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DOMINO’S PIZZA (DPZ) – STOCK GETS HIT! – updated writeup, and conclusion

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Domino’s Pizza (DPZ) – updated writeup, and conclusion


Our last updated writeup on DPZ was on 10/5/18 with the stock at $281, and our conclusion was “We wouldn’t want to be short this fine company’s stock, and DPZ has been a fantastic holding over the last decade, but we have a feeling that “the easy money has been made”.

Today, nine months later, worth  9-10% in terms of valuation relative to annual EPS growth (12%-14%), and combined with the 10% lower stock price, DPZ is valued about 20% less, relative to the fundamentals, than at 10/5/18. Affected, to be sure, as they are in the short term by the competitive effect of the new delivery aggregators, we believe that is now adequately reflected in the stock price. We believe that Domino’s is positioned as well, or better, than the other major restaurant brands, is valued no higher (and sometimes less), and therefore suggest that an opportunity exists for long term investors.

COMPANY OVERVIEW (Per July 2019 Investor Presentation)

Domino’s, with more than 16,314 locations, as of 6/30/19, in over 85 countries around the world, is the largest pizza company in the world based on global retail sales. Founded in 1960, Domino’s roots are in pizza delivery. In recent years, however, a significant amount of sales have come from carryout. On average, Domino’s sells more than 2.5 million pizzas each day. Domino’s business model is simple – they handcraft and serve quality food at a competitive price with easy ordering access and efficient service enhanced by their technological innovations.

Domino’s generates revenue and earnings by charging royalties and fees to their franchisees, 5.5% of sales domestically and 3% internationally. The Company also generates revenue by selling food equipment and supplies to franchisees, primarily in the U.S. and Canada, and by operating a number of Company owned stores. In Domino’s international markets, they generally grant master franchises for a geographic area. These master franchises are charged with developing their geographical area and they may profit by sub-franchising and selling food and equipment to these sub-franchisees as well as by running their own stores. Domino’s pioneered the pizza delivery business and has become one of the most widely recognized consumer brands in the world.

Domino’s business model yields strong returns for their franchise owners and Company owned stores. Historically, Domino’s has returned cash to their shareholders through dividend payments and share repurchases.

LONG-TERM BUSINESS STRATEGY (Per July 2019 Presentation and 2018 10K)

Begun in 2009, Domino’s first priority was to reinvent their core pizza, and they relaunched the brand by introducing a new recipe for their signature product. Next, they improved existing products and/or introduced new items that complimented changes to the core pizza.

Secondly, in 2013 they launched the program to reimage the stores to be more attractive for carryout customers – creating the “Pizza Theater” design which allowed customers to see the process of pizza making. This has been an effort to respond to market studies (from NPD/Crest) that indicates that the take-out business is much bigger than delivery. In 2017, delivery business equaled over 1 billion occasions whereas carryout was over 2.5 billion occasions. Since Domino’s carryout focus was launched in QTR-1 2011, by Q1’18, Domino’s share of carryout had risen from 7.5% to 14.4%. However, since carryout necessitates Domino’s to be closer to the customers, the Pizza Theater remodel was introduced in 2013 to make carryout more convenient. By the end of 2018 the majority of US and international stores had completed this remodel. Also emphasized, starting several years ago, was a realignment of the US franchise system (called the Fortress program) into more concentrated multi-unit operating hands. Since 2016, Domino’s U.S. franchise base count has contracted from 1,300 to about 800 owners. This new alignment continues to drive growth with multi-unit franchisees who share the corporate vision

Thirdly, a priority continues to be an aggressive investment in technology (which began in 2010) to be the leader in making connections with consumers through technology that exceeded their expectations. This became an aggressive investment in building digital platforms and eventually data analytics in-house. In 2016 Domino’s developed its own digital platform to manage internal operations and customer-facing actions all with the goal to simplify ordering and payment processing and enable order tracking on virtually any communication device. The system is called GOLO (Global Online Ordering). Together with a sophisticated loyalty program (launched in 2016), the platform provides a rich source of data for its robust marketing initiatives.


As of its 2018 10-K Report, Domino’s operated and franchised 15,914 units globally generating more than $11 billion, making them the largest pizza chain in the world, based on global retail sales, as well as the number one pizza delivery company. Approximately one-half (49%) of the global sales are generated by 5,876 domestic stores (5,486 franchise and 390 Company). The remainder (51%) is produced by 10038 franchised stores in over 85 markets around the world. Additionally, $1.94 billion was generated from Domino’s supply chain.

The following table provides summary financial statistics over the five years ending 12/31/18.

Domino’s revenue, as shown above, is generated from multiple sources: domestic franchise fees (5.5% of franchisee sales), international master franchise fees (3.0%), domestic and GOLO digital fees, and supply chain and Company-owned store segment.

UNIT LEVEL ECONOMICS (Per July 2019 Investor Presentation and 2018 10K)

From the FDD and the above sources, we estimate AUV’s of Company units are about $1.25M $1.25M (or about $833/sq. ft. assuming the average store size of 1,500 sq. ft.) and domestic franchised units AUV’s are about $1.05M. Disclosed average store level EBITDA of domestic franchisees is about $141K – up from $61K in 2009 or a store level EBITDA margin of 13.4%. (These figures are presumably net of royalty fees and advertising fund contributions.) The cash investment for leasehold improvements, furniture, fixtures, equipment, signage for a new store (provided from Domino’s 2017 Franchise Disclosure Document) is about $410K. Accordingly, the $141K store level EBITDA would represent a store level cash on cash return of 34.3% for a domestic franchised unit.

The supply chain provides pricing and distribution scale and consistent uniform quality ingredients to participants. It operates 18 regional dough manufacturing and food supply chain centers in the U.S. It also operates centers in Canada and leases a fleet of more than 500 tractors & trailers.

SHAREHOLDER RETURN (Per 2019 Investor Presentation)

Since 1998 the Company has been structured with a leveraged balance sheet and has completed a number of recapitalization events. The Company’s most recent recapitalization transaction (in 2018 and early 2019) primarily consisted of the issuance in 2018 of $825M at a blended rate of 4.2% and the repurchase of about $600 million of common shares, after repurchasing $1.06B worth in 2017. Remaining on the stock repurchase authorization is $150M.  Following the most recent recap activities, the Company has about $3.5 billion in total debt, which is approximately 5.8x trailing EBITDA.

While DPZ has been in a “trading range” over the last twelve months, the long term stock performance has been outstanding, one of the very best within the restaurant industry. There is a common stock dividend that amounts to a current yield of about 1%.


While same store sales were several points less than analysts expected, and up at lower rate than in recent history (as you can see from the table above, Domino’s basically continued its outstanding performance in Q2’19, with domestic same store sales up 3.0%, international up 2.4%. It was the 100thh consecutive quarter of int’l SSS growth, only the 31st domestically. Diluted EPS was up 23% on a GAAP basis and 19% “adjusted”.  Income from operations (pretax) was up a more modest 10.3%, income before taxes, after lower interest, was up 16.2%, net income, after a lower tax rate, was up 19.3%, and EPS, with fewer shares outstanding, was up 23.0%. There were 200 net new stores added to the system, 158 internationally and 42 domestically.

The Conference Call provided some additional operating details.

While both US sales and international sales were up, it was driven by ticket growth and the comparison against strong sales in ’18. The global total retail sales growth of 5.1% would have been 8.4%, adjusted for the strong US dollar. Management emphasized on the conference call the effect of new competing delivery aggregators (Doordash, UberEats, etc.) who are advertising aggressively as they fight for market share. Management does not expect any near term reduction in this competitive incursion.  On the positive side, net new unit growth continued strong with 200 net new openings.  The company continues to invest in technology, with $110-120M to be spent in ’19, similar to ’18. Still, the first half of ‘19, after capex, generated over $175M of free cash flow. A new GPS tracking program will be introduced by the end of ’19 and an experimental pilot program, in Houston this fall, will test self driving delivery vehicles. A heavy emphasis continues to be made with the Points for Pies loyalty program.

Though the most recent couple of quarters have been at the low end of long term guidance, especially for same store sales growth, management reiterated their 3-5 year outlook for growth in global net units of 6-8%, US and Int’l SSS growth of 3-6%, and total Global Retail Sales growth of 8-12%.

CONCLUSION: Provided at the beginning of this article.

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David Rosenberg, one of the most highly regarded investment strategists, and not a perennial “gold bug” by any means, just this morning wrote “WHY GOLD HAS ALLURE”.

(1) The Fed is set to cut rates, which will send the fed funds rate into negative territory in real terms.

(2) Geopolitical risks, including Iran’s behavior, are increasingly bothersome.

(3) Trade talks with China do not seem to be making progress, and Beijing has “tools” to hit back, including the ability to weaken their currency and/or continue reducing their US Treasury holdings.

(4) The economic war between the US and France is heating up, as Emmanuel Macron imposes a tax on American large cap tech companies. At the same time, trade tensions increase between the US and Japan, as well as South Korea.

(5) The Chinese economy, as well as the entire Asian economy, as clearly in retreat, adding to the prospect of worldwide monetary ease.


In terms of supply of demand for physical gold:

(1) Russian and Chinese Central Banks continue their steady accumulation.

(2) India,  between their central bank and their population,  perennially the second largest accumulator of physical gold,  imported 78 tons in May alone, running 49% ahead of a year earlier.

(3) The price charts, for gold as well as gold mining shares, indicate much higher prices. Gold bullion has broken out to a five year high, though still 25% below the 2011 high. The gold mining shares are at three year highs, still 60% below the 2012 high.


There are never any certainties, especially in the short run, but it seems like both fundamental and technical considerations are in gear, and indicating much higher prices.

Roger Lipton

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We will know more specifically, as companies start to report results,  in the next several weeks how the second calendar quarter developed relative to sales and traffic. Anecdotally (see Postscript below), however, we hear nothing particularly encouraging. The late spring early summer numbers that showed sales up low single digits and traffic down low single digits seems to be continuing (see Postscript below), which has basically been the case for the last two years. Quick service restaurants that provide a midday (food) fuel stop seem to be holding up a bit better than full service casual dining companies that are required to provide an experience to help  justify the much higher average ticket. While wage rates are moving higher, discretionary income is not. Five dollars is the favored price point at lunch, but when a family of four sits down for a full service meal at Applebee’s, it is going to run upwards of $50.00 with tax and tip and that is a noticeable after tax expenditure. The weather was unsettled in many parts of the country in the last couple of months and that can also affect traffic by a point or two which is the difference between “strong”, “mediocre”, or “weak” sales these days. A constant drumbeat from newscasters about tariffs is affecting not only the business world but dining customers who understand that budgets have to balance at some point. National economic discourse, where debt doesn’t matter to the existing administration and unlimited social programs are the mantra for the Democratic contenders, is no doubt further unsettling relative to consumer confidence. Without question, for any number of reasons, the economy is slowing. Sales and traffic trends are unlikely to buck this reality, and we will let you know when they do.

From an operator’s standpoint: they continue to be pleased by a more business friendly environment. However, you can’t pay the rent with an intangible such as “less regulation” and lower taxes was last year’s story. Wages move inexorably higher, and there is no material expense that is moving lower. The only thing that can help restaurant margins is higher sales, and one or two points of sales improvment is not enough to overcome higher costs. Our expectation, therefore, is for more of the same as Q2 reports are made public. The better operators will come close to maintaining margins, but most year to year comparisons will not look good. The lower tax rates last year allowed many companies to show strong year to year after tax earnings, though pretax operating earnings were down in many cases,  but that will not be repeated in 2019. Stock repurchases could help some companies, but fewer than last year as some companies have already leveraged their balance sheets.

We leave you with some good news. (There had to be something, right?) Though too many operators are sitting with real estate that is fully utilized only on Friday and Saturday nights, there remains a great deal of opportunity relative to food consumed “offsite”. Curbside pickup, takeout, and catering all offer opportunity, though they are different business to a degree and must be managed accordingly. At least you don’t need more square footage. Furthermore, margins on delivery service should start to improve as Doordash, Ubereats, Grubhub and the others compete for business. Delivery is a necessary evil these days, but restaurant companies can’t afford to cut 20-30 points out of their gross margin. Many operators have suggested that delivery business is largely incremental. We accept that delivery is incremental, in part, but it stands to reason that if a customer has food delivered tonight, they are far less likely to visit that same restaurant tomorrow night. Delivery will be become more profitable (at least less of a burden on margins), and delivery companies will experience margin contraction, which they may or may not be able to offset with operating efficiencies.

Roger Lipton

P.S.  No longer “anecdotal”. Just received the highly regarded Miller Pulse survey results through June. Headline is positive (“June Sales Cap Off a Solid Second Quarter”) but details show more of the same. Overall restaurant same store sales rose 2.0% in June, up 2.1% for Q2 as a whole. The QSR segment was up 2.3% and Casual Dining was up 0.4% in June. The 2.0% result in June was, as Miller Pulse put it “a model of consistency, remaining in the narrow 2.0-2.3% range since the dip in February”. Importantly, “traffic, as is the norm these days, was weak again at -1.7% for the month”. In summary, the numbers confirmed our anecdotal conclusions.


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The general capital markets were strong in June: equities because investors came to the conclusion that the Fed “put” is back in place, and bonds because the Fed tightening (“QT”) is behind us. Gold and the gold mining stocks were strong as well, for lots of overdue reasons, a couple of which  are discussed below. Gold bullion was up 8.0% and gold mining benchmarks were up 18.4% (the average of ETFs,  GDX and GDXJ) and 16.2% (the average of precious metal mutual funds (TGLDX, OPGSX, and INIVX) respectively. Our  portfolio was up in line with the benchmarks. The  subject matter below describes only a couple of the many reasons that justify the recent overdue action in gold and the gold mining stocks.  Reminds me of the song “we’ve only just begun”.


The most important justification for our our ownership of precious metal related securities is the 5,000 year history of gold being the safest and surest protection of purchasing power. Gold is a unit of exchange and a store of value. There has never been an unbacked “fiat” currency that has survived. It is just a question of time until the politicians of the day dilute their currency into oblivion and today’s politicians (of both parties) are clearly on the same path. Our portfolio represents gold as the safest currency and we believe that the history of the quantity of gold owned by Central Banks relative to the amount of paper currency they have created (M2 or “FMQ” as shown on the below chart) is indicative of where we are at the moment. You  can see from the chart below that gold bullion relative to M2 was at a low in 1970 (before gold went from $35 to $850/oz. and 2000 (before gold went from $250 to $1900). Lo and behold, gold is at that level again today. In terms of a price objective, we believe $850, the top of the parabola in 1980, was too high. Probably $300-$400 was more appropriate. The move from $250 in 2000 to $1900 was more justifiable, based on our standard that the gold owned by Central Banks should be in the range of 25-40% of the paper currency out there. This is the range between 1790 and 1913, before the creation of Central Banks, when inflation was zero and real GDP growth averaged 4%. This is how we conclude that an appropriate price of gold today is perhaps $5-7000 per oz. Of course, this price objective is moving higher all the time as more paper currency is created. Two or three years from now, the objective could well be $9-10000/oz. We conclude that just because gold has gone from a low of $1050 a couple of years ago to $1400 now, we will not be tempted to lighten up any time soon. If we had a stock that had gone from $10.50 to $14.00 and we thought the upside was north of $50.00 per share, that would be a lot of money to potentially leave on the table. Don’t forget that the mining stocks, depressed as they still are, could move 2-3x as much as the gold price.

We like to keep our letters short, but since we recently reviewed the “state of the union” in terms of the current deficit, we present the information below. This part of the puzzle is important because it indicates how much new paper “fiat”, unbacked, currency must  be created to fill the deficit gap. We predicted a few weeks ago, when we published this information here that the deficit for the current year would be over $1 trillion. The Congressional Budget Office has now confirmed our work.


There are about 250 persons working at the Congressional Budget Office, according to their website. Their budget, according to Wikipedia was $46.8M annually, as of 2011, probably higher now. Their projections are widely quoted, and presumably relied upon by policy makers in our administration. The CBO updates their projections on an irregular basis, sometimes several times per year, sometimes only once per year. The update from 5/2/19, only two months ago has now been adjusted upward. Considering how far off their past projections have been, and the questionable assumptions within their analyses, it is a wonder that anyone takes these numbers seriously, and the latest installments provide a good example why not.

A brief two months ago, on 5/2, based on relatively firm numbers through March, and presumably pretty reliable indications through April, the CBO predicted that the US operating deficit through the current fiscal year, ending 9/30/19, would be $897 Billion. April and May results are now reported, and the table below shows the monthly numbers for the last two fiscal years.

You can see that last year’s total operating deficit was $779B, and the total debt went up by $1,271B (due to “off budget” items, the largest of which is the social security shortfall). The projection two months ago was for the current year’s deficit to be $897B, up 15.1% from fiscal ’18. The total debt is not projected, and you can see that number frozen the last few months since our administrators have already exceeded the formal debt “limit”.

The April result, with tax receipts generating the surplus (normal for April) of $160B, which was lower than the $214B surplus a year earlier, so the cumulative deficit through April (shown at the extreme right of the table) was up 37.6%. They May results showed a $206B deficit, up from $147B, so the cumulative deficit is up 38.6% year to  year. Last  year, the monthly deficits from June through September totaled  $246B. The CBO projection, on 5/2, of $897B for the ’19 year would allow for only $158B the rest of the year, down 36% from the last four months of fiscal ’18 – which was ridiculous.

We don’t have 250 professionals pushing numbers here but during the current year:  December’s YTY deficit reduction (which some might have considered hopeful) was on an  immaterially low base. March’s improvement was material, but March and April combined (tax season) showed a $13B surplus this year versus $5B in fiscal ’18, which is an immaterial change. May bounced back to a 40.1% increase YTY in the deficit. You can see, along with ourselves, that the last four months would have to be 36% lower than last year, improbable, to put it mildly.

Our projection, with 247 professionals fewer  than the CBO was for the following, and we published this conclusion several weeks ago: The last four months would provide a deficit about  40% higher than a year ago ($247B), which would provide for $346B  on top of the current $739B, for a total of $1.08 Trillion. This is 20% higher than the $897B projection made by the CBO with only five months left in the fiscal year. We shouldn’t have to point out that: if the CBO was 20% off the mark with five months remaining, their projections ten years out don’t have a great deal of credibility.

Furthermore: the total debt, whether or not the debt ceiling has been formally raised, will have expanded by $1.3-$1.5 Trillion, bringing it close to $23 trillion.

We have presented a great deal of information in this letter, and our conclusions are justified by much more. The biggest single reason that gold and gold mining stocks are going up in price is that they never should have gone down in the first place.  All the reasons we have discussed over the last six or seven years continue to intensify.

Roger Lipton


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Dunkin’ Brands reported their first quarter in early May and the stock has been moving higher ever since, trading near a record high, which in and of itself encourages more buying. Our full writeup, elaborating on our summary provided last week,  is provided below.


Earnings and cash flow generation has been consistent but up only modestly in recent years and likely to remain so. DNKN stock is trading near its high not because fundamental performance has been outstanding, but because (1) institutional investors are embracing an “asset light” model with presumably “free” cash flow (2) The stock market generally has been strong, and investors are reluctant to sell good performers (which DNKN has been) because the proceeds have to be reinvested and cheaper stocks are hard to find (3) the company, led by a new CEO, tells a promising story about operating initiatives (4) a great deal of stock has been repurchased, especially the $680M worth in ’18, which supported the stock and helps to increase EPS.

One could question (and we have) the wisdom of spending a fortune to repurchase shares at over 20x expected earnings and close to 20x trailing twelve months EBITDA, far from a bargain valuation compared to roughly mid-single digit growth in earnings and cash flow. This is  especially questionable when the franchisees (who pay the bills at the end of the day) have “needs”. Perhaps the presumed “free cash flow” is not so free over the long term, especially when $3 billion of debt has to be repaid. Of course, Modern Monetary Theory doesn’t worry about the repayment of debt  🙂

Management admits that the balance sheet has been fully leveraged, with debt at over 5x trailing EBITDA so repurchases of stock will be more modest in the future and earnings per share will not benefit as much as in the past. The timing of the acceleration in US unit growth and same store sales remains to be seen. International progress has been offset by Baskin Robbins weakness so the outlook revolves around the performance of US franchised Dunkin’ locations.  We haven’t noticed that Starbucks or McDonald’s have backed down from the battle for market share. In summary,  we are not inclined to chase the breakout of DNKN common stock.


The first quarter was better than calendar ’18 as a whole. While international locations are the growth element, it is relatively immaterial  ($14M of segment profit in calendar ’18 vs. $466M  of segment profit from Dunkin’ US and $68M from Baskin Robbins) and partially offset by less profitability from the Baskin Robbins segment. The heart of this company is the US Dunkin’ store franchise system, which showed comp sales of 2.4% in Q1. (calendar ’18 was up 0.6%).  In Q1’19, consolidated revenues were up 5.9%, operating income was up 12.8%, net income was up 4.3%, adjusted net income was up 2.8%, On fewer shares outstanding, diluted earnings per share was up 8.1%.

There are lots of operating initiatives taking place here, which we will detail next week, but for the moment we will focus on the latest guidance for calendar ‘19, which remains almost exactly the same as that provided a few months ago with the yearend ’18 report, remains far from exciting and consistent with recent results. Comps will be at low single digits at US Dunkin’ and BR locations. Dunkin’ US net new units will be at the low end of 200-250 stores, contributing $130M of systemwide sales. (34 net new locations opened in Q1). Consolidated revenues will grow low to mid-single digits. SG&A expenses will be reduced at a mid-single digit pace. Operating and adjusted operating income will be up by mid-to-high-single digits. GAAP diluted EPS will be $2.63-$2.72 (previously $2.74 to $2.83) and diluted adjusted EPS will be $2.94-$2.99. In essence: a flattish performance compred with $2.90 per share in calendar 2018. According to Bloomberg, analyst consensus is $3.24 in 2020, up 8% from the $2.99 consensus for 2019


Net Cash Provided by Operating Activities was: $282M in ’16, $283M in ’17, $269M in ’18

Net Income After Taxes was $175M in ’16, $272M in ’17, $229M in’18

Additions to property, equipment and software: $21M was spent in ’16, $21M in ’17, then $52M in ’18.

$1.4 billion of long term debt was added in ’17.

Repayments of long term debt were $25M in ’16, $754M in ’17, $32M in ’18

Stock repurchases were : $55M in ’16, $127 in ’17, $680M in ’18

Dividends paid were: $109M in ’16, 117M in ’17, $114M in ’18

Total Effect on Cash for year was -275M in ’16, +572 in ’17, -538M in ’18

Bottom line, looking at the big numbers: – Cumulatively over 3 years, Total Net Income After Taxes was $676M. Adding back depreciation of a total of $136 provided $812M of after tax cash flow. Total capex (reinvestment in the system) was $94M ($52 of which was spent in ’18) and dividends were $340M, leaving $378M of “free cash flow”. Stock  repurchases amounted to a cool $862M, exceeding free cash flow by $484M and that was financed by incremental long term debt of $589M ($1.4 billion of new debt less repayments of old debt). Cash in hand at year end went from $432M at 12/31/16 to $1.11M at 12/17 to $598M at 12/18.

COMPANY OVERVIEW (2018 10-K):  Dunkin’ Brands Group is one of the world’s leading franchisors of Quick Service Restaurants (QSR) serving hot and cold coffee and baked goods as well as hard ice cream. They franchise restaurants under the Dunkin’ Donuts and Baskin-Robbins brands. They have over 20,900 points of distribution (retail stores) in more than 60 countries worldwide.

Dunkin’ brand is a 100% franchised business model and they believe that this model offers strategic and financial benefits; such as being able to focus on menu innovation, marketing, franchisee coaching and support, and other initiatives to drive overall success of their brand. Financially their franchised model allows them to expand points of distribution (retail stores) and brand recognition with limited capital investment by the Corporation.

Dunkin’ divides its business into four segments: Dunkin’ Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins U.S., and Baskin-Robbins International.

Dunkin’ Brands History:   – Both of Dunkin’ Brands, Dunkin’ Donuts and Baskin-Robbins, history dates back to the 1940’s. Baskin-Robbins and Dunkin’ Donuts were individually acquired by Allied Domecq, PLC in 1973 and 1989, respectively. The Brands were organized under the Allied Domecq Quick Service Restaurant subsidiary being renamed Dunkin’ Brands, Inc. In 2004, Allied Domecq was acquired by Pernod Ricard SA. In March of 2006 Dunkin’ Brands, Inc. was acquired by investment funds affiliated with Bain Capital Partners LLC, the Carlyle Group, and Thomas H. Lee Partnerships LP through a holding company incorporated on November 2005 and was later renamed Dunkin’ Brands Group, Inc. An IPO in July 2011 brought Dunkin’ public once again. completed.


Dunkin’ Donuts – U.S. – Dunkin’ Donuts is the QSR leader in donut and bagel categories. Dunkin’ Donuts is also a national QSR leader for breakfast sandwich servings. Since the late 1980s, Dunkin’ Donuts has transformed itself into a coffee and beverage-based concept and is a national QSR leader in servings in the hot regular/decaf/flavored coffee category and the iced regular/decaf/flavored coffee category, with approximately 1.7 billion servings of total hot and iced coffee annually. Over the last ten years, Dunkin’ U.S. systemwide sales have grown 5.4% compounded annually and total Dunkin’ U.S. retail stores grew from 6,412 to 9,419 as of December 29, 2018. Approximately 85% of these locations are traditional restaurants made up of end-cap, in-line and stand-alone restaurants; many with Drive Thru. In addition, Dunkin’ Brands has special distribution opportunities (SDO’s) such as full or self-serve kiosks in offices, hospitals, colleges, airports, grocery stores, wholesale clubs and various small footprint properties.

Baskin-Robbins – U.S. –  Baskin-Robbins is one of the leading QSR chains in the U.S. for servings of hard-serve ice cream and sells a full range of frozen ice cream treats such as cones, cakes, sundaes, and frozen beverages. Baskin-Robbins U.S. segment has experienced comparable store sales growth in six of the last seven fiscal years. Baskin-Robbins enjoys an unprecedented Brand recognition in the U.S. known for its “31 Flavors” and its popular “Birthday Cake” program.

International Operations

 Dunkin’ Brands International operations is primarily based on joint venture and country or territorial license arrangements with “master franchisees” who operate and sub-franchise within their licensed areas. Dunkin’ International is predominantly located in Asia and the Middle East. 2018 International systemwide sales were $2.2 Billion which represented approximately 19% of Dunkin’ global sales. As of December 28, 2018, Dunkin’ had 3,452 International restaurants/points of distributions, up from 2,405 in 2008. As of December 2018, there are 5,491 Baskin-Robbins in their International market base which represents $1.5 Billion in sales.

SOURCES OF REVENUE (2019 QTR-1 10-Q): – For QTR-1 ending March 30, 2019, Dunkin’ Brands had total revenue of $319,091,000. Dunkin’s revenue is generated from primarily five sources: (1) franchise fees and royalty income, (2) advertising fees and related income, (3) rental income, (4) sales of ice cream and other products, (5) other revenues. Systemwide sales for the period ending March 30, 2019 were $2.768 Billion compared to same period last year of $2.660 Billion; a 4.1% increase.

Other noteworthy QTR-1 highlights, further described under Recent Developments:

  • Dunkin’ U.S. comparable store sales grew 2.4%.
  • Baskin-Robbins U.S. comparable store sales grew 2.8%.
  • Dunkin’ added 34 net new locations in the U.S. and a total of 8 new combos of Dunkin’/Baskin-Robbins locations globally.
  • Revenues increased 5.9%.
  • Diluted EPS increased by 10.5% to 63¢.

STRATEGIC INITIATIVES (Updated – Source: QTR1 10-Q March 30, 2019; Earnings Call Slides):

Dunkin’ Brands provided updates on their management’s strategic initiatives during their Earnings Call Presentation on May 2, 2019.  Dunkin Brands’ Slide Presentation offers a detailed look into the Company’s initiatives designed to balance near-term operational initiatives with longer term strategic outlook in an effort to modernize the Dunkin’ Brand while staying true to its core culture.

Dunkin’ USA:

 New Unit Growth Plan: Dunkin’ USA’s new unit growth plan was updated to include the strategic initiative of offering different development strategies for different markets. Regional focus will be based on maturity and store penetration. The U.S. is broken down as follows: The Northeast – a mature market with very heavy penetration. Its development plan is to transform/optimize existing assets. The East market – a mature market with heavy penetration. Its development plan is incremental growth to drive convenience. The West market is younger, with shallow penetration. Its development plan is one of accelerated growth to establish the Brand presence. Lastly, the Frontier market, which consists of the northwestern U.S., has no development as yet.

  • 2019 Target: 200-250 new units with the majority being the Next-Gen design.
  • 3 to 5 Year Target: 200-250 new units annually. 80% of new development outside of core markets.

Restaurant Excellence: This strategic initiative is centered on improving the guest experience through restaurant simplification, new technologies aimed at improving the ordering process/speed of service, and new programs designed to eliminate unnecessary procedures hindering a seamless transaction. A refocus on training at all levels is designed to drive effective customer interaction.

Influence Brand Relevance: Continuing the reimaging of existing locations to the Next-Gen store design. This new design is aimed at improving guest and crew experience. The main features are:

  • Dedicated Mobile Order & Pick-Up area.
  • Front facing bakery cases which promotes impulse purchases.
  • A Tap system to serve iced beverages.
  • Relaunch of the espresso platform.
  • Transition from foam cup to double walled paper cups.

Menu Innovation: Going forward, menu innovation is expected to be led by beverage innovation. From a food perspective, value messaging around sandwiches and wraps is resonating with customers in test markets. Beverage attachment rates are helping to drive higher average tickets.

Unparalleled Convenience: Upgrades to the Drive-Thru experience that seek to improve guest convenience. The Company’s digital efforts also focus on driving members into the Perks Loyalty Program (which stands at 10.6 million incremental members in 2018).

Brand Accessibility: Increased consumer accessibility through the continued development of points of distribution.

Restaurant Excellence: One of the vital components is menu simplification.

The Company has rolled out a simplified menu in many of its core markets and continued this roll out during the first quarter. A 1% improvement in COGS (largely driven by lower waste), a 1% improvement in labor margins, and a 2% increase in order accuracy were seen. The reduced menu simplifies operations, saving approximately 90 minutes/day/store.

New store equipment and technology: Company is focusing on opportunities to help ease the impact from operational bottlenecks and ongoing labor inflation through the introduction of label machines for drinks, machines that help to calibrate coffee equipment, and other speed/accuracy solutions. Other technology solutions include point of sale system improvements that support conversational ordering (improving speed/accuracy of order taking), cloud-based pricing, seamless integration with delivery partners, zero footprint training,  improved labor forecasting, and inventory/cash/labor scheduling management.


Raising the Bar: Initiatives include:

  • Improving guest experience.
  • Increase value offerings.
  • Enhance convenience through:
    • Digital in-store ordering.
    • Home delivery with DoorDash.
  • Expanding test of Moments Store Design.
  • Optimize restaurant base through strategic closures and transfers.


Focus on strategic markets and long-term growth opportunities.

  • Enhance in-store experience.
  • Establish strong delivery infrastructure.
  • Grow nontraditional channels.
  • Increase Brand accessibility and convenience.
  • Enhance Brand relevance.

 BASKIN-ROBBINS – STRATEGIC PLANS: – The Company’s goals for Baskin-Robbins is to “Raise the Bar” of total operational activities, maintaining the premium the high quality reputation of Baskin-Robbins heritage. To that end it has overhauled marketing plans and is experimenting with more attractive franchise offers, including multi-unit offers to its top performers. The principal current challenge with BR is to grow its U.S. segment once again.


Dunkin’ Brands continues to stabilize its international businesses and, along with its franchisees, is focused on driving traffic through value offerings, product innovation, and making the brands more easily accessible through digital technologies.

Delivery continues to be an opportunity for both brands, and the Company is working with its partners to further roll out delivery programs, based on the success that its Middle East and Asia franchisees are experiencing.


Dunkin’ USA:  Low single digit SSS, Low end of 200-250 net new units,  $130 Million        systemwide sales for new units opened in 2019.

Baskin-Robbins:  Low single digit SSS, 10 net unit closures.

International:  Flat Ice Cream margins, Flat JV net income.

  • Other financial targets:
    • Medium to single digit reduction to G&A
    • 28% effective tax rate
    • $2.63 to $2.72 GAAP diluted EPS
    • 84 Million full year weighted – average shares outstanding
    • $122 Million in net interest expense
    • $40 Million in capital expenditures

SHAREHOLDERS’ RETURN (Source – QTR-1 10-Q May 2019; Press Release May 2, 2019):

 Cash Dividend Declared:  The Board of Directors declared, payable on June 12th,  a quarterly cash dividend of .375¢ per share.

Shareholders’ Deficit – Equity Incentive Plans (Source QTR-1 10-Q May 2019):

 During the three months ended March 30, 2019, the Company granted stock options to purchase 619,306 shares of common stock and 50,287 restricted stock units (“RSUs”) to certain employees. The stock options vest in equal annual amounts over a four-year period subsequent to the grant date and have a maximum contractual term of seven years. The stock options were granted with a weighted average exercise price of $72.28 per share and had a weighted average grant-date fair value of $12.54 per share. The RSUs granted to employees, vest in equal annual amounts over a three-year period subsequent to the grant date and had a weighted average grant-date fair value of $69.13 per unit.

In addition, the Company granted 47,431 performance stock units (“PSUs”) to certain employees during the three months ended March 30, 2019. These PSUs are generally eligible to cliff-vest approximately three years from the grant date. Of the total PSUs granted, 20,681 PSUs are subject to a service condition and a market vesting condition linked to the level of total shareholder return received by the Company’s stockholders during the performance period measured against the companies in the S&P 500 Composite Index (“TSR PSUs”).

Relative to the stock repurchase program: After repurchasing $650M of common stock in the open market in 2018, only $129,000 worth was bought in Q1’19.

Relative to the balance sheet, it is noteworthy that on April 30, 2019, $1.7 billion of new debt prepaid debt from 2015, with new repayment dates of  4.75 years ($600M), 7 years ($400M), and 10 years ($700M). The new annualized net interest expense, on current total debt of $3.1B is approximately $122M  with a blended rate of 3.978%.



Roger Lipton



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Fast Casual Pizza Segment

MOD Pizza

MOD Pizza, based in Bellevue, Washington was founded in 2008 by Scott and Ally Svenson, who had built two successful food service companies while living in England. The first, Seattle Coffee Company, was sold to Starbucks in 1998, and Scott stayed on as President of Starbucks Europe. The Svensons were also involved with the founding of Carluccio’s Ltd, a chain of Italian restaurants, which went public in the UK in 2005 and grew to 35 locations by 2008.

After returning home to Seattle with their four children, the Svensons foresaw the emergence of “fast casual” pizza, a segment which didn’t previously exist. To our knowledge, MOD was the “first mover” in this regard. The Svensons started MOD pizza with the intention of making a positive social impact in the communities it serves, and a “people first” culture. The MOD experience provides customers the opportunity to create and customize their own pie for one price as they move through the ordering line choosing their ingredients. The pies are rapidly cooked in a 700-degree oven and served super-fast in about 8 minutes (including both preparation and cook time).

Rapid Store Growth accompanied by Substantial Capital Infusions

The first location opened in downtown Seattle in 2008. The second location opened in early 2010 and there were five locations, in a variety of settings by late 2011. With about $7 million of expansion capital provided by the Svensons and other early stage investors over the 2012 and 2013 fiscal years, expansion took the chain to 14 locations by year-end 2013. MOD raised an additional $14 million in March of 2014, and by year-end 2014 there were 31 stores in AZ, CA, CO, OR, TX, and WA, all but one (franchised in CO) were company operated. During calendar 2015, MOD closed an additional funding round of $45 million and grew to a total of 92 locations, 80 company operated and 12 franchised (having signed a small group of experienced multi-unit operators). During calendar 2016, $77 million of additional capital was raised and 100 net new locations were opened, bringing the total to 192. During calendar 2017, $33 million of additional equity was raised, led by previous investors, bringing the total equity raised to about $179 million, and a $40 million credit facility was also established.  Net new openings in 2017 totaled 110 systemwide, building on its prior year base by an impressive 57%. During calendar 2018, 102 net new units were opened (on a base of 302), 77 by the company, 21 by franchisees, and 4 by their UK JV partner. Just announced in May of 2019, MOD raised an additional $160M in equity funding led by Clayton, Dubilier & Rice, a private equity firm, bringing the total equity raised to $339 million.

Within the 404 total units at the end of 2018, the Company operated 302 locations with franchised partners operating 93 and their UK JV partner operating 9. MOD is now represented in 28 states and the U.K., after entering one new state (AL) during 2018. System-wide sales were $398 million in 2018 (a YTY increase of 45%), netting MOD $312 million (a YTY increase of 42%) from company store revenues plus initial franchise fees and ongoing royalties. Domestic system-wide same-store sales were a positive 3.1% in 2018, bringing its two-year same store sales growth to 8.2%. The Company expects to continue its strong store growth in 2019 and beyond, with targeted unit growth of approximately 100 stores per year over the next five years which would approach 1,000 units in total, with the majority of the openings expected to be company operated.

Highly Qualified Management Team

The Company has been dedicated to building a strong corporate operating team, prepared to make the necessary investment in people. In terms of executive talent, Paul Twohig serves as President of MOD and was the former President of Dunkin Donuts US and Canada. John Maguire is the COO and was previously President and Chief Executive Officer of FIC Restaurants Inc. (Friendly’s restaurants) and Johnny Rockets Group, and prior to that COO of Panera Bread. Mark Shambura is the CMO and previously led the marketing team at Chipotle Mexican Grill, and Bob Barton, CFO, was formerly the CFO & VP of Operations of the publicly traded

The Culture

Scott (CEO) and Ally (Chief Purpose Officer) have built and inspire an operating team focused on making a positive social impact and a people first culture. “Spreading MODness”, the idea of using the business as a platform for positive social change, was demonstrated in 2018 by, among other things, a contribution of over $1.8 million to support local communities and Squad members in need. These contributions, achieved with the help of MOD franchisees, included the delivery of nearly 450,000 meals as part of a continued effort to address childhood hunger in partnership with Generosity Feeds. MOD’s strong connection and social impact with Squad members, consumers, and the community at large continue to be reflected by various awards during 2018. It is noteworthy, and consistent with the corporate culture, that the first loyalty program and mobile app, introduced in 2019, has a points to dollar structure that also gives customers the option to donate their points to charity.


MOD, the fastest growing restaurant chain in the United States for the past four years according to Technomic, Top 500 Restaurant Report 2015-2018, with a dynamic leadership team, supported by deep pocketed financial backers, has built an admirable company to this point, and provides every indication of continued success.

Roger Lipton



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There are about 250 persons working at the Congressional Budget Office, according to their website. Their budget, according to Wikipedia was $46.8M annually, as of 2011, probably higher now. Their projections are widely quoted, and presumably relied upon by policy makers in our administration. The CBO updates their projections on an irregular basis, sometimes several times per year, sometimes only once per year. The last update was 5/2/19, only about six weeks ago. Considering how far off their past projections have been, and the questionable assumptions within their analyses, it is a wonder that anyone takes these numbers seriously, and the latest installment provides a good example why not.

Six weeks ago, on 5/2, based on relatively firm numbers through March, and presumably pretty reliable indications through April, the CBO predicted that the US operating deficit through the current fiscal year, ending 9/30/19, would be $897 Billion. April and May results are now reported, and the table below shows the monthly numbers for the last two fiscal years.

You can see that last year’s total operating deficit was $779B, and the total debt went up by $1,271B (due to “off budget” items, the largest of which is the social security shortfall). The projection, six weeks ago, was for the current year’s deficit to be $897B, up 15.1% from fiscal ’18. The total debt is not projected, and you can see that number frozen the last few months since our administrators have already exceeded the formal debt “limit”.

The April result, with tax receipts was a surplus of $160B, which was dower than the $214B surplus a year earlier, so the cumulative deficit through April (shown at the extreme right of the table) was up 37.6%. They May results showed a $206B deficit, up from $147B, so the cumulative deficit is up 38.6% year to  year. Last  year, the monthly deficits from June through September totaled  $246B. The current CBO projection of $897B for the ’19 year would allow for only $158B the rest of the year, down 36% from the last four months of fiscal ’18 – which is  ridiculous.

We don’t have 250 professionals pushing numbers here but this year to date: December’s YTY deficit reduction was on an  immaterially low base. March’s improvement was material, but March and April combined (tax season) showed a $13B surplus this year versus $5B in fiscal ’18, which is an immaterial change. May bounced back to a 40.1% increase YTY in the deficit. You can judge for yourself the likelihood that the last four months will give us a deficit 36% lower than last year.

Our projection, with 247 professionals fewer  than the CBO is for the following: The last four months will provide a deficit about  40% higher than a year ago ($247B), which would provide for $346B  on top of the current $739B, for a total of $1.08 Trillion. This is 20% higher than the $897B projection made by the CBO with only five months left in the fiscal year. We shouldn’t have to point out that: if the CBO is 20% off the mark with five months remaining, their projections ten years out don’t have a great deal of credibility.

Furthermore: the total debt, whether or not the debt ceiling has been formally raised, will have expanded by $1.3-$1.5 Trillion, bringing it close to $23 trillion.

This reality is unlikely to be comforting to the capital markets.

Roger Lipton

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Dave & Buster’s reported first quarter, ending 4/30, results last evening and their stock is trading down 22% this morning. The results were only modestly disappointing, and guidance was lowered just slightly, so the stock market reaction could be considered severely overdone. However, as our readers have been informed for almost two years now, the underlying business has been deteriorating for quite some time and that is now becoming clear to almost all observers. First, the Q1 results, not so bad:

EPS was $1.13 vs $1.04 last year. EBITDA was up 3.2%, adjusted EBITDA up 2.4%. Total revenues were up 9.5%. Same store sales were up 0.3%, a point or so less than expected, which management attributed to weather and disappointment related to sales over the Easter holiday. Seven new stores were opened, and “new store performance remained strong”. Previous trends relating to increased sales at Amusements (comps up 1.8%) and decreased sales at Food & Beverage (comps down 3.3%) continued. The details were less comforting, to be sure. Operating Income was down 1.5%, down 170bp to 15.9%. Net Income $42.4M vs. $42.2M, so EPS was higher due to a lower share count. Though EBITDA was up 3.2%, it was down 150bp to a still impressive 24.4% of revenues. Adjusted EBITDA was down 290bp to 27.0%. Store Operating Income was up 3.6%, but down 180 bp to a still impressive 31.0%.

Guidance was lowered just slightly for all of fiscal 2019, ending 2/2/20: Revenues will be $1.365-1.39B, vs. $1.37-1.4B previously. Comps will be -1.5 to +0.5 instead of Flat to +1.5%. Net Income will be $103-113M instead of $105-117M. EBITDA will be $283-295M instead of $285-300M.

So: on the surface, results were affected by weather and a calendar shift, and the full year is adjusted mostly to reflect the first quarter shortfall.

However: there is no tangible reason to think that trends will improve. As discussed on the conference call: The second quarter has started off “choppy”. Virtual Reality has not provided much of a lift, extra labor is involved, volatility is to be expected in this “hit driven” area, and pricing of this attraction is still a question mark of sorts. Food & Beverage initiatives, including a Fast Casual test, haven’t paid off yet even if customer surveys are promising. Competition was called out, once again, as a negative factor, and is not expected to abate.

There is a lot more detail we could provide, but, in the interest of getting this summary out as promptly as possible, you get the picture.


PLAY may now seem like an attractive turnaround speculation since it now trades near its lowest price in several years, and the valuation does not seem expensive at about 13.5x ’19 earnings and 6.5x trailing EBITDA. New store returns continue to be attractive and the Company as a whole throws off a great deal of apparent free cash flow which can be used  for new stores, dividends and stock buybacks. However, as we have described several times over the last two years, the underlying long term trends are challenging and expected to remain so. Earnings and EBITDA have been essentially flat for several years now, the Company has spent over half a billion dollars to keep it that way, and there is no predictable reason to expect improvement. Deteriorating returns on investment do not make for a premium valuation so we considered PLAY adequately valued at the current time.



We take a long term view. This management team, led by previous CEO, Stephen King, who stepped up to Chairman in August, did a fine job of refurbishing the brand prior to bringing D&B public again in late 2014. It is important to note that hundreds of millions of dollars were spent in that effort, and it would have been disappointing indeed if operating results had not improved dramatically for at least a few years.

We have pointed out in our previous commentary that the return on the incremental investment is shrinking, just as it did when D&B was publicly held the last time. We update that discussion with the following table, which starkly shows this trend.



You can see that capex was $162M in calendar 2015, and the operating results were still ramping up, to the new “plateau” of $143M in pretax income in calendar 2016.

After that improvement demonstrated by calendar 2016 results as a result of previous spending: ($181M was spent in 2016(but we assume couldn’t have affected  the $143M of Pretax Income by much), on top of $181M in 2016, an additional 219M was spent in 2017, $216M in 2018 (a total of $616M), and pretax income is projected to be the same in 2019 ($135-150M) as 2016 ($143M).

In essence: after the ramping of results through calendar 2016, presumably as a result of the last re-invention , ($181M in 2016, 219M in 2017, and $216M, a total of $616M) will have been spent, Pretax Income will have been essentially flat, and EBITDA will be up about 30M. That’s zero current return on a pretax income basis, only about 5% on an EBITDA basis, and (we have to say again) depreciation is not free cash flow.

Management could counter that three years is not the end of the story, and there is no doubt a “tail” in terms of return on upfront investment. On the other hand, it is pretty clear that continual refurbishment of this concept is a requirement. It’s also a major feature of this story that new locations have a huge first year return. That is no doubt true, but that would mean that new stores are providing a very large part of the total results, and older stores are falling off sharply. If there is a first year return of over 50% on new stores, that would be something like $100M on the last 15-16 stores, $200M on the other 110.

In any case, if earnings at PLAY are going to continue to grow, at say 10-20% annually, more new stores have to open, materially more than the 10-12% budgeted (some of them with a smaller footprint), to offset the declining contribution from the growing base of mature stores where contribution is declining.

While most analysts may not want to talk about this strategic reality, it’s possible that PLAY’s price performance, essentially flat for the last two years, is reflecting the above discussion. At only 18x projected earnings and about 8.5x last twelve months EBITDA, the stock might seem attractive when the first year cash on cash returns for new stores  are over 50%. However, the longer term view indicates that it will be increasingly difficult to build upon the current results, especially in a retail environment that is generally unforgiving.


Dave & Buster’s Entertainment reported their Q2, ending 8/5/18, last Thursday, and the stock responded positively, up 7-8% on the slight sales “beat”, the more material EPS beat, and positive company commentary regarding results of the new Virtual Reality platform.

Conclusion: The upward move in PLAY stock was mostly a function of “beating” expectations for comps and EPS, which have been coming down in the last six months, and a short position among traders who are inclined to panic. Forward guidance was raised by the Company, but the amounts were modest, and were reductions in certain negative expectations, rather than inspiring confidence that traffic and margin trends will turn positive any time soon.  On the positive side, initiation of a dividend, providing a yield of about  1%, and continued stock buybacks are positive factors. However, management has distinguished itself by its unwillingness to hold shares outright, promptly selling shares acquired by way of options. On balance, we view PLAY stock as “fairly priced”, with a still strong operating model generating impressive levels of store level EBITDA. This apparent attractiveness, however,  is offset by the risk element of the “fashion driven” Amusement segment that is the main driver of profitability and cash flow.


The Positives:

  • (1) Cash on cash returns are still among the very highest in the restaurant and retail universe.
  • (2) There is a very long runway for future growth, which  has been extended by virtue of the smaller format.
  • (3) The balance sheet continues to be strong, relatively unleveraged, with substantial cash flow for unit expansion, stock repurchase, and dividends possible as well.
  • (4) There is potential improvement in the food element, separately and/or in conjunction with the new smaller format, including a Fast Casual approach to food & beverage.
  • (5) A lower corporate tax rate would improve future after tax EPS, though it obviously would not affect EBITDA.

The Negatives:

  • (1) Comps have been coming down, narrowing overall, with a continuation movement toward Amusements, now 56.9% of revenues. With less than 30% of sales from food, D&B is more of an amusement park than a restaurant.
  • (2) Average Unit Volumes are coming down, at least partially due to the increasing mix of smaller stores.
  • 3) Margins at the store level have been coming down modestly, and may not recover due to higher marketing, higher rents, higher commodity prices, and sluggish traffic trends, especially within the food & beverage segment
  • 4) Competition, and cannibalization is playing an increasing role in suppressing sales and margins.
  • (5) Depreciation, that is the useful life of Amusements,  continues to be an underlying issue. EBITDA is a valid measure of “cash on cash” return at the store level, but it seems to require increasing amounts of original (undepreciated) capital as the years go on.  Noone can be sure of the useful life of Amusements. The Company declares that it is “between five and twenty years”. We discuss this issue at more length in the full Corporate Writeup on our  website (9/14/17) at :  We have not seen this issued addressed in either company documents or analyst discussions. If our concerns are misguided,  we welcome further discussion of this issue by the company or the money management community.
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We wrote about J.Alexander’s (JAX) three and a half years ago, with the stock at exactly the current price, and that article is reprinted below. The conflicts of interest were clear, we didn’t think that the public shareholders would get a fair opportunity to share in the company’s fortunes, and they haven’t.

A controversial deal a year ago was rife with conflicts of interest: the proposed acquisition by JAX of Ninety Nine Restaurants, was owned by JAX parent, Fidelity National, and the deal was (appropriately, in our view) voted down. With the stock underperforming the market and peer group by a large margin, Ancora (owner of 9.7%) has made a cash buyout proposal at $11.75 which the Company has turned down. Another large shareholder, Marathon Partners (owner of 6.6%) has called for a full auction process. The Company, has argued that $11.75 is not enough, but they have publicly disclosed no effort, other than continuing emphasis on better operations,  to better that price.

At the moment, in an attempt at better “governance”, Ancora is urging shareholders to vote against re-election of two board members (Timothy Janszen and Ronald Mggard), and Institutional Shareholder Services (ISS) has backed that suggestion. The Company is resisting this change, citing that “Tim is the CEO of our largest shareholder and Ron has been investing in and managing restaurant companies for decades”. (Tim’s private-equity firm is a large shareholder of Ninety Nine Restaurants and Maggard was on a Board at a Fidelity National subsidiary, Newport Global Advisors.)

Bottom Line:

While public shareholders have not benefited, management and affiliates of Fidelity National have profited from the marketability for their shares as they have become vested. At this point, it seems that the clock has run out for management and their obviously sympathetic Board of Directors. Adjustments to “governance” will be have to made if the Company remains publicly held. June 20th is the shareholder meeting so shareholder wishes will be made clear. Since Newport Global Advisors owns only 11.08%, it seems likely that the two directors in question will not be re-elected. Some Companies should not be public, and this is one example. JAX has made no money for public shareholders over the last four years. Perhaps the next four years will be different

Below article is reprinted from November 9, 2015, when JAX closed at $10.47

Opportunity often presents itself when companies are spun out of other diversified holding companies, in this case JAX out of FNFV.  Generally not a lot of shares of the spinoff are distributed relative to the holdings of the previous parent, and there is not a great deal of analyst coverage to the newly public vehicle. While there is an S-1 disclosure document filed with the SEC, very few observers will take the time to analyze the extensive (in this case over 150 pages) document.

JAX has been publicly traded only since 9/15/15 and their well-regarded restaurants, averaging $5.6 million for their J.Alexanders/Redland Grills and $3.4 million for the Stoney River Steakhouses could attract investors. While the Company has said little until their earnings report and conference call just last week, the third quarter earnings did not undermine the numbers presented in their filing documents dealing with the spinoff. Their third quarter report basically followed in line with the numbers in the S-1 prior to the spinoff and the company repeated the guidance issued 9/15 of about $26 million of EBITDA and $0.40 of EPS for the 2015 calendar year. Based on that, at $10 the company has a market value of about $160 million or a little over 6x trailing EBITDA and 25x 2015 earnings. Management gave no further guidance relating to 2016 other than indicating that the growth in units will be about 10% on the base of 41 current units. We don’t know what the earnings power will be but Lonnie Stout (CEO) has been there for many years and presumably the profit margins and EPS will continue the steady progress of the last several years while the Company was privately held. As a vote of confidence, the Company announced their intention to buy back $15 million of stock over the next three years.

Here’s the problem; as disclosed in the presentation on the company website dated 9/15 “Certain officers and directors of FNFV and J.Alexander’s Holdings, Inc. (JAX) …..formed a Management Consulting Company called Black Knight Advisory Services”(BK). There is a tremendous amount of legal jargon surrounding the new relationship between JAX and BK, but it is clear that BK will get 3% of EBITDA, plus reimbursement of out of pocket costs. The rational for this is the “complementary services” that BK will provide, with their experience in mergers, acquisitions, corporate governance, strategic planning, etc.etc. This will go on for at least 7 years. More complex is an arrangement whereby BK will receive what looks like an option on 10% of JAX, which will vest over a period of three years. This was described in the 9/15 presentation, which is posted for investors on JAX’ website. I hope to talk to Lonnie Stout, CEO, later this week, to see if I have misinterpreted the arrangement between BK and JAX in any way.

Of further interest to me, and presumably to investors is the compensation arrangement for management, if employment is terminated with or without a “change of control”, that would pay out a total of about $6.7 million (about $4.5 million to Lonnie Stout, CEO). It seems that this is quite a large amount of money to pay out for a company of this size. Referring back to the “complementary services” that BK will be providing, 3% of $25,000,000 is $750,000 annually for services that could well be purchased more cheaply.

In summary, while FNFV was gracious enough to spin off JAX, thereby creating value for the previous parent’s shareholders, it is not exactly an “unencumbered” interest the new shareholders receive. On the surface, JAX looks inexpensive enough to be interesting. However, the above described self-serving features of this situation do not advance my desire to become a shareholder of this new public company.

Roger Lipton

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CRACKER BARREL REPORTS Q3 – stock up at first, giving it back a day later – A METAPHOR FOR THE RESTAURANT INDUSTRY

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CRACKER BARREL REPORTS Q3 – stock up at first – giving it back a day later – A METAPHOR FOR THE RESTAURANT INDUSTRY

Cracker Barrel Old Country Store, Inc. (CBRL) reported their third quarter yesterday morning, with earnings beating estimates by $.02, announcing a $50M share repurchase, increasing the quarterly dividend from $1.25 to $1.30/share, and declaring a special dividend of $3.00 per share. Sounds great, and it’s not bad, but this well run company with a strong balance sheet, providing great value to their customer base, is fighting, like everyone else, the battle for market share. The following template shows some of the historical operating details, as well as analyst estimates going forward.


Here are some of the details you should know. While same restaurant sales were up 1.3%, traffic was down 1.8%, outperforming the casual dining industry, to be sure, with the average menu price up 3.1%. Comp retail sales were down 2.6%.

For the third quarter:  A reduction in the cost of goods offset other higher line items. Cost of goods was down 90bp, labor was up 50 bp, other store operating expenses was up 30 bp, store operating income was barely up, by 10bp. G&A offset that by 10bp, so operating income came in flat at 8.8% of revenues, up 2.8% for the year. Below the operating line, interest expense was 10 bp higher, income tax was 10bp lower, Net Income After Taxes was flat at 6.8%, generating $2.09 per share fully diluted, up from $2.03.

For the three quarters to date, ending April: cost of goods was down 30bp to 30.8%, labor was up 50 bp to 35.1%, other store operating expenses were up 40bp to 20.3%, store operating income was down 60bp to 13.8% (after depreciation), G&A was flat at 4.9%, operating income was down 60bp to 8.9%, pretax income was down 60bp to 8.4% and Net Income After Taxes was down 150 bp to 6.9%.

Company guidance for the full year is essentially unchanged. Comp store restaurant sales will be about 2%, retail comps will be flat to slightly negative, food commodity inflation will be about 2% for the year, operating income will be 9.0-9.3% of sales (so the fourth quarter will help), EPS expectations are unchanged at $8.95-9.10 (compared to $10.29 in ’18, which reflects an accounting adjustment and 52 weeks this fiscal year vs. 53 in ’18.

On the conference call:

National TV supported sales in the quarter, highlighting the food and value. The newest food platform revolves around Southern Fried Chicken (read our article from two days ago relative to healthier eating by way of meatless products). There was apparently quite a bit of training involved with this new platform, and the Company declined to break out how much of the labor increase was related to that but said that most of the labor increase was wage related. National TV and new creative on the billboard system will continue to be employed. Off premise sales increased 110 bp as a % of total sales, up over 15% YTY, but the total % was not mentioned.  Retail sales were disappointing but inventory optimization and control of shrink improved gross margin (CGS was 48.8% vs. 51.1% in ’18). Unfavorable weather cost them about 30bp. EBITDA for the quarter was up 6%.

Commodities, beyond ’19, are expected to be a bit more volatile and a bit of a headwind, pork (about 10% of the commodity mix), in particular. From a retail standpoint, an effort is predictably being made to diversify away from Chinese suppliers. New unit productivity upticked a bit, especially with higher menu prices on the West Coast. Wage inflation continues to be a challenge, but it is hoped that guests will benefit from higher disposable income. The use of tablets with the POS system is helping to control labor costs.  Menu price increases are targeted at about 2% per year. Delivery is being expanded, now in about 350 stores (out of 660), using Doordash. Other vendors may be used, chosen market by market. They believe this business is “highly” incremental.

The Bottom Line:

We view CBRL as one of the most consistently managed and well positioned casual dining chains. It is safe to assume that less well situated chains are having even greater difficulty in their attempts to build market share and increase cash flow and earnings. We note that there are quite a few restaurant companies that can be considered strong cash flow generators, and some of that will be “returned to shareholders” through dividends and stock repurchases. These days, however, very few restaurant companies can be considered  attractive growth vehicles over the foreseeable future. Investors like to see a growth rate in earnings per share of at least 50% of the P/E multiple, which generally ranges in the high teens. Very few companies are predictably growing earnings per share close to 10% annually.

Roger Lipton

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