It allows the company to leverage the company’s scale and over 1,000 kitchens with no extra equipment needed (It’s Just Wings will operate out of current Chili’s and Maggiano’s, customers can’t walk in and order in-store).
  • It supposedly does not create operational complexity within the Chili’s system.
  • Brinker management is convinced that It’s Just Wings can deliver the best product at the best value for guests.

On the second quarter conference call, management stated that IJW is generating $3M in weekly sales or $150M a year. While the profit contribution is not yet clear, these results seem to be a good start when you consider Wingstop took over eighteen years to achieve $150M in systemwide sales. Also consider that these results are being achieved without any major marketing support. Management revealed that the brand is seeing high satisfaction scores and strong repeat usage. However, at this point DoorDash is not sharing individual guest contact information so Brinker is not able to register these customers in their loyalty program. If the company is not able to convert these users to the Chili’s loyalty program that would be a disappointment.

Brinker wants to expand its virtual brands to further leverage restaurant operating costs. One possible concept that has been mentioned is called Plattered and Pies, apparently an Italian concept, which makes sense considering Maggiano’s Italian heritage. Another concept that CEO Wyman Roberts has mentioned in the past is a fast-casual Mexican brand, since the Chili’s menu has a significant number of Mexican food options on it. While the ultimate profit contribution from this effort is unclear, it seems that Brinker does not have to pay a commission to DoorDash, which would help profitability long-term.


To bolster liquidity during the worst of the pandemic, in May 2020 Brinker issued 8.1M shares at $18.25 per share, raising over $146M. In retrospect, of course, considering that in FY19 and FY20 the company spent $200M buying back 4.4M shares at an average price of $45.50, it wasn’t such a good trade. On the other hand, a pandemic was not on anyone’s radar.

The company ended Q2 2020 (12/23/20) with $64M in cash and over $594M available on its revolving credit facilities. Year-to-date Brinker has paid down $66M on the revolver and is well on its way to achieving its 3.5X Lease Adjusted Debt to EBITDA goal next fiscal year (from 4.5X last year). The two outstanding notes totaling $650M do not mature until 2023 and 2025. The company continues to produce significant free cash flow. Brinker has always been able to generate significant amounts of free cash flow. Cash from operations for six months  was a strong $130M, down only $12M from last year. Capital expenditures were only $37M, which means the company produced nearly $97M in free cash flow YTD. We would expect the company to resume its dividend payments sometime this year, though the resumption of the $0.38 per share dividend would not be huge at a 2.3% dividend yield.


As operating income from the owned stores has stagnated over the years, income from franchisees has become a significant source of corporate income and profitability. Franchise revenue generates a reported 90%+ profit margin and requires minimal absolutely required capital to grow. We interject here our often stated concern that too many franchisors short change their systems by not investing sufficiently to refresh the brand, as the same time increasing the franchisee burden with required advertising and operational fees. That said, the table below shows how this extremely high margin income stream has become a significant percentage of operating income for the company. Franchise revenue as a percentage of operating income has risen steadily over the last five years, from under 30% to approximately 50%. In fact, in FY20 it represented over 100% of operating income! While there is significant operating leverage ahead for the company stores as the impact from Covid 19 subsides, the growth in franchises, especially internationally, is going to be a significant source of income growth in the future. While the growth rate has recently slowed significantly, there remains a potential to franchise some of the current company store base.

In recent years, Brinker has been adding about 20-30 new franchise stores a year. Most of these stores are being opened internationally. As mentioned, the global pandemic has caused a significant slowdown in this development. In FY19, Brinker opened 23 franchise restaurants and originally projected opening 31-36 in FY20 (It only opened 25). Through the first two quarters of FY21, the company has only opened six (compared to 18 last year). The company is only projecting opening 9-12 franchise restaurants in FY21. This slowdown will negatively impact the growth in operating income for the next two years.


Now that the Democrats have reclaimed the Presidency and the two houses of Congress, the push for a federal $15 minimum wage has begun. We believe that Brinker has done a good job helping out its employees during this pandemic and has earned some goodwill with its front-line workers. For example, last year the company spent $17M on employee support by continuing to pay hourly employees and managers even though they were not working or reaching their profitability goals. However, that doesn’t mean that Brinker will be able to avoid any increase in the federal minimum wage. Brinker does pay above this rate in many of the states it operates in. This topic remains a political football, and was discussed at length on the recent conference call. As we see it, $15 federal minimum wage or not, labor costs move inexorably higher, but Brinker should be able to cope as well as anyone else.


One final material detail within the six month 10Q filing (ending 12/23/20) was the relatively large increase in the deferred gift card balance. Over the last six months it has risen by 20% or $20M, not affecting reported revenues or costs, but inflating cash flow over the period. Success in this area indicates that customers are continuing to find value in Brinker’s offerings and should  contribute to a rebound in sales, but the cash receipt has already been reflected.

CONCLUSION: At beginning of this article

Roger Lipton




The capital markets in January were dominated by the action in Gamestop and other heavily shorted stocks, so the Russel 2000 and Nasdaq indexes were up. The larger indexes, the Dow and S&P were down. Gold bullion was down about 3.2%.  Gold mining stocks, to be expected, were down about double that. However, the year has just begun, the dollar printing presses are preparing to print trillions of stimulus dollars, and the broad background, as discussed below, is moving in favor of the “real money” (i.e. gold, and it’s “little brother”, silver) on almost a daily basis. Additionally, the populist revolution of Robinhood traders, the last few days spilling over to silver, demonstrates how quickly and dramatically mass psychology can turn. It will take more than a group of young traders to move the gold and silver markets sharply higher but the institutions and computer driven trading programs are odd lotters at heart, chasing momentum rather than fundamentals. Gold related securities have had positive fundamentals for a long time now, so it’s just a question of time until the psychology turns. We discuss just below the analogies between Gamestock and the precious metals  before providing an update on the broader fiscal and monetary developments.


Recent short term trading developments seem far removed from precious metals but there are similarities that could come into play.

First, the buyers of Gamestop, from the trading platforms such as Robinhood, were out to punish the fat cat hedge funds that, as they see it, have gotten rich by shorting low priced stocks into oblivion. The new buying from the “little guys” forced the hedge funds that were short to limit losses by covering at increasingly high prices. A critical technical aspect of this situation is that the total short positions had been allowed (by hedge fund custodians such as Goldman Sachs) to be well over 100% of the shares outstanding, called “naked” shorting, and there was no way, until Robinhood suspended trading, that all the shares that had been shorted could be bought back. It should be noted that, while many commentators expressed concern about the price volatility, almost everyone is sympathetic with the little guy, nobody feeling sorry for the hedge funds that took huge losses. At least a couple of multi-billion dollar hedge funds closed their doors in the wake of the unprecedented upsurge.

Here is the application to the gold and silver markets.

First, the prices of gold related securities are thought by many (including ourselves) to be suppressed similarily as Gamestop. In the case of gold, the suppression is by worldwide politicians and their affiliated bankers, who don’t want a rising gold price to bring attention to the huge dilution of the unbacked paper currencies. Gold related securities, especially the gold mining stocks, for no apparent fundamental reason, have therefore participated very little in the asset inflation of the last seven or eight years. The fact is that several large market makers in gold and silver related securities, including futures and options, have paid fines amounting to hundreds of millions of dollars for manipulation of precious metal markets. There has, therefore, been a distortion in the “price discovery” of precious metals, just as we have described for years.

The other important similarity between Gamestop and Gold is the use by the Gamestop short sellers of “naked shorts” as described above. This “paper” that was over 100% of the total “underlying” created a potential demand, once the stock started going up, that was impossible to satisfy except at much higher prices. The term you will hear is “short squeeze”. The number discussed, relative to Gamestop, is that the total short positions amounted to 140% of the shares outstanding, a ratio of 1.4 to 1. NOW GET THIS !  In the gold market, the “paper”, that is composed of derivatives such as options, futures, ETFs, etc., that reside on top of the physical trading of the “underlying” gold is thought to be something like 100 to 1, that’s ONE HUNDRED TO ONE. We don’t mean to suggest that all of that “exposure” is on the short side, but a great number of positions are built on borrowed money, and no doubt a substantial amount is “short”. In addition, buyers (like the “little guys” at Robinhood) in the gold or silver futures market could require “delivery”, rather than a cash settlement, and the short seller would obviously have a bigger problem than just buying back the paper short and taking the loss. They would have to find a seller of physical metal.  It has been reported by dealers of physical gold and silver that there has been a huge increase in demand by retail buyers who expect delivery, not settlement in cash.  This spills over into the derivatives market as physical dealers buy options and futures contract to protect their profit between the time they give a customer their “report” and when the dealer receives, then delivers against payment the physical product.  A final simplistic point is that it takes ten years to bring on stream a newly discovered gold mine. In the stock market, Gamestop could issue more shares at some point and satisfy some of the demand. As it applies to gold, nobody can “issue” new gold bullion overnight. In fact, there are no new large gold mines scheduled to come on stream for years. If potential physical demand is to be satisfied, it has to come from an existing physical holder, and they will likely require a very much higher price.

As always, the timing of a large move in gold related securities continues to be uncertain, but some of the critical catalysts are similar in nature to those that drove Gamestop so dramatically higher. Everyone agrees that there are no possible fundamentals that could justify the recent price of Gamestop, even at $90, up from $20, let alone at a high of $500.  In the case of Gold, we are not suggesting that it should be trading  20-30 times higher, but somewhere between $6,000 and $10,000 an ounce  can be rationally jusified. That could take gold mining stocks up by least 10x and would be adequately satisfying.

With that review of the most current events in the capital markets, below is a continuation of our longer term broad fundamental perspective.


It’s becoming a common refrain: “don’t fight the Fed”, originally coined by the late and great market strategist, Martin Zweig back in the 1980s.

Jerome Powell, Fed Chairman, has made it clear that he will do “whatever it takes” to get back to relatively full employment and balanced economic growth, “balanced” referring to a narrowing of the wealth gap. He has reiterated that he is “not even thinking about thinking about raising interest rates”, signaling that the Fed will continue to expand its balance sheet, keeping interest rates very low, bond markets and the stock markets still supported by the “Fed put”. The Fed’s largesse has no doubt been an important contributing cause of the weakness in the US Dollar, which supports exporting US industries.

A historical footnote: This disillusionment with the US Dollar is similar to 1969 and 1970 when the Europeans, led by France’s Charles DeGaulle, exchanged their predictably diluted Dollars for the US Gold. In the course of just a couple of years, the US Gold holdings were reduced from over 20,000 tons to the 8,400 tons that we still own today.  Richard Nixon famously “closed the gold window” in August, 1971, inflation took off, taking Fed Fund Rates to 18%, and the price of gold went from $35. to $850/oz. by January, 1980. An important corollary is that the amount of gold that  the US, as well as collective worldwide central banks, own, relative to the paper currency outstanding, is today at roughly the same (7-8%) level it was in 1971.

Back to the current situation:

Enter Powell’s predecessor, Janet Yellen, likely to be confirmed by the Senate as new Treasury Secretary. While the Fed and the administration’s Treasury Secretary are theoretically independent of one another, it has long been the case that the Fed is responsive to political concerns. Interest rates have firmed up a bit in the last two weeks, and the dollar has also bounced off its lows since early January.  Some headlines have said that “Yellen does not seek a weaker dollar for competitive purposes”, implying that she will favor a stronger dollar, likely accompanied by higher interest rates. Not exactly. She also said she is in a favor of a “market driven dollar”. All of her remarks indicate that she is agnostic as to where the Dollar trades.

Now let’s see what is going on in the economy and how Fed/Treasury policy will play out.


Retail Sales Are Weak – December sales came in weaker than expected, down 0.7% YTY and November was revised to down 1.4% vs. originally estimated negative 1.1%. Further breakdowns of the overall numbers look even worse. Restaurant sales were down 4.5%, electronics -4.9%, appliances and furniture -0.6%, online sales -5.8% after -1.7% in November.  In essence, aside from restaurant sales, “stuff” in demand due to the Covid seems to have run its course. While we don’t doubt that a certain amount of demand will be released when the Covid-related cabin fever breaks, a case can be made that a traumatized consumer, who have saved or paid down credit balances with stimulus checks may well spend less and save more than was the case before the pandemic. From March through November, 2020, American households saved $1.6 trillion more than a year earlier, while credit balances collapsed at a record 14% annual rate.


Jobless claims in December were 965k, versus an estimate of $790k, in spite of Christmas retail hiring, much higher than November which was revised lower by 3k to $784k.


US real GDP is improving relative to the disastrous 2nd and 3rd quarters, but still down very sharply from a year ago. While it is well accepted that 2020 will be a lost year, economists and commentators are quoting “growth of something like 6% in 2021. Goldman Sachs just raised their forecast from 6.4% to 6.6%, fueled by $1.9 trillion (or something close) stimulus’ effect on disposable incomes and government spending. The reality is, however, that the US economy has been growing at a tepid low to mid 2%+ range for twelve years now. It grew at an average of about 2.3% for eight years under President Obama. In the four years of the Trump administration, with the tailwind of lower taxes, major government deficit spending, less governmental regulation, a trillion dollars of repatriated overseas capital and interest rates very close to zero, GDP grew at an average of about 2.5%. This can fairly be called “the law of diminishing returns”, a lower “marginal return on invested capital” or, less charitably a “misallocation of capital”.

At the same time that economic signals are weakening, inflationary signals are more apparent.

The deficit so far this fiscal year, the three months through December, show a deficit 58% higher than a year ago. Unfortunately the new fiscal stimulus package, proposed at $1.9 trillion, will inflate the government spending again this year. Though the amount is negotiable, President Biden has stated that it is only a “downpayment” on future plans. It seems reasonable to expect this fiscal year’s deficit to at least approach the $3.1 trillion of last year, perhaps even exceed it.

We point out again that the debt increases almost every year at much more than the annual deficit would suggest. This is due to “off budget” spending, and those dollars are in large part borrowed from the social security fund.  The deficit shown above in ’19 was $984 billion but the debt went up by $219 billion more, $1.2  trillion higher in total. The deficit in the Y/E 9/30/20 was $3.1 trillion but the increase in debt was $4.2 trillion. People….these are not  trivial differences, and this huge accelerating debt load will further drag on our economy.

INFLATIONARY SIGNALS ARE APPEARING, though it still may be a way off

First, the parabolic increase in the M2 money supply has to be some cause for concern.

Secondly, reported import and export prices for December are cause for inflationary concern, and this could be one contributing factor to the rise in interest rates and the US Dollar. December import prices were up 0.9% instead of the expected 0.6%. November was revised slightly upward, from 0.1% to 0.2%. Export prices were also up much more than the expected 0.6% in December to 0.9%. November was also revised upward by 0.1% to 0.2%.

Lastly, the seemingly inevitable move to a nationwide $15 minimum wage could also contribute. While it is true that perhaps only 3 or 4 percent of the workforce earn the $7.25 minimum wage, with the lowest paid sector (leisure/hospitality) earning $17/hr, a higher minimum could well provide upward pressure. That $17/hr worker might not be happy earning just over the acknowledged subsistence level, and expect a bit more.  Its also true that employers will attempt to hold the pricing line by absorbing labor increases by way curbing expenses elsewhere, but a great deal of that may already be in place. In any event, we haven’t seen any arguments that a higher national minimum wage will be deflationary.

In spite of the factors provided above, the month to month CPI report doesn’t show much yet, up 0.4% in December but up just 1.4% for the twelve months ending December. The so called core-CPI, less food and energy, was up just 0.1% in December, up 1.6% for twelve months. The Fed, of course, has clearly stated a policy to allow inflation to run higher than 2% annually for a while because it has been under 2% for so long. Keep in mind that, while prices of goods and services (except for major expenses like education and health care) have been stable, asset price inflation has been huge. There is a reason why very rich people are paying over $100M for a residence or a rare painting. They want to own anything but cash. They don’t know what that Van Gogh or oceanfront property will sell for, but they know their cash will lose a lot of purchasing power. As always, inflation is the cruelest tax, affecting the rich the least. They have their land, homes, art, stock and stock options, gold, etc. It’s the lower and middle class that gets hurt, left to wonder why they are making more in nominal terms but have to work harder to make ends meet.

Inflation is in our future, guaranteed, with governments around the world printing currency at an unprecedented rate, with a stated goal of creating of something over 2% for a long time. Short term, however, there is a lot of under-utilized manufacturing capacity, consumer spending is still restrained, and rents (“rent equivalent” is over 25% of the CPI index) are stagnant as city dwellers move out. Education and Healthcare, two of the largest family expenditures, are not in the CPI that is most often quoted by officials. The CPI, also, does not reflect the inflation in asset prices, including speculations such as Bitcoin and Gamestop. For these reasons, the reported CPI may not take off for a while but inflation in the real world is inescapable.


The Federal Reserve and the supposedly independent US Treasury, as a result of at least forty years of fiscal/monetary promiscuity have incompatible masters to serve.

On one hand they are supposed to keep inflation at a tolerable level, these days no higher than a “symmetrical” 2%, At some point that will call for higher interest rates, and normalization to 150-200 bp above the rate of inflation, a range of 3.5-4.0%, providing a “real” return to savers. Unfortunately that would add an unacceptable $800-900 billion of annual interest to government expenses, blowing the deficit even higher, exacerbated further yet because tax receipts would contract as businesses cope with higher interest rates. So….interest rates might edge up, but not by much.

On the other hand the Fed’s second mandate is to foster full employment. This requires relatively low interest rates and continued government fiscal stimulus, which along with a weaker dollar will support US business activities. These policies problematically foster the inflation that they don’t want to get out of control.

The objectives are inconsistent.


When in doubt, the policymakers will pursue the inflation every time. The public, especially the lower and middle class, doesn’t quite understand why they have to work harder and longer to make ends meet.  It is very apparent, on the other hand, when interest rates and/or taxes are going up and unemployment is rising. Far better for the incumbent politicians to stimulate the economy by way of government spending, low interest rates, and a lower dollar. Somebody else can deal with the inflation later on. Paul Volker came along in 1979 and Ronald Reagan stuck with him, enduring the higher interest rates of the early 1980s to squeeze out inflation, but there is no Paul Volker or Ronald Reagan these days and the problems (the deficits, the debt, the tepid economy, the already very low interest rates) are an order of magnitude larger.

The recent runup in speculative securities such as Gamestop could be a forerunner of a similar explosion in gold and gold mining stocks. As discussed above, the disdain for “the fat cats” is driving a populist revolt (with sympathy from both sides of the political aisle) that has driven heavily shorted stocks up by ten times and more in a matter of weeks. The stage could well be set, for a lot of the same reasons as discussed above for precious metal related assets. The Gamestop crowd, at the end of their recent run, broadened their focus to silver and silver miners, and gold rose in sympathy a couple of days ago. As attention is drawn to fiat currency alternatives, the price action of gold, silver, and the miners could start to reflect the compelling fundamentals.

Roger Lipton