All posts by Roger Lipton


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CONCLUSION: Starbucks has written the book on service and hospitality in the QSR space, creating a worldwide brand (now 32,000 stores !) in the process, admirable on many levels. There is no reason we know of that the extraordinary performance will not continue to be the case. From the standpoint of investing in SBUX, the P/E of 28.8x expected earnings in the current year, and over 20x TTM EBITDA, now growing at 8-10% annually,  seems to adequately value the equity in the next year or two. Longer term, if valuations in the general market hold up, SBUX, the stock,  should do fine as it grows materially faster than the worldwide economy as a whole.

THE COMPANY: Starbucks began in 1985 and today is considered the premier roaster, marketer and retailer of specialty coffee in the world. Currently, Starbucks operates in 81 markets around the world. Besides coffee, Starbucks sells a variety of teas and other beverages as well as a variety of high-quality food items. In recent years about 20% of company operated locations has been food. Starbucks also sells their products through other channels such as licensed stores, grocery stores and other food service outlets through their global coffee alliance with Nestle’s S.A.

Starbucks has three  operating segments: (A) the Americas which is inclusive of the U.S., Canada and Latin America, (B) International which is inclusive of China, Japan, Asia Pacific, Europe, Middle East and Africa, and (C) Channel Development. Revenue as a percentage of total net revenues for fiscal 2019 were as follows: Americas 69%, International 23% and Channel Development 8%.


DEVELOPMENT COMMENTARY: Total global store count increased 1,932 locations or 6.6% over fiscal year 2018. The greatest increase in company stores came from International markets, China in particular with 602 net new stores (629 opened and 27 closed)  bringing the total there to 3,521.  The Americas increased store count between 2018 and 2019 by 2.9% to 9,974. Licensed stores increased by 10.3%, with growth most notable in Korea, which added 103 net units to a total of 1,334, U.K adding 54 to total 707, Turkey adding 41 to 494, Indonesia adding 56 to 421 total, Philippines adding 37 to 397 total, and Thailand transferring 377 from the company to 392 total licensed at year end.


UNIT LEVEL ECONOMICS COMMENTARY: While we can calculate that the AUV, worldwide, for company operated locations is slightly under $1.4M, and the stores are very profitable to be sure, it is difficult to be precise about store level economics. Unit level results vary between markets that are spread worldwide, and licensing income and expenses come into play as the company reports by geographical segment. As a guide however, and using The Americas as the best indication, we provide the table above. Note that Cost of Goods include equipment and product sales to licensees so we calculate all expense lines against total net revenues which include license fees. With that in mind, CGS decreased in fiscal 2019 over fiscal 2018 by 90 basis point. Store Operating Expenses (including Labor and Benefit costs) increased by 110 basis points primarily driven by investments in the Labor content. On this basis, Approximate Store Level EBITDA was virtually flat at 26.6% of Total Net Revenues. It’s good to sell an addictive product 😊


SAME STORE SALES COMMENTARY: 2019 global same store sales, as indicated above, increased by 5% in fiscal 2019 driven by 3% increase in average ticket and a 2% increase in comparable traffic. In ’19, SSS was 5% in the Americas (including 2% transaction growth), 3% International (1% transactions).

RECENT DEVELOPMENTS: (Per the year end earnings release and conference call) Noteworthy developments in the year ending 9/30/19, in addition to corporate growth in units and sales cited above, include: Active Starbucks’ Rewards membership in the US  up 15% to 17.6M, returning $12B to shareholders in the form of dividends and share buybacks, benefit from the licensing of their CPG and foodservice to Nestle that was closed in late Aug.’18. Operating income in the Americas was up 5% YTY, 70 bp less than the prior year, with a 9% increase in revenues.This decreased operating margin was due to the Starbucks Leadership Experience, providing higher wages, benefits and labor hours, which was partially offset by cost savings initiatives and sales leverage. Internationally, Operating Income was up 18%, up 180 bp on a 6% increase in revenues. It was driven by 11% store growth, as well as cost savings and the conversion of certain retail business to licensed markets, partially offset by higher wages and an unfavorable product mix shift.

Fiscal 2020 guidance included global comp sales growth of 3-4%, about 2,000 new stores globally (1400 international plus 600 in the Americas), consolidated GAAP revenue growth of 6-8%,  consolidated operating income growth of 8-10% (with obviously higher operating margin), an effective tax rate of 22-24%, GAAP EPS from $2.84-$.2.89 (non-GAAP from $3.00-$3.05), capex of about $1.8B. Interesting (to us, anyway) that Bloomberg, as shown in the template above, carries the non-GAAP estimate. Whatever happened to Generally Accepted Accounting Principles?

On the conference call: Management pointed out that the fourth quarter comp of 6% in the US included transaction growth of 3% and a two year comp of 10%. China, also, had a very strong Q4, with a 5% comp including transaction growth of 2% (which this year reversed previous slightly negative transaction counts) and a two year comp of 6%. Cold beverages are helping, with Nitro Cold Brew introduced in the US last summer and The Pumpkin Cream Cold Brew this past fall. The Reward Program now has over 10 million active members in China (up 45% YTY), on top of the 18M in the US, where the program is generating 42% of store revenues. Also in China, Starbucks is now delivering to over 3,000 stores, mobile orders amounted to 10% of sales with 7 points from Delivery (only 1% of sales in the US) and 3 points from pickup. In China also, perhaps driven by the competitive efforts of Luckin Coffee, a new Voice Ordering and Delivery  by a “Tmall Genie” was introduced to enhance the mobile experience. Management also made the point that the Global Coffee Alliance, with Nestle, was EPS accretive in ’19, faster than originally expected. Overall, CEO, Kevin Johnson, summarized the strength of the Starbucks brand well. “Growth at Scale has really enabled us to ..differentiate Starbucks…the focus that we’ve put on the customer experience…the beverage innovation…..the digital customer relationships..executed with a discipline that has driven our customer connection scores to an all time high.”  We have only touched on a small portion of the various operating initiatives taking place at this premier worldwide brand. Those of our readers that are interested can access the full conference call transcript at

CONCLUSION: Provided at the beginning of this article









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Luckin Coffee (LK), the most rapidly growing retailer on the planet that we know of, lost $78M, 100M, and $82M in the first, second, and third calendar quarters of this year respectively. The market value of their equity is $8.4 billion at yesterday’s closing price. For those of you not familiar with the fundamentals, you can SEARCH for our writeup in mid 2019. Suffice to say that LK is building thousands of units annually in China, is losing a great deal of money currently, but has stated plans to leverage it’s the G&A and improve store level profitability within the next 12-24 months to the point of overall profitability.

We should interject here that we are neither long nor short this situation. We provide this commentary merely to present the possibilities, in terms of raising capital, when interest rates are suppressed around the world, producing “misallocation of capital”. We are not suggesting that LK is going to fail. The predictable prize in that regard goes to WeWork. It may well result that LK proves to be one of the wildly successful beneficiaries such as Amazon, and only time will tell.

The bulls and bears can debate the merits of this situation but management has clearly voted  that the stock is adequately priced for the moment. Though LK still had a couple of hundred million dollars in the bank as of 9/30, which should have been sufficient to turn cash flow positive within the next year or so, they have registered the sale of 12 million new shares, 7.2 million for the company and 4.8M for selling shareholders. In addition, they registered the sale of $400M worth of five year convertible bonds (no doubt convertible above the market price) and that was quickly upsized to $460M because of the demand. Tongue in cheek we say:  It’s easy to understand the appeal of this bond, because the expected interest rate, between 0.5% and 1.0%, is a lot more than the negative interest rate attached to well over ten trillion of sovereign debt that trades at a negative interest rate.

The bottom line: the management and Board of Directors of Luckin Coffee have appropriately decided that the $8.4 billion value of their equity is adequate for the time being, and it is timely to raise about $700M (call it a cushion) to pursue their ambitious growth strategy. If you are going to tell a story to the investment community, make it a good one. It’s a wonderful world !!

Roger Lipton

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On June 4, 2019,  with meatless products all over the news, BYND was at $100, a day later it was $130 on its way to $230, and was recently trading at $74. Our article, from June 4th, is below:

The CONCLUSION on June 4th was:

“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.

TODAY: 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 show, if 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.

Roger Lipton

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CONCLUSION: Ark Restaurants is not typical of most publicly held restaurants companies. It’s operations are the furthest thing from “cookie cutter”, but long term value is accruing. Predictability of cash flow growth may be better today than at any time in its 35 year publicly owned history. Over the next year or so, Ark should be able to more or less repeat the last twelve months that showed a 20% increase in EBITDA. Over the next year or so better cash flow generation from Rustic Inn and JB’s in Florida, renovated food courts in FL and LV, and the absence of several properties that have recently penalized results should allow for better results. Intermediate term, expansion plans in Ohio should contribute to results. Longer term, 3-5 years out, The Meadowlands may become a reality. If and when that happens, Ark’s earnings and cash flow should move to a materially higher level. In the meantime, the stock is not overpriced with an enterprise value of $102M which is a little over 8x trailing adjusted EBITDA. Stockholders receive a 4.5% yield while they wait for long term equity value to build.

THE COMPANY: Ark Restaurants operates 20 restaurants and bars, 17 fast food concepts, and catering operations. They have grown out of their New York city roots established almost forty years ago and are today located also in Washington, D.C., Las Vegas, Atlantic City, Florida and Alabama. They have also shifted over the years from neighborhood restaurants to larger destination properties that benefit from high traffic and can attract catered events. Included are 12 fast food facilities in Tampa and Hollywood, FLA (2004), Bryant Park Grill in NYC (1995), Sequoia in D.C. (1990), Village Eateries (1997) at New York, New York Hotel, plus room service, in Las Vegas, Gallagher’s Steakhouse and Gallagher’s Burger Bar in the Resorts Hotel in Atlantic City (2005), Yolos at Planet Hollywood in Las Vegas (2007), Robert at the Museum of Arts & Design in NYC (2010), Clyde Frazier’s Wine & Dine in NYC (2011)Broadway Burger Bar & Grill at the Tropicana Hotel in Atlantic City (2013), The Rustic Inn in Dania Beach, FL (2014), Shuckers in Jensen Beach, FL (2016), two Oyster Houses in Alabama (2017) and JB’s on the Beach in Deerfield Beach, FL (2019). There are also properties that are less than wholly owned, but managed by Ark, including El Rio Grande in NYC, a Tampa Food Court, a Hollywood, FL food court, and Lucky Seven at Foxwoods Resort in Connecticut.

The restaurants obviously differ in terms of themes, menu and décor, the last of which is generally marked by dramatic interior open spaces and extensive glass exteriors.

The most recent changes in the portfolio of restaurants include:

The acquisition, on 5/15/19 of JB’s on the Beach, in Deerfield Beach, FL, for $7,036,000. This acquisition was financed by way of a $7,000,000 bank loan. The food court at the Hard Rock was relocated, at landlord expense, closing the old space and at the same time reopening on 9/16/19, with an appropriate increase in rent. The food court at the Hard Rock in Tampa was renovated, at landlord expense, also with an increase in rent. That location was closed for about four months, reopening on 9/28/19. A disposition took place as of  12/19/18 (with closing on 1/12/19) of the Durgin Park restaurant in Boston, due to decreased traffic at the Faneuil Hall Marketplace and rising labor costs. As a result, a total of $1.1M penalized income in the third quarter ending 6/19/19, all but $52k impairment and accelerated depreciation non-cash items.

THE MEADOWLANDS OPPORTUNITY: The largest long term opportunity within Ark’s portfolio  is represented by its investment in the Meadowlands Newmark, LLC, (MN) which is an owner of the New Meadowland’s Racetrack LLC (NMR). Ark began with a $4.2M investment in March, 2013, invested another $464k in November,2 2013 and $222k in February, 2017, so that Ark currently owns 11.6% of the first entity and 7.4% of NMR.

IN addition, in April, 2014, Ark loaned $1.5M to MN, at 3% due in Jan, 2024. In July, 2016, Ark added to that investment by $200k, same terms and maturity.

Currently: Ark has entered into a long term agreement with NMR for the exclusive right to operate the (current) food and beverage concessions serving the new raceway facilities at the Meadowlands grandstand. Ark currently receives an annual fee equal to 5% of the net profits earned by NMR at the concessions.

The bottom line here is that, according to Ark’s 10k, “if casino gaming is approved at the Meadowlands and NMR is granted the right to conduct said gaming, the Company (Ark) shall be granted the exclusive right to operate the food and beverage concessions in the gaming facility with the exception of one restaurant.” New Jersey, and many other states, with their need for tax revenues, are increasingly moving toward the legalization of casino gaming. In New Jersey, on June 7, 2018, the state legislature voted to legalize sports betting at casinos and racetracks in the state. It is impossible to judge the timing or magnitude of this opportunity for Ark but management obviously feels it could be very substantial.

SAME STORE SALES: Typical “cookie-cutter” analysis does not apply because of the variety of operations and financial structure of individual deals.  However, the following table shows same store sales by region:

COMMENTARY: It’s worth noting that “Other Revenues”, outside of same region sales, include sales at new restaurants, JB’s on the Beach, purchased during ‘19, and Durgin Park which generated $1.04M in ’19, down from $2.84M in ’18.

OPERATING EXPENSES: The following table shows the line by line operating items:

COMMENTARY: Cost of Goods Sold, as well as Labor, were well controlled, virtually flat as a percentage of sales, which is admirable in the currrent environment. Occupancy expense was down 90 bp to 10.7%, as a result of renegotiated rent at one of the D.C. properties and higher sales at certain properties owned outright. Other Operating Costs were down 80 bp as a result of cost cutting initiatives and reduction of legal fees. G&A (New York corporate support) was up 40 bp due to annual wage increases and higher professional fees. D&A was flat as a percentage of sales, at 3.2%, up $159k in dollars as a result of fixed asset additions.

CORPORATE CASH FLOW, AND THE DIVIDEND: Michael Weinstein, founder, in 1983, the largest shareholder, and CEO of Ark, in addition to leading his operating team, is obviously an opportunistic deal maker. Weinstein’s primary objective is to build upon the current cash flow which has proven its stability over the years. It’s important to note that this company has been built over the last thirty years with no dilution of equity. The last equity raise was in 1987. The company has paid a dividend of $0.25 quarterly, providing a current yield of 4.5%, continuously over the last ten years, and that seems comfortably covered by consistent cash flow generation. There seems every reason to believe that the dividend will be, at the least, maintained in the foreseeable futfure.

RECENT DEVELOPMENTS: per the yearend report and conference call: EBITDA in the fiscal year ending 9/29/19, adjusted for non-cash items was $12.39M, up from $10.11M in fiscal ’18. Weinstein stated on the conference call that a 20% increase is a possibility in the current year. We have provided the line by line income analysis above.

Michael Weinstein, CEO, reviewed the current properties and prospects, as follows, on the conference call, as follows:

Florida is doing well. Recently acquired JB’s on the Beach is promising, doing better than under previous management, but the high season has just begun on 12/26. Shuckers and Rustic “continue to perform better than our expectations”. $1M was spent at the Rustic Inn to build a new barge which includes seating and a rooftop bar, and the response has been excellent.  Sequoia in D.C. is still disappointing, but improving and ’20 should be better than ’19. The higher minimum wage is pressuring margins in NYC but there seems to be room for increased menu pricing. The food courts in Tampa and Las Vegas that were renovated are both reopened and showing increases. There is nothing new regarding a casino license at the Meadowlands, but Weinstein points out that New Jersey needs to replace the revenues from the declining base in Atlantic City. With new casinos opening in Philadelphia and New York State, things are not going to improve in Atlantic City. Sports betting is working well at the Meadowlands, and Ark, with a 10% minority interest, is presumably earning 800-900k, but does not know when that will be distributed. Negotiations are taking place with MGM regarding the New York, New York (Las Vegas) activities, since those leases expire in about three years, and they seem favorable but the outcome is not  yet clear. Ark has a new project planned at the Easton, Ohio large regional retail center and expects to be building 10-20 restaurants, with and without operating partners. The first two or three restaurants will be built, owned and operated by Ark. With that base, further projects will likely be joint ventures or licensing deals with minimal capex requirements.  The tenant allowances in Ohio are substantial but will still cost Ark $750k to $1M per restaurant that they own themselves, with Easton providing something like 70% of the cost. Ohio will not impact ’20 but could be substantial thereafter.

Overall, Weinstein guided to the possibility of a 20% increase in EBITDA for the current year. He does not expect any further borrowing. Capex will be limited to “whatever is left on the build-out of the barge, which is not very much, and the Ohio projects. So free cash flow should be pretty good this year”.

CONCLUSION: Provided at the beginning of this article

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JACK in the BOX (JACK) – UPDATED WRITEUP – CEO, Leonard Comma to depart, what does it mean?

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CONCLUSION: JACK stock is reasonably priced statistically, but the Company is operating in a very competitive segment. Its unit growth has been unimpressive in recent years for the simple reason that the return on investment for newly built locations in today’s real estate environment is not high enough to encourage franchisees. The chain is here to stay, especially with its strong geographical presence in California and Texas, but most of the financial levers (re-franchising, balance sheet leverage, stock buybacks) are already utilized to create value for shareholders. We have difficulty picturing a catalyst, from an operational standpoint, that could ignite the fundamentals and improve the franchisee or the investor attitude toward Jack In the Box. However, a significant development that could provide great comfort to all stakeholders would be recruitment of a replacement for Leonard Comma with an outstanding reputation. No doubt the Board of Directors will do their best in this regard and, on that basis, the reward/risk relationship becomes interesting at this point.

THE COMPANY: Jack in the Box operates and franchises 2,243 Jack in the Box QSR restaurants with corporate headquarters based in San Diego, CA and originating in 1951. Jack’s top ten markets, located principally in California and Texas,  comprise approximately 70% of their total system. Noteworthy also is that Jack in the Box is at least the second largest QSR burger chain in eight of these ten markets. As of September 29, 2019, the Jack in the Box system included 2,243 restaurants in 21 states and Guam and 137 are Company operated. Jack in the Box initiated its re-franchising program over five years ago and as of September 29, 2019 they have increased franchise ownership to 94% from 81% in 2014. There has been periodic interest from activist investors over the years, less so recently as Qdoba has been sold (in March, 2018), most of the re-franchising has been completed, and the balance sheet is already levered to 4.7 times trailing EBITDA. In recent news, Lenny Comma, with JACK for 15 years and CEO since 2014, turned in his resignation on December 11, 2019.  His resignation is in the wake of well publicized tension between corporate and the franchise community, and a search for a new CEO has begun.

UNIT LEVEL ECONOMICS COMMENTARY: The AUV at Company stores rose 5.7% in fiscal 2019 and was primarily driven by the decrease in the average number of Company restaurants which was a combination of the re-franchising initiative of 135 locations and to a lesser extent a decrease in traffic. The AUV for franchise stores rose less than 1 basis point in fiscal 2019. Cost of Goods Sold at company stores increased in 2019 by 20 basis points primarily due to the shift in product mix and higher ingredient costs. This was partially offset by menu price increases. Labor and Related Expenses increased 90 basis points in 2019 due primarily to higher average wages. Occupancy and Other Related Costs decreased in 2019 by 100 basis points primarily driven by the decrease in the number of locations from re-franchising and the subsequent reduction in maintenance and repair expenses. Store Level EBITDA decreased 10 basis points primarily as a result of the increase in Labor and COGS but offset to some degree by the lower Occupancy and Other Related Expense of 100 basis points.

DEVELOPMENT COMMENTARY: During Fiscal 2019 the Company did not have any unit development activity. However, the franchisees opened 19 new locations and closed 13 under performing units for a net new store growth of 6 restaurants.

SAME STORE SALES COMMENTARY: Jack in the Box same store sales increased 1.3% in 2019 driven by menu price increases and a favorable shift in product mix that offset the decrease in traffic.


Fourth quarter same store sales were the best in four years, up 3.5% driven by average check growth of 2.8% and transaction growth of 0.7%. Diluted EPS from continued operations (GAAP) was $0.86 vs $0.68 for the quarter, $3.52 vs. $3.62 for the year. Non-GAAP Operated EPS was $0.95 vs. $0.77 for Q4, $4.35 vs. $3.79 for the year.  Adjusted EBITDA (non-GAAP) was $66.9M in Q4, vs. 54.0 in ’18, $269M for the year, vs. $264M in ’18. Restaurant level margin (EBITDA) at company stores was down 190 bp in Q4 to 24.2%, as a result of wage and commodity inflation (4.4% in Q4), partially offset by menu price increases. The Company reports “Franchise Level Margin” as a percent of franchise revenues, which was relatively flat at 41.1% vs. 41.3% in ’18. The company repurchased about 1.4M shares in Q4 at an average price of $87.33 and purchased another 0.7M shares as of 11/20/19. An additional $100M had been authorized on 11/15.

Guidance has been provided for the year ending 9/27/20, calling for systemwide same store sales of 1.5-3.0%, restaurant level EBITDA margin of about 25.0% with commodity inflation of about 4% and high single digit wage inflation. SG&A will be 8-8.5% of revenues and 1.7-1.9%  of systemwide sales. There are expected to be 25-35 new franchised locations.

Management emphasized on the conference call their focus on the “guest experience”. Involved in this effort is faster drive thru service, new digital menu boards, designated parking for pickup and delivery. Better “value bundles”, snacks and side items are helping sales and will continue to evolve. The breakfast daypart continues to be an important focus and delivery service is available at 90% of the system through various providers.  Guidance for EBITDA in fiscal 2022 is about $300M, up about 9-10% from Adjusted EBITDA of $265-275M in the current year.

It should be noted that Leonard Comma’s retirement was announced in early December, just weeks after the conference call on 11/21. A CEO search has begun and Comma’s departure date is not established.

CONCLUSION: Provided at the beginning of this article



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December, and the fourth quarter, continued in the same vein as the first three calendar quarters.  The operating leverage for the miners is starting to be recognized, since the move in mining stocks in December was more than double the 3.7% that gold bullion moved. It was a similar case for the year, with gold bullion up 17.9% and the miners up about double that. The most impressive relative move of the month was the last two days when the miners were up  2-3% with bullion up only 0.4%, so it is possible that this is the beginning of the still very depressed mining stocks catching up to the bullion price. The performance of our investment partnership, almost entirely invested in gold mining companies, mirrored that described above.

While bullion (at $1525/oz.) is down about 20% from its high of $1900/oz. (in 2011), the miners are down 50-70%, so the mining stocks could go up 100% or more with bullion rising 20-25% to the previous high. Since we believe that bullion will sell for something like $5,000/oz. within the next few years, you can see how our portfolio could multiply by many times the current price.

There is no reason to change our longstanding view that gold mining stocks have the most upside potential of any liquid asset class we know of. All the reasons we have been discussing for the last six years are only intensifying, and the potential reward for our patience has increased with time. You can review at your leisure our article written in August  of this year: THE CASE FOR GOLD – we are gratified that a true giant of the gold mining industry, Rob McEwen, who built Goldcorp, one of the largest and successful mining companies (recently merged with Newmont Mining),  has re-published (with our permission) our article on the website of his young company, publicly traded McEwen Mining (MUX). . Maybe we know something, after all 😊

Our many articles on this subject, largely summarized in THE CASE FOR GOLD, are hereby augmented with the following thoughts regarding Inflation, Central Bank Gold Purchasing, US Deficits and Cumulative Debt, Interest Rate Expectations and Worldwide Economic Trends.

INFLATION, which is supportive of the gold price, is not dead, as widely assumed. The apparent absence of inflation, as measured by the Bureau of Economic Statistics, has provided comfort to the PHDs at central banks. However (1) the price indexes that are quoted, inexplicably excluding food and energy which are consumed daily, have been manipulated periodically to put a false face on reality. Among other benefits to our government, understated inflation provides an insufficient increase to entitlements such as social security payments (2) Though certain imported apparel prices and some consumer electronics have not increased in price, asset prices (explicitly targeted by central banks), including stocks and bonds and prime real estate and collectibles have made the rich richer while the middle class strains to make ends meet. Inflation is with us when a Van Gogh painting sells for $240M or a NYC coop sells for over $100M. The super rich are purchasing iconic items which they know will command a premium price long into the future, as opposed to holding the colored paper that they know will have a tiny fraction of its current purchasing power. Even an understated 2% annual inflation rate destroys 50% of your purchasing power in 35 years. A 1971 dollar is worth about $0.15, a 1913 dollar is worth less than $.03. That Van Gogh or Central Park South penthouse will do better than that. The chart below shows how big ticket items, where the money is spent, have inflated over the last twenty years at rates well above those reported by our Bureau of Economic Analysis.

CENTRAL BANKS INCREASE GOLD BUYING, and the inevitable ramifications are becoming more obvious. Central Banks, most notably China and Russia, are buying physical gold at a record rate in 2019, at the same time reducing US Treasury Securities as a percentage of their reserves. Central banks collectively, even with China’s understated purchases, are now absorbing more than 20% of annual worldwide gold production. Furthermore, an increasing amount of trade is taking place between China, Russia, and the Mideast, conducted in terms of Yuan and Rubles and Gold, and the ounces of Gold it takes to purchase a gallon of Oil may indeed be a very important guidepost that determines the future relationship between various currencies. With geo-political-trade tensions so high, nothing would please the Chinese, the Russians, or the Saudis more than an ability to conduct more of their business in something other than US Dollars. Well connected sources are increasingly suggesting that China, combining the gold ownership of its many government agencies, likely owns upwards of 20,000 tons of physical gold, rather than the 1,900 tons owned by the Peoples Bank of China, which they report. This dwarfs the 8,100 tons the US has owned since 1971. Russia, with their rapidly increasing 2,200 tons, is the largest owner relative to the size of their economy and currency and most able to implement some sort of a gold related monetary system if they were so inclined.

There are reports of international discussions relating to a new “reserve currency”, joining or even replacing the US Dollar. The Bretton Woods Agreement of 1944 assumed the US would maintain the “value” of the US Dollar by backing it with gold. The USA has blatantly abused its trading privilege during the last 75 years by “closing the gold window” in 1971, generating annual operating deficits in 35 out the last 39 years, running up $23 trillion of debt (excluding tens of trillions of unfunded entitlement)  and printing $4 trillion of fresh (fiat, i.e.unbacked) money by our Federal Reserve Bank. International monetary circles are starting to consider a new monetary “approach”, and worldwide central banks may be anticipating that likelihood by way of their physical gold purchases.  We believe that China could announce, almost any time, a new form of currency, perhaps a so called crypto-currency, backed by upwards of 20,000 tons of gold. At the same time, a new base price for gold bullion at $5,000/oz. or more would be supported by the Chinese.

The current worldwide fiscal/monetary “promiscuity”, unbacked paper currencies being diluted into oblivion by the politicians of the day, cannot go on indefinitely without predictable ramifications. When a trend cannot go on, by definition, it will not. We view gold as re-emerging as the true currency, the store of value and unit of exchange it has been for 5,000 years. Central banks, including our most direct political and economic adversaries, get it. The public in China and India get it. Investors in North America hardly at all, some might say “whistling past the graveyard”. It’s going to be interesting.

THE FEDERAL DEBT is north of $23 trillion in the US, also growing rapidly in the other largest trading nations in the world. We’ve pointed out many times that the debt is increasing even more than the annually budgeted operating deficits would imply. This can only happen with governmental accounting. The difference is due largely to the federal government borrowing from the social security trust fund. In the fiscal year ending 9/30/19, for example, the operating deficit was $984B but “off budget” spending, financed by the social security system which is itself approaching insolvency, took the cumulative debt up an extra $206B, from $21.97T to $23.16T. This is not “one off”, it happens almost every year and is to be expected. Therefore, we can expect the total deficit in the fiscal year ending 9/30/20 to be something like $24.5T, on its way to $26T by the time the newly elected president takes office in January,’21. This assumes that there are no economic disruptions, and a recession, with lower tax revenues and larger deficits are out there somewhere. All of this is very important because, the larger the debt the more difficult economic growth becomes. Whether we’re talking about an individual, a family, a company or a country, the more effort it takes to service debt, the less investment can be made in productive pursuit. Our economy and other major worldwide economies will therefore continue to be kept afloat by central bank financial creativity. It will work until it doesn’t, and will inevitably be accompanied by many unintended painful consequences.

INTEREST RATES are not going to change much in the foreseeable future. Interest payments on the debt are barely tolerable only because rates are so low. Every increased point (100 basis points) of extra interest equates to $230B of extra interest as current bonds mature, and over 50% of our outstanding debt is under 5 years. This extra interest would be a material increment and would squeeze out potentially productive government spending. Higher interest rates, which the US Fed tried briefly a year ago, stopped our economy and the stock market in its tracks, and the policy was quickly reversed. The US economy has stabilized currently but GDP growth is projected to be no more than a tepid 2% this year, even less than it was a year ago when slightly higher interest rates took their toll. The only way interest rates could rise by much is if the Federal Reserve, and other central banks, lose control over the situation and this would be a sign of impending financial chaos. Lower interest rates are possible, but the 10 year treasury note is under 2%, and the marginal benefit of lower rates from here is debatable. Negative interest rates on something like $13T of sovereign debt is a fact of life, but that approach has its own set of unintended consequences, and adoption by the US Fed would clearly be a sign of desperation. Give or take 50 basis points, we believe interest rates are “range bound” for the next year or two.

WORLDWIDE ECONOMIC TRENDS support our contention that worldwide central banks, in support of local economies, will maintain low interest rates interest rates, which provides a major tailwind for our portfolio. Headlines in the Wall Street Journal today, January 2, include (1) Asian Economies Must Brace for Chill Wind From China (2) Japan’s Lost 30 Years (with debt going to 250% of GDP) Give Pause to Those Looking at U.S. (3) Japan Has Gone from Growth Market to Bargain Rack (4) ‘Japanification’ Haunts Slow Growth Europe (5) Latin America’s ‘Oasis” Descends Into Chaos. As Wendy’s put it, thirty years ago: “Where’s The Beef”.

PUTTING IT ALL TOGETHER, we’re certainly pleased that our gold mining oriented investment partnership provided positive results in December, the 4th quarter, and the year.  The mining stocks have just begun to gain investment traction. It seems that, until now investors and analysts have not believed that gold at $1400-1500 per oz. is here to stay. They have been therefore unwilling to adjust upward their estimates of gold reserves, mine lives, earnings and cash flow expectations for the gold mining companies. Gold bullion prices have now clearly broken out on the upside from their six year “consolidation” and the possibility (we call it a likelihood) of a big upside move now comes into view. We can therefore expect upgraded expectations and higher valuations.

There have been virtually no major new gold reserves discovered in the last ten years, and new mines take many years to get permitted. Higher prices will allow expanded mining of some lower grade reserves by established companies but will not allow new mines to come onstream for many years. Existing miners have made major progress in cost control over the last few years and are in a position to improve cash flow and profits dramatically, even at current prices. Operating results for the quarter ending 9/30/19, the first quarter in eight years that the gold price was something like $200/oz. higher than a year earlier, have begun to demonstrate the operating leverage that is in place. We believe that the bull market in gold and gold mining stocks has resumed and the upside potential is very substantial.

Roger Lipton


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Key Economic Metrics Summary (from 10K dated August 13, 2019)

CONCLUSION: Selling at less than 10x earnings estimates for the fiscal year ending 6/20 and under 10x trailing twelve month EBITDA, EAT is reasonably priced statistically. The problem is that they are operating in a very competitive segment and continuously challenged to differentiate their commodity. They’ve done a credible job of controlling expenses, at the same time improving customer satisfaction, as evidenced by steadily improving comp sales. On the other side of the coin, typical of most publicly held restaurant companies, the growth of off-premise activity makes “dine-in” traffic comparisons even more negative than reported. Considering that off-premise is the primary source of sales growth, there are still too many restaurants out there and far too much square footage. It’s no accident that the best sales performance is coming from the small box (delivering)operators such as Wingstop and Domino’s. The 3.7% yield here is secure, the earnings improvement this year from their recent acquisition can likely be extended in fiscal ’21, but it is hard to see above average growth from there. They’ve already bought back a lot of stock, and the balance sheet leverage is fairly high (though it could be pushed further). Absent a catalyst that we cannot foresee, we don’t know why EAT would outperform the industry or the market on the upside.

THE COMPANY: Brinker International, Inc. (EAT), corporate headquarters are located in Dallas, Texas. They own, operate and franchise the Chili’s Grill and Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) restaurant concepts.

The Brands: As of August 13, 2019 there are 1,613 Chili’s locations worldwide with 664 being franchised.. Chili’s has been operating restaurants for over 40 years with the first being opened in Dallas, TX. Chili’s original core menu was gourmet burgers, skin-on-fries and frozen margaritas. Today it is known for its gourmet burgers, fajitas and baby back ribs. As of August 13, 2019 there are 52 Maggiano’s locations. Maggiano’s is a full service polished Casual Dining concept offering Italian American cuisine. Average check in fiscal 2019 was $28.66.

UNIT LEVEL ECONOMICS COMMENTARY: The AUV increase at Chili’s was 2.0% as shown, including a menu price increase of 3.9%. Maggiano’s AUV was up 4.4%, including a 1.6% menu price increase. The increase in COGS, up 30 bp to 26.5%, was caused from unfavorable menu mix and 20 bp increase in produce costs. Labor and Related costs increase of 10 bp to 34.1% was a result of higher wages which were partially offset by lower Manager Expense. Occupancy & Other Related Expenses rose by 130 bp to 26.2%. This was a result of higher Rent Expense associated with new operating leases, as well as higher Advertising & Marketing Related Expense. Store level EBITDA was 13.2% of total restaurant revenue for fiscal 2019. This was a 170 bp decrease from 2018 fiscal year results. This decrease was primarily a result of the increase in Occupancy and Other expense.

DEVELOPMENT COMMENTARY: For fiscal year 2019 the company opened 4 new company-owned Chili’s restaurants and closed 25 Chili’s franchised restaurants. During fiscal 2020 the company has acquired 116 Chili’s locations from franchisee ERJ Dining. Additionally, Chili’s is expecting to open 9-11 new company units and 30-35 franchise Chili’s. EAT is also planning on opening 1 new franchised Maggiano’s.

SAME STORE SALES COMMENTARY: Comparable restaurant sales represent locations that have been opened at least 18 months prior to the start of the accounting period. The increases in the table above are inclusive of the menu price increases, which provides negative traffic in each case.

RECENT DEVELOPMENTS: Per Q1’20 Earnings Release and Conference Call – Adjusted EPS, as shown in the statistical template at the top of this article, shows a 12% decline to $0.41 per share., primarily due to the acceleration of stock based compensation expenses for newly retired executives. Operating Income, aside from Other Gains, was $30.3M vs. $35.8M, down 15.4%, though $3.5M of the $5.5M decline was the just mentioned non-cash stock based compensation. Chili’s company operated comp sales were up 2.9%, US franchise sales were up 0.4%, and Int’l franchise sales were down 1.3%. Maggiano’s company owned comp sales were down 1.8%. Restaurant operating margin (EBITDA) was 11.0% of sales, down 10bp from 11.1%, well controlled with CGS up 40bp to 26.7%, Labor down 10bp to 35.1%, Other Expenses down 20bp to 27.1%. This was the 6th consecutive quarter of positive comps and the 7th consecutive quarter of outperforming the peer group in terms of traffic. In terms of openings: One company owned Chili’s opened, One domestic franchised Chili’s opened, Eleven int’l franchised Chili’s, , for a total of Thirteen Chili’s systemwide. Most importantly, 116 Chili’s Midwest US franchised restaurants were acquired, representing about $300M of annualized sales, three weeks of which ($15.3M of revenues) were included in Q1 results. The purchase price was $99M, funded from the existing credit facility. Cash flow from operations was $86.6 million, which resulted in $66.1M of free cash flow after $20.5M of capex. Relative to the balance sheet, adjusted leverage totaled 4.1x EBITDA, expected to be the high point of the year, coming down to 4.0x by 6/30/20.

From a product and marketing standpoint, there continues to be an emphasis on the “3 for 10” platform. A new and improved chicken product was rolled out. New products will continue to be developed, at the same time maintaining the narrowed focus that has served EAT well over the last two years. New table top devices are being rolled out and development of hand held units continues. Food to go, both takeout and delivery, is an important growth area, with two thirds of off-premise sales by way of digital channels. Off-premise sales was up over 25% in the quarter, now representing about 15% of total sales. Takeout is apparently growing roughly at a high single digit rate, reduced lately by the faster growth of Delivery. Improved packaging is a current emphasis, to reduce cost and increase customer satisfaction.

In terms of expectations, comp sales and margins are expected to be little changed from recent trends during the balance of the current year. Reference was made to “a little bit of headwind” affecting the somewhat higher end consumer at Maggiano’s, but bookings for the holiday season “look good”. While details were not discussed, earnings accretion, after interest charges, from the 116 store acquisition are likely expected to help during the balance of ’20 and then the fiscal year ending 6/30/21.

 CONCLUSION: Provided at the beginning of this article

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Key Economic Metrics Summary (from 10K – August 13, 2019)

CONCLUSION – Selling at just over 16x Adjusted EPS estimates for the year ending 7/31/20 and a little under 10x trailing twelve month EBITDA,  we consider that CBRL has more upside potential than downside risk. Punch Bowl Social is small relative to the size of CBRL, Maple Street Biscuit even more, so neither will move the EPS needle by much any time soon, but both could be intriguing to investors and allow for multiple expansion. Cracker Barrel’s Board of Directors has done a credible job of “returning cash to shareholders”, by way of stock buybacks, the regular dividend that equates to a current yield of 3.4% and special dividends of $3.75 and $3.00 in 2018 and 2019. Cracker Barrel is most accurately described as a cash cow rather than a growth vehicle at this point in their maturity cycle, but the cash flow is well managed, and two new concepts can allow for an attractive return on incremental invested capital.

THE COMPANY: Cracker Barrel Old Country Store, Inc. (CBRL) is principally engaged in the operations and development of the Cracker Barrel Old Country Store concept. Founded in 1969, they are headquartered in Lebanon, TN. As of September 18, 2019, there were 660 Cracker Barrel stores in 45 states. The format consists of rustic, old country store design which features a full-service dining room and a menu that focuses on home-style country foods. The entryway functions as a general store offering a wide variety of decorative and functional items such as rocking chairs, seasonal gifts, toys, apparel and foods. All locations are freestanding buildings with approximately 20% of the space dedicated to retail. The front porch features a row of rocking chairs that are utilized by guests during long waiting periods.  Cracker Barrel’s restaurants represent 80% of the revenue and their retail represents 20%. On July 18, 2019, the Company purchased about 58.6% of the “economic ownership interest” and 49.7% of the voting interest of PBS HoldCo., LLC, operator of Punch Bowl Social. As of 11/1/19, CBRL’s investment in PBS was $89.1M. Punch Bowl Social, with 19 locations averaging about $7.5M, can best described as an adult oriented Dave & Buster’s (but with a lot better food). On October 10, 2019, the Company purchased 100% ownership of Maple Street Biscuit Company, a breakfast and lunch fast casual concept (with 28 company owned and 5 franchised units), for $36M.


UNIT LEVEL ECONOMICS COMMENTARY: AUV – Restaurant Average Unit Volume increased from $3,724,000 in fiscal 2018 to $3,735,000 in fiscal 2019; an increase of 2.6%. This was due to the increase in average check by 3.3%. The retail AUV decreased from $902,000 in fiscal 2018 to $887,000 in 2019 due primarily to a decrease in retail traffic and price markdowns on slower moving merchandise. COGS – Total Cost of Goods Sold decreased in 2019 to 30.3% of sales compared to 30.9% for fiscal 2018. The decrease was primarily due to the menu price increase, lower food waste and a shift to lower cost menu items partially offset by food commodity inflation of 1.6% for the restaurant side. For the retail side, the contribution to the decrease resulted from lower markdowns and a decrease in the provisions for obsolete inventories. Labor and Other Related Costs – increased to 35.1% of sales in fiscal 2019 compared to 34.8% of sales in fiscal 2018. This increase was primarily due to an increase in store hourly labor costs (wage inflation that exceeded menu price increase) and an increase in store-level bonus expense in 2019. Other Operating Costs – increased from $601,889,000 in fiscal 2018 to $626,453,000 in fiscal 2019. The increase was primarily a result from an increase in maintenance of 0.3%, depreciation of 0.2%, supplies of 0.2%, store manager conference expense of 0.1% all due to higher costs associated with wage increases and for depreciation resulted from a higher capital expenditure. (Cracker Barrel combines multiple costs into this category which includes: utilities, operating supplies, repairs and maintenance, depreciation and amortization, advertising, rent, credit card and gift card fees, real and personal property taxes, general insurance and costs associated with their bi-annual Manager’s Conference and training events.) Store Level EBITDA – decreased from $666,144 in fiscal 2018 to $656,324 in 2019. The decline was a result of the increase in labor costs and other operating expenses partially offset by the savings from lower COGS.

At newly acquired Maple Street Biscuits, targeted AUV is over $1M and targeted store level EBITDA is over 17%. Punch Bowl Social has AUVs approximating $7.5M.

DEVELOPMENT COMMENTARY: For fiscal 2019 the company opened 8 new locations and closed 1 underperforming location for a fiscal year-end total of 667 locations. Expansion plans for fiscal 2020 include six new Cracker Barrels and one new Maple Street. Additionally, six of the seven unit Holler & Dash chain that has been incubating within CBRL will be converted to MSB. PBS is on hold for the moment, as a new smaller prototype is being developed. Longer term expansion plans for both MSB and PBS have not been established, no doubt to be discussed at length during the analyst meeting scheduled for June’20.

SAME STORE SALES COMMENTARY: Comparable same store sales consist of sales of units open at least six full quarters at the beginning of the year and measured on comparable calendar weeks.

RECENT DEVELOPMENTS: Per Q1 Earnings Release and Conference Call

The closing of Maple Street Biscuit took place in Q1, and $14.2M worth of stock was purchased as well. The decline of $$0.17 per share included $0.11 related to transactional and integration expenses related to MSB and $0.25 loss from the equity method of investment in PBS. The overall negative comp included an increase of 2.1% in restaurant sales included a 3.6% check increase and 1.5% traffic decline. Retail retail sales decreased 0.9% in Q1.

The income statement line by line: Total Cost of Goods Sold was down 100bp to 29.3%. Restaurant Cost of Goods was down 60bp to 24.6%. Retail CGS was down 170bp to 49.6%. Labor and Related Expenses was flat at 35.2%. Other Store Operating expenses was up 90bp to 21.7%. Store Operating Income (after depreciation) was up 10 bp to 13.8%. G&A was flat at 5.3%. Operating Income was up 10bp to 8.5%. Pretax Income was up 20bp to 8.0%. Provision for Taxes was flat at 1.4%. Net Income, after 80bp loss from unconsolidated subsidiary, was down 60 bp to 5.8%.

For fiscal 2020, ending 7/31, the Company guided to GAAP EPS of $8.50-$8.65, driven by: comp restaurant growth of about 2.0%, retail growth of about 1.0%, Operating Income margin of about 9.0% of sales (versus 8.5% in Q1), capex of $115-125M, an effective tax rate of 16-17%. This also includes an equity method loss of $0.80 from Bunch Bowl Social, as well as $0.15 loss from integration of MSB ($0.11 of which has already been recognized). MSB management is relocating to Nashville and PBS is staying in Denver, still to be led by CEO Robert Thomson.

Product emphasis during Q1 included a heavy emphasis on the Signature Fried Chicken Platform. Homestyle chicken is now available all week long, not just on Sunday, and a new Homestyle Chicken BLT sandwich was supported by six weeks of national TV.  Off premise sales are expanding by way of third party delivery available in nearly 600 stores, as well as 235 catering vans and several new catering sales managers.

Conclusion: Provided at Beginning of Article


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The new fiscal year for the US government started October 1st. In the two months ending 11/30, the current deficit has been $337B, up 10.4% from a year earlier, headed comfortably over $1T for the current year, up from $984B.  As always, the increase in debt is higher, up $360B, the difference being the “off-budget” spending, mostly to finance the deficit in the social security entitlement account. Most years, this off budget spending totals a couple of hundred billions, still a serious amount of money.

It’s no coincidence that the Fed Balance Sheet has increased, from 9/25 until 11/27 by $194B so the Fed has financed about 57% of the two month operating deficit. It’s clear therefore that the Fed has no choice but to continue expansion of its balance sheet. Now at $4.095T, it is clear that a new high above $4.5T is in the cards by the end of the current fiscal year ending 9/30/20.  Of course, the old high was put in place to stimulate growth in the wake of the 2008-2009 financial crisis. The new high will take place in the middle of “the greatest economy the country has ever experienced.”

THE QUESTION: What’s the matter with this picture?

THE ANSWER: In the 2008-2009 crisis the Fed balance sheet went up by $3.5T. Might the Fed need to take its balance sheet to at least $7-8T to forestall the next downturn. With any addiction it always takes a bigger hit to maintain the high. Economic policy would be simple if recessions (and worse) could be easily avoided by the printing of new money. Do you not suppose that a price must be paid at some point ? It’s trite but true: if something can’t go on forever, it won’t.


Today’s Wall Street Journal describes how the US is in a relatively strong bargaining position relative to trade negotiations. We respectfully disagree. (1) Both economies are increasingly burdened  by debt and supported by government spending.  China, though growth is apparently slowing to a mid single digit pace, with financial strains to be sure, still owns the fastest growing major economy in the world. The US, with its own set of economic distortions, is growing at a tepid 2% rate. (2) China, though diversifying away from dollar denominated securities, still owns over $1T of our debt, and could create havoc by forcing worldwide interest rates higher with their sales. While the markdown on their remaining position might create some discomfort at home, this remains a possibility (3) China can offset new tariffs by weakening the Yuan, requiring retaliation by the US and other trading partners (4) China is dedicated over the long term to joining, or replacing, the US Dollar with the Yuan as a reserve currency. Most students of the situation believe that China is very substantially understating gold reserves. We believe that many other Chinese agencies besides the People’s Bank of China have been buying physical gold, and far more than the PBOC has reported. Add the fact that adversarial Russia continues to purchase physical gold. Nothing would please China, or Russia, more than to replace the US Dollar with a new reserve currency that is backed by gold, and we believe that is where the worldwide monetary system is headed. It so happens that China and Russia are in the best position to do so. The key question remains: when ???

Roger Lipton

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Conclusion – The company is doing fine, the stock at 86x the consensus EPS estimate for the Y/E 8/20/20 is substantially overvalued. If there were a probability of margin expansion or an acceleration of same store sales, there would be the possibility of a rational expansion of the valuation. The risk, from this elevated valuation is that potential inefficiencies from the expansion plan, as well as the new expenses of supporting a publicly held vehicle, could impact store level and corporate margins negatively. We think it is likely that there will be a more attractive entry point down the road, when the performance as a public company is better documented, and the valuation relative to earnings and EBITDA could be better as well.

The Company  -Kura Sushi USA, Inc. (KRUS), based in Irvine, California, is a majority owned subsidiary of Kura Japan, which now operates over 400 locations. Kura, USA opened its first restaurant in Irvine in 2009, and operated, as of 8/31/19 twenty three locations across five states. Thirteen were in California, seven were in Texas, one each in Georgia, Illinois, and Nevada. Kura’s concept is technology enabled, providing a unique dining experience by way of a revolving sushi service model. Their cuisine encourages a healthy lifestyle by way of providing ingredients free of artificial seasonings, sweeteners, colorings or preservatives. KRUS came public on 7/31/19, selling 3.34M shares at $14.00/share.

 Unit Level Economic Commentary – while the AUV was flat year to year, the 6.2% increase in same store sales, a shown below, was driven by an increase in average check and traffic. The decrease in CGS from 34.0% to 32.8% of sales was due to an increase in menu prices. The slight increase in labor costs to 31.0% of sales was due to additional labor costs related to openings. Occupancy & Other expense increased primarily due to higher rents and pre-opening expense at new locations. Other Store Expense was up due to the opening costs of new restaurants, including credit card fees, kitchen supplies, advertising and promotions, royalty fees (0.5% of sales to Kura Japan) and utilities.

Development Commentary –  in Fiscal ’19 four of the six new units were in California, one in Schaumberg, IL and the other in Las Vegas, NV. Six new locations are planned for the FY  8/31/20. Over the long term, 20% unit growth is planned.

Same Store Sales Commentary – Comparable sales represent restaurants open for at least 18 months prior to the start of the account period, including those temporarily closed for renovations during the year. The sales growth measure excludes the Laguna Hills, CA locations, which closed during fiscal 2018.

Recent Developments  – Per 8/31 report and conference call – Comp sales were up 9.4% in Q4, including 3.0% price,  the eleventh quarter out of the last twelve that comps have been up. In particular, two stores located in shopping centers became fully occupied for the first time, contributing (a “very significant” amount) to the overall comp gain. Two new restaurants opened in the quarter, in Garden Grove, CA and Las Vegas. Adjusted EBITDA, in this first reporting quarter after going public, was $2.2M, up from $2.1M in Q4’18. Restaurant level EBITDA was down 280 basis points to 21.6% as a result of occupancy and other costs. During Q4, in August,  the rewards program was expanded from two restaurants to sixteen locations. The response has been “encouraging”, with a boost in average check size and frequency. A new Touch Panel ordering system is currently being tested. It is noteworthy that the effective tax rate for FY’19 was only 4.5%. Guidance for the Y/E 8/31/20 includes comp growth of 2-4%, restaurant level EBITDA from 20.5-21.5%, openings backloaded with two in Q3 and 2 in Q4, expect a net loss in Q1, near breakeven in Q2 and steady profitability improvement in the second half of ’20. That margin improvement is expected to come from pricing, technology driven efficiencies, better labor control and reduced waste.

Conclusion – Provided at the beginning of this article

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