All posts by Roger Lipton


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I haven’t written much in the last two weeks (seems a lot longer), because there is not much any one individual can add to the 24/7 conversation in the news. It is amazing how many commentators, who are presented as “authorities”  have no credentials better than yours or mine. many of which even have a particularly  poor success record. Brings to mind what Yogi Berra said: “Predictions are tough, especially about the future”.
Relative to the restaurant industry:
It’s normally about day to day execution, the “micro” side of things. You’re only as good as the last meal you served.  These days, it’s all about worldwide health trends and “macro” financial considerations.
(1) There will be no V shaped recovery. While there will be a “recovery” from the disastrous current situation, as the “cabin fever” breaks, consumers will still be traumatized. I will be happy  to get out again, but I’m not going to eat three times as many meals to make up for those I missed. Our parents remembered the depression for their lifetimes. This is a shorter term event, but won’t end all it once. Economic and health concerns will still be with us.
(2) Yesterday we read an 8-K  filing by Dave & Buster’s (PLAY)(in which I have no current position)  that included reference to “going concern considerations”.  The Company has received a waiver from their lender, allowing PLAY to have a “qualified opinion” from their auditor. As the filing says “The Company currently anticipates that its financial statements will contain disclosures indicating substantial doubt about the Company’s ability to continue as a going concern as a result of the events occurring after February 2, 2020.”
We do not point this  as a negative for PLAY, in particular, who are apparently now negotiating for additional equity. There are now thousands of businesses, worldwide, that are not “going concerns” under current circumstances and with the lack of visibility. It will be commonplace for companies that have not yet finalized year end audits to have audit opinions qualified by “going concern” considerations. It will also be commonplace for waivers to be given by lenders, who have lots of other things to do rather than run these businesses. Their “workout” departments aren’t nearly big enough. All of these financial adjustments, for almost all companies,  will not be a source of comfort to investors.
“Moratorium” is becoming the operative word. Salaries, rents, and mortgage payment relief have increasingly been discussed over the last couple of weeks. For the first time, this morning we heard the Bank of America CEO suggest that mortgage obligations over the next 3-6 months be “suspended” and added to the end of the mortgage. The domino effect of a restaurant not paying rent is obvious. The landlord has a mortgage to pay, and the lender has its own financial obligations. Everybody can’t be covered, and we will likely  go through some sort of a “force majeure”, though it may be piecemeal and unstated. There are going to be multi-trillion dollar inefficiencies, and this will last for years. It ought to be inflationary, but who can tell?  Read our “Semi-Monthly Fiscal/Monetary Update that we published yesterday.
(3) ON A POSITIVE NOTE: Nobody knows how this plays out, or the timing. There were huge changes in our life after 9/11, airport security being the first to come to mind. There will be similar adjustments after this crisis. It’s is easy to suggest  that nobody will ever sit in the middle seat on an airline. When will Cheesecake Factory or Olive Garden be packed again? Seems like never. HOWEVER: less than twenty years ago, we watched people jump off the WTC buildings to save themselves. Who would believe that those tower “targets” would be replaced and that companies would locate on the top floors. LIFE WILL CHANGE, BUT NEVER SAY NEVER!
Roger Lipton
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First, from myself and my administrative partner for over thirty years, Michael Heyward,
we are hopeful that you and your loved ones are surviving this ordeal as well as
possible. Michael and I and our respective families are unharmed so far. Michael is
working out of his NYC apartment and I am with my wife and daughter in Southampton,
where my daughter had already been living and working. We can always be reached by email ( or phone. Our office phone will be forwarded to my cell phone. This letter is longer than I usually like to provide, but I’ve got the time to write it, and you probably have the time, for a change, to read it. It helps me organize my thoughts, is probably therapeutic for me, and I like all of you to be as well informed as possible.

Our world, in many ways, has changed for the foreseeable future. Unprecedented
measures are in place from a healthcare standpoint, and financial remedies are being
undertaken that are even more uncertain. All of this has created unprecedented
volatility, with equity markets often moving 5-10% per day. While gold bullion, as
a safe haven was actually up a bit for the month, the gold mining stocks acted
like stocks (as discussed below), and were down with the general equity market.

It is worth noting that most of the largest mining companies are paying dividends.
While the average return is about 1.5% (more than twice that of a 10 year US treasury note), the amounts are increasing and could become much more meaningful as earnings reflectthe higher gold price and lower operating expenses. As an example, in late 1929 the
value of Homestake Mining stock was about $80/sh. During the next six years
Homestake paid out a total of $128/sh. in cash dividends, including $56 per share in
1935 alone. Many of today’s mining companies have demonstrated a willingness to
share profits with investors by way of dividends.

I’ve often said that “hope is not a strategy”, and a dramatic recovery of gold mining
stocks is not just a hope, but continues to be a well considered expectation. The stocks
are a huge bargain under just about any scenario and there is no place I would rather
be for a still large part of my family’s liquid net worth.


Even the modest year to date increase in the price of gold bullion has not reflected the
unprecedented creation of paper currency by the Federal Reserve Bank and the multi-trillion fiscal stimulus from the government. Furthermore, the dramatic relative weakness
of the mining stocks seems to be due to a number of short term factors.

(1) The gold mining stocks are “stocks”, in brokerage accounts, and subject to margin
calls as portfolios depreciate, as opposed to physical gold, which is usually paid for in full and generally stored in presumably safe places. Physical bullion is accumulated worldwide, including by Central Banks, while mining stocks are owned largely by North American investors who are not nearly as committed an “uncorrelated safe haven” or a “money substitute”. In a panic phase, stock investors sell “what they can, rather than what they want to”.

(2) Eight to ten years ago, quite a few mining companies did a poor job allocating
resources and managing balance sheets, particularly with acquisitions. In many cases,
corporate management has changed and/or learned from experience. Operating profits
were also reduced until just recently by the high cost of energy, partially offsetting the
higher gold prices. Balance sheets are now generally strong. Operating results have
been excellent for most established miners in the last year or so, vividly demonstrated in Q4’19, as gold production is sold for prices $200/oz. more than in ’18 and energy costs started to come down.

(3) There have been a number of mines closed temporarily due to the Coronavirus. This
is obviously not a short term positive, but this has not been widespread so far, the
money is still in the ground, so the long term value of the companies are intact.

(4) A great deal of daily trading is still dictated by computers, responding to short term
trading patterns, so price weakness begets more selling, for no particular fundamental


Fundamentally, the Coronavirus has quickly created the financial desperation that has
been inevitable in the wake of forty years of financial folly, especially the last twenty
years, most especially in the last ten. Since ’08, the $3.5 trillion of money creation and
growing operating deficits, accompanied by suppressed interest rates have allowed for
tens of trillions of mis-allocated capital, as investors “reach for yield” in various forms.
The unpredictable surprise is that the financial “chickens would come home to roost” as
a result of an internationally contagious virus.

We pointed out to you just last month that the current trading pattern is likely to be a
repeat of ’08 and early ’09, when gold and the gold miners went down with the general
market. Once the markets stabilized, gold quadrupled over the next two years and
the miners did even better. The difference this time is that gold bullion has held up
relatively well, so the gold miners are even more of a long time bargain. Of course, the
money printing and fiscal stimulus now being provided is an order of magnitude larger,
so both gold bullion and the miners should make proportionately even larger moves than
in ’08 to ‘09.


The unimaginable amounts of currency that are being created will have two possible
general consequences. There could be the desired “save” of the economy, and the
potential very inflationary consequences are far down the current list of worries by our
leaders. Workers will go back to their jobs, restaurants will reopen (in many cases),
sports events will take place (with appropriate care) but it is hard to picture “old times”
any time soon. As a middle ground (e.g. the 1970s) we could have “stagflation”, which
especially affects the middle class. The other extreme is a 1930s type deflationary
downturn, as the government stimulus fails to turn the economic tide, and economic
distress for almost everyone.


The best demonstrations of the inflationary influences on gold bullion and gold
mining stocks comes from the 1970s and the period from 2000 to 2012.
Setting the stage for the discussion of the 1970s: recall that the Bretton Woods
Conference in 1944 established the US Dollar as the world’s “reserve currency”, with
worldwide trading to take place in “King Dollar”. The US had the responsibility of
backing the Dollar with gold, at an exchange rate of $35.00/oz . That conversion
option would presumably control the natural political instinct to produce paper
currency at excessive rates, in essence spending to satisfy electoral constituencies.

The program worked adequately well until the mid-sixties when spending increased under the influence of Lyndon Johnson’s Great Society and the Vietnam War. Foreigners realized that operating and trade deficits were on the horizon and reduced the US stash of gold between 1969 and 1971 from over 20,000 tons to 8,400 tons, which hasn’t changed since then. President, Richard Nixon, closed the gold window in August, 1971, eliminating the conversion privilege. His speech, which you can find on YouTube, assured us that this move would be for the best, and help the US economy.  The gold price took off immediately, peaking at $850/oz. nine years later. The economy went into “stagflation”. The stock market reflected the economic malaise, climaxing in 1973-1974 with the collapse of the highly valued “nifty fifty” growth stocks (FANG of the 1970s). Inflation went up steadily, peaking at about 12% as theFederal Funds Rate went to 18% late in the decade. Gold stocks, mostly South African mining companies did well, though hardly any are still independently trading and it is difficult to find price histories through the decade. We did find that the Gold Mining Index, composed of ASA (a mining stock mutual fund), miners Campbell Red Lake and Dome Mining, appreciated more than 260% from its 1973 low (40) to its 1974 high (147). So during the most severe portion of the 1973/74 bear market, while
stocks lost half their value – gold mining companies almost quadrupled.

Starting in 2000, after about twenty years of relatively controlled government spending
and three years of budget operating surpluses (can you believe it?) at the of Bill
Clinton’s presidency, government spending took off. This was the result of coping with
Y2K, the aftermath of the 9/11/01 terrorist attack which included two wars, and the
collapse of the stock market dotcom bubble. Alan Greenspan’s Fed papered over the
problems, which helped to produce the ’08-’09 financial crisis. In the course of
preventing an economic collapse ten years ago, we all remember TARP, Cash for
Clunkers, and other government programs which cost something like a trillion dollars. At
the same time, the Fed embarked on an interest rate suppression experiment, taking
their balance sheet from about one trillion to $4.5 trillion to buy fixed income securities,
including those issued by the US Treasury.

The US balance sheet has also become  increasingly burdened with debt as a result of annual operating deficits. The US federal debt more than doubled under GW Bush to about $11T, grew to about $20T under Obama, is now $23T and accelerating in a major way. As a percentage of GDP, it has been just under the peak when we were conducting WW2, and will shortly exceed that. Gold was trading around $300/oz. in 2000, peaked at $1850-1900/oz. in 2011. Gold mining stocks did even better. As a proxy, the Tocqueville Gold Fund went from $10 to $90. All the influences that provided this performance are back in place today. The only difference is that gold mining shares are even less expensive, relative to the price of bullion, than they were in 2000, and the positive factors we have discussed are much larger. There is a lot more paper currency being created, zero percent interest rates
were not even conceivable in 2000, operating deficits are much larger, and a “safe
haven” has hardly ever been more of a need for investors.


Overriding all of the inflationary or deflationary possibilities, Central Banks, which were
created to control inflation, are desperately trying to stimulate inflation, lately targeted by
the US Fed at a “symmetrical” 2% rate. This means that a rate of over 2% (no doubt
substantially over) will be tolerated because we have been well under 2% for so long.
Inflation is necessary to encourage consumers to spend today, before prices go up,
and to allow everyone, from individuals to countries, to liquidate their debt for less
valuable currency. Above all, deflation is the ultimate curse, because consumers won’t
spend and the debt at every level becomes more of a burden.


The other possibility is to allow the markets to “clear” in the course of a deflationary
depression. It hurts me emotionally to even use the word, but it has happened before and it will happen again at some point.

The magnitude of the current monetary and fiscal support is unprecedented. According
to historical accounts, the Federal Reserve Bank, while active in the 1920s, essentially
ceased open market operations in 1934, so did not play a meaningful role. However, the
FDR administration, over seven years from 1933 through 1939, provided $41.7 billion,
which translates into about $700 billion in today’s dollars. The increase in the federal
debt during that time was 30%. The cost per capita, in today’s dollars, was about $5,800
per US person. The $41.7 billion represented about 40% of the 1929 GDP.

At the moment, the Federal Reserve Bank has committed to creating $1.5 trillion, to
purchase all manner of securities, backstopping money market funds, various ETFs,
and mortgage securities, among others. Last Friday, the federal government passed a
$2.2 trillion stimulus bill, with a promise to do a lot more, as needed. The combined
“down payment” of $3.7 trillion amounts to over $11,000 per US capita, almost double
the seven year New Deal. Almost everyone expects many trillions of dollars to follow.

The effect on the US balance sheet, already at a level that has impeded growth, is
similarly dramatic. Previous expectations were that the current year’s deficit would be
about $1.2 trillion, and the debt would go up by about $1.5 trillion (including off budget
items, funded by borrowing from the social security trust fund). Those numbers were
expected to go steadily upward in the 2020s, assuming steady GDP growth of 3%,
which was always questionable. It is clear now that the current year’s deficit, ending
9/30/20 will be at least $ 2 trillion and a lot more in 2021 with the absence of capital
gains tax receipts, as well as lower personal and corporate taxes. The current federal
debt is above $23 trillion, already over 100% of GDP, so it is easy to picture federal debt
well over $30 trillion seven years from now, an increase of a lot more than the 30% of
the 1930s. This is important, because a higher debt burden impedes productive
investment and growth, for a family, a business, or a country.

The last comparison is the stimulus and spending relative to the nation’s GDP. The New
Deal spending was about 40% of the nation’s 1929 output. GDP in fiscal 2019 was
$21.4 trillion, so 40% would be $8.6 trillion; a number which we believe will be exceeded
before the dust settles. It is important to note, however, that the federal debt/gdp ratio
was only 16% in 1929 and 33% in 1933 (before the creation of social security and
Medicare and other entitlements), and stayed around 40% through the 1930s. This
compares to over 100% in the US currently (without including unfunded entitlements).
The US in the 1930s was therefore at a much more manageable starting point, more
able to spend 40% of GDP in an attempt to save the economy.

An argument can be made that gold mining firms do even better during a deflationary
depression than during an inflationary depression (or stagflation). Profit margins are at
their best during these conditions because labor is cheaper and operating costs are
lower. In particular, energy costs to drive earth moving equipment amounts to 20% or
more of variable expenses and drilling rigs are more available. One of the reasons gold
mining stocks have underperformed other commodity stocks over the past few years
was because the cost of production was rising so dramatically.


Relative to the 1930s, it is well documented that the economy stabilized from 1933
through 1936, then endured a serious recession in 1937, blamed on the Fed who is
accused of tightening money markets prematurely. It wasn’t until after World War II,
when the soldiers came home and the US resumed normal activities (making babies,
buying autos and homes, etc.etc.) that the US economy, its GDP and employment
statistics, returned to pre-depression levels. Economists debate whether FDRs New
Deal shortened or lengthened the adjustment after the roaring twenties. We are in the
latter camp, partly due to our observations about more recent governmental

Following the Asian Financial Crisis of 1997, Japan fell into an economic recession.
Beginning in 2000, the Bank of Japan (BOJ) began an aggressive QE program to curb
deflation and to stimulate the economy. The BOJ moved from buying Japanese
government bonds to buying private debt and stocks.  Between 1995 and 2007, Japanese GDP fell from $5.4 trillion to $4.52 trillion, so the QE program was obviously ineffective. Japanese government debt has continued to accumulate, now amounting to about 250% of GDP, but continues to fail in terms of stimulating inflation and better economic growth.

The Swiss National Bank (SNB) also instituted QE after the 2008 financial crisis. The
SNB has now accumulated assets, including US equities, nearly equal to annual GDP,
the highest in the world, relative to GDP. Even with the QE program, GDP growth has
averaged less than 2% for the last decade. Even with interest rates below zero,
the SNB has been unable to stimulate inflation, averaging under 1% for the last decade.
It is, of course, unclear, what might have been the case without QE, but the results have
not met targets.

The Bank of England (BofE), after creating 375 pounds ($550B) of new money between
2009 and 2012, in August 2016 announced a QE program to counteract “Brexit”. The
plan was to buy 60 billion pounds of government bonds and 10 billion pounds in
corporate debt. The object was to suppress interest rates and stimulate business
investment. From August 2016 through June 2018, the UK reported that capital
formation (a measure of business investment) was growing at an average quarterly rate
of only 0.4%, lower than the average from 2009 through 2018. It is, once again,
impossible to know what would have been the case without QE.

We have all lived through the various QEs that were created to deal with the
2008-2009 financial crisis. The Fed took their balance sheet from about $1T to
$4.5T and almost a trillion dollars was provided by government spending
(TARP, Cash for Clunkers, etc.etc.). Interest rates have been maintained at
rates close enough to zero that all kinds mis-allocation of capital has been the
result. GDP growth averaged a tepid 2.3% from 2009 through 2016. The last
three years, under a business friendly administration, have continued to
provide monetary and fiscal accommodation, but GDP growth has averaged
no more than 2.5%. Once again, while it is impossible to know what would
have been the case without government “help”, the results have been less
than impressive.


There is no reason to think that the programs being implemented will be successful in
re-igniting the US, or worldwide, economy by way of even larger credit and debt
creation. By the way, the US did not have a 3% GDP economy prior to the Coronavirus, as is being promulgated by the conservative media and more or less accepted by the liberal commentators. Last year was about 2.5% and Q1’20 was on the way to just over 1% before the Coronavirus reared its head.

Overall, one does not get out of a hole by continuing to dig. Even China has failed
to maintain their previous double digit growth rate by way of the rampant availability of
credit. The Chinese Communists are very smart and plan for the long term, but they
have not repealed nature’s laws of supply and demand.

We cannot predict to what degree the governmental intervention will succeed in
papering over the current healthcare challenge which is already becoming an economic
crisis. As described above, no matter which direction the worldwide economy takes,
gold should emerge as the best currency standing as well as the asset class that will best protect purchasing power. We cannot know the exact timing, or extent to which gold (and the mining stocks) will appreciate from today’s bargain prices. It is true that other asset classes have recently become better bargains as well. However, gold and the gold miners, especially at recent prices, represent the ultimate uncorrelated asset class, safe haven and most secure long term store of value.  Accordingly, they should appreciate very substantially whether Central Bankers succeed, or fail, in their desperate effort to “save” the economy.

None of this is any fun but the above discussion should provide a template in terms of the possibilities. The investment partnership that I manage is 95% invested  in gold mining stocks, and open to new investors 🙂

These difficult days move slowly, but we will all get through this. Stay
healthy and safe, and call or write any time you like!

Roger Lipton

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We are all stunned, investors, operators, analysts, bankers, alike. Our lives, professionally and otherwise are seriously changed, if not forever, then definitely over the next year or two.

You’ve no doubt already read a number of excellent articles and heard podcasts outlining steps  that operators should be taking, including: cash conservation, focus on off premise sales wherever possible, talk to your bankers and landlords (who are financing your premises), communicate with your employees (and ex-employees) as much as possible to be prepared for the startup. We disagree with the suggestion that it will be difficult to restart if you close down completely. Your current staff, if you treat them humanely as they leave, will be anxious to get back and they haven’ t forgotten how to cook, serve, or manage.

I haven’t written anything in the last week or so because my primary focus is on the financial side of things, and it is impossible to know what that aspect looks like. We don’t know when or how renewed activity is going to take place. We know there will be a great deal of damage to balance sheets but can’t measure it. Stock prices have come down from a relatively  modest 20% (in the rare case of Domino’s) to a more typical 75-80% at the lows of last week. Yesterday and today we have seen huge “dead cat” bounces, over 100% in the case of Red Robin (from $5 to $12), for example, but it is still down from $24 three weeks ago and $36 six weeks ago. In most cases, the prices at the moment, still down over 50% from just a few weeks ago, are efficiently valuing the huge uncertainties ahead.

My observation is that the restaurant industry participants most affected long term but probably not yet adequately discounted by their stock price, is that group that took the greatest opportunity to leverage themselves to the hilt. That is the pure franchisors, living off “free cash flow”, and leveraging themselves to the hilt in the process. Private equity investors and activists have blessed the “asset light” model and this has been a catalyst in the process. If current management of the publicly held company won’t engineer the balance sheet appropriately, there have been hundreds of millions of dollars with private equity firms, with leverage on top of that, that will be happy to help. It has been a productive formula for a long time. We have written many times about the fact that franchise royalties are not “free cash flow”, that support has to be provided to the system to keep it modern and relevant. We have pointed out that funds used to repurchase hundreds of millions (and more) of stock could have been, at least partly, used for new product development, and a myriad of other operating needs.

Just a few examples of heavily indebted pure franchisors are: Wendy’s (with debt at 4.8x trailing twelve month Adjusted EBITDA), Dunkin’ Brands (4.8x), Yum Brands (4.7x), Restaurant Brands (4.5x), Jack in the Box (4.2), Dine Brands (4.3x). Of course the  multiple of debt vs. TRAILING TWELVE MONTH EBITDA has become irrelevant. We can’t even imagine what the EBITDA is going to be the next twelve months, the twelve months after that, or beyond.

What we can imagine is that the franchisee, when he or she re-opens their stores, is that royalty payments are going to be the farthest thing from a priority. Rents have to be renegotiated, suppliers and employees have to be paid if product is going to move through the facility, utilities and insurance can’t be stretched too far, trash  must be picked up, etc.etc. Sales will likely be strong compared to the last few months, after the cabin fever breaks, but it is reasonable to assume that social distancing will be in place, enforced or not. You get the picture.

With the above in mind,publicly and privately held franchisors had best evaluate their own levels of corporate overhead, since all that free cash flow has turned out to be not so automatic. This brings us back to the billions of dollars of loans that have to be repaid somehow, probably with fewer stores and lower sales. No doubt more than a few franchised stores will close and I wouldn’t count on many newly built locations. For example, that $11B of net debt at Restaurant Brands (QSR) may have to be stretched out, and I don’t think they will be buying any more stock back from 3G. (FWIW, I currently have no position in QSR.)

Since I promised to point out some opportunities, I would most seriously consider operators with little or no debt, a small physical store footprint, an ability to provide off-premise service, and historically strong store level economics. Valuations aside, chains that meet that general outline include, Starbucks, Domino’s and WIngstop.

As a last word, on an optimistic note: The restaurant industry has been over-stored for years, with new locations still being built. That issue is solved. Rents, which have only gone up, will be far more negotiable. Labor will be more available, for not much more than the minimum wage. In short, survivors could have an easier time, even though a difficult transition is ahead, and people have to eat, after all.

The sun is still rising in the east, and we’ve had a good run. Stay healthy, and we’ll figure something out.

Roger Lipton


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The challenge in these times is to remain constructive, productive, and flexible, and healthy, of course.

Our friend, John Hamburger, proprietor over the Restaurant Finance Monitor and Franchise TImes (the publications and the conferences) published the following article. We are reprinting here, with his permission.


The challenges for restaurants from the Covid-19 virus are formidable. Already, some state and local governments have ordered restaurant interiors to either be closed or capacity constrained. Expect those requirements to be a national mandate soon. Fortunately, carryout, delivery and drive-thru operations are spared. Things are bleaker for sit-down restaurants that don’t have carryout or delivery capability.

The focus of this article is survival and what you can do to stay in business and protect the long-term viability of your restaurant operation. Two things are paramount, and we’ll discuss them both in more detail, below: First, keep your employees informed and try to keep them working as much as possible. Second: Restaurants are notorious for running with negative working capital. As sales slow, cash must be hoarded at all costs. Curtail all non-food, non-labor cash outflow immediately.

Here are some ideas to ensure the viability of your business at least until the all-clear signal is given.

  1. Communicate, Communicate, Communicate. Now is not the time to crawl into a hole. Keep your employees informed and working as much as possible. They know the situation with the virus and the community need for social distancing, but what they don’t know is how it will impact them. Set up a communications and scheduling team just to deal with employees. You will need your employees to return to work. Employers who do not take care of their employees, as best they can, face a difficult recovery. Also, make sure to keep the safety of your employees and customers front of mind. They must know that you’re concerned for their safety. You will need a designated point person for communicating with customers, vendors and landlords. As for the bank, get a phone meeting ASAP to share your plan.
  2. New Store Development and Remodeling. Stop all new development and image enhancement projects immediately. It makes no sense to build new restaurants or remodel others right now. Forget about your franchise development agreement. You need to preserve cash for your operation and that means stopping the cash going toward new locations and remodels.
  3. If you are a franchisee, defer the payment of royalties and ad fees immediately. Let’s get one thing clear: You will eventually be required to pay these royalties and ad fees back, however the asset-light franchisors understand they need you to stay in business to support their valuations and they don’t want to spook their bank or Wall Street any more than they have are already.
  4. You’ve paid March rent, but if your store is temporarily closed, call your landlord and let them know you can’t pay the April rent right now due to something completely out of your control. Tell them you need to get through this crisis first, and that you will eventually pay them, or restructure the lease—workouts happen all the time in real estate. As a precaution, remember to disable any auto-pay rent features on your bank account.
  5. Off-Premise. This is where the game will be played in the next few months. Focus all of your efforts on delivery and takeout.

Staff only those employees needed to run that aspect of the business.

  1. Municipal utility companies are not going to turn off power and light during a crisis. Use them for credit as long as they will let you.
  2. Bank Loan Agreements. Start a discussion immediately with your banker. Ask them to suspend any principal payments due for the next 90 days, with a right to extend for another 90, if circumstances dictate.
  3. Real Estate Taxes. There may be penalties for non-payment, but the county is not going to kick you out.
  4. Marketing and Advertising. Focus your spend on your loyal customers. Curtail all unnecessary media, unless it is used to drive delivery, take-out and drive-thru orders. Radio advertising is worthless now as no one will be driving cars to and from work.
  5. Store Rationalization. You may be forced to close restaurants located near sports venues and airports. Make sure you have security around them. As people get bored with staying home, vandalism and looting could occur.

I’m not a medical doctor but one can only hope the Covid-19 will start to dissipate by mid-to-late April. People will be anxious to get out of the house and start attending sporting events and visiting your restaurants again. There may be some disaster assistance available to restaurant owners via the Small Business Administration but it will probably come after the fact.  The important point here is to use any means necessary to stay in business so you can serve guests once again when this pandemic is over.

John Hamburger

Reprinted by: Roger Lipton

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ln no way do I want to minimize the seriousness of the situation. There is no question that life has changed in a major way for all of us. You don’t need me to talk about worst case situations, or speculate on what the future might look like,  since that aspect is being well covered, 24/7, and your guess may be as good as mine. So:

There was a very good, constructive, and even hopeful, interview that Maria Bartiromo conducted with Michael Milken, the enormously productive billionaire philanthropist. Milken, as many of you recall, was the “junk bond king” in the late 1980s, went to jail for a couple of years for reasons that may or may not have been justified. We need not debate that aspect of his adult life.

He had “terminal” prostate cancer shortly after he came out of prison, and he beat it with a world class study of the causes and treatments, and that ongoing research has benefited victims of prostate cancer every since.   The important thing today is that he has transformed medical science over the last thirty years by way of his research foundations.  Below is the transcript of this weekend’s interview. FWIW.


In an exclusive interview with “Sunday Morning Futures,” financier Michael Milken, chairman of the Milken Institute, discussed what he believes are effective ways to address the coronavirus crisis.

On Sunday, Milken, who has been studying life-threatening diseases for decades, discussed testing and potential cures for the virus.

“Testing is going to change dramatically,” Milken noted. “In Nebraska, they’ve announced they have the test down to two hours and I’m sure it will become faster.”“We can’t talk about all the mistakes or what went wrong in the past. We need to focus on how to ramp up testing,” he continued.  Milken then referenced President Trump’s press conference from the White House on Friday, which included major retail CEOs such as the CEO of Target and Walmart, and where Trump declared a “national emergency,” pledging $50 billion to stem the tide of the coronavirus pandemic. During the news conference it was revealed the administration will attempt to expand coronavirus testing around the country by implementing “drive-through” sites at retailers, including Walmart and Target.

Milken said Friday’s press conference shows that “just like Pearl Harbor, private industry and public partnerships are mobilizing today to deal with the testing problem.” “That will be behind us,” he added.

Milken then went on to discuss potential treatments with host Maria Bartiromo.

“There are more than 30 antiviral treatments that we are testing today,” Milken said on Sunday. He then noted, “We do not have a vaccine for HIV and AIDS, but antivirals has brought it under control for the vast majority of people in the world today and so the treatment with antivirals, the treatment with antibodies and the things that can energize your immune system and put good bacteria in your body are already occurring in cancer and Crohn’s disease and have been very effective.” “There’s a high probability that we will control this disease (COVID-19) with antivirals and other treatment long before we have a vaccine,” he added. Last month, the World Health Organization (WHO) estimated it would take 18 months to develop a vaccine for the novel coronavirus. Milken explained that antivirals, therapeutics and “putting good bacteria into patient’s bodies” could actually be quite significant, even if a vaccine isn’t available for more than a year. 

“We know the Gilead anti-viral treatment has already gone into patients,” he told Bartiromo.  In February, Gilead Sciences, Inc. announced the initiation of two Phase 3 clinical studies to evaluate the safety and efficacy of remdesivir in adults diagnosed with COVID-19. Beginning this month, the randomized, open-label, multicenter studies will enroll about 1,000 patients at medical centers primarily in countries globally with high numbers of diagnosed COVID-19 cases. The initiation of these studies follows the U.S. Food and Drug Administration’s rapid review and acceptance of Gilead’s investigational new drug filing for remdesivir for the treatment of the novel coronavirus.

“There are numerous Americans that have had good outcomes … We could take their good bacteria and put it into other individuals,” Milken said on Sunday.”



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You don’t need me to tell you that we are all living through unprecedented times. First and foremost, I hope everything is well with you and your loved ones. For what my opinion is worth, and from what I read, the virus hates “heat”, temperatures above 77F degrees and sun, and I think the weather will warm up in the USA before the most dire of the predictions take hold. That of course varies from country to country but aggressive precautions are now in place all over the world, and I hope (and actually expect) that will be sufficient to stabilize this situation.

In terms of all equity portfolios, this has obviously been an unbelievably volatile month in the financial markets. The last week and a half have been brutal, there has been no place to hide, everything gets hit with margin calls and so forth. Investors, and especially traders, sell “whatever they can”, not “whatever they want to”.

As you know, I’ve been writing, and investing, with the long term debt and credit bubble in mind, expecting a new round of money printing and stimulus when the next recession hits, which will drive gold and especially the gold miners much much higher. I have expected, in the next few years, for gold to be $5000 or higher and the gold miners to go up 10-20x in value. The big question, of course, is timing, but with the trillions of stimulus now being discussed, it seems like the time is just about here. Just as in 2008-2009, once the dust settles, gold and the gold miners should lead the recovery by a lot. Nobody could foresee that it would be a worldwide virus that would start the deflation of the latest and largest debt and credit bubble, but I view the forty years of monetary and fiscal promiscuity by central banks and governments as the cause of the current situation in the capital markets. The coronavirus, expected by nobody, is just the catalyst.

My general conclusion, therefore, is that this too shall pass, in terms of the coronavirus, but the effect on the worldwide economy (and probably the equity markets) will be much more long lasting. Recovery will take place in stock prices, but it could be a long time coming. There has been an enormous amount of psychological damage to investors. The lack of liquidity in everything, and the risk, especially in equities, has now been demonstrated. There are a lot of “kids”, who have only managed money during the last ten years, who never saw a real downtick until ten days ago. Also, stocks may look “cheap”, but in 1974 there were 150 stocks on the NYSE selling for about one times EBITDA, so equities can get a lot cheaper before they recover. Central Banks and Governments, around the world, will “do what it takes” to support the capital markets but it will require many trillions of new dollars. That will provide a much larger debt burden, which will be a larger deterrent on an economic recovery, and therefore limit the recovery in stock values. Japan has been leveraging up their government balance sheet for 30 years and have avoided recession but growth has been slow, and their stock market is still way below the speculative high of 1990. I’ve provided a chart below.

My personal ongoing strategy is to stick with the gold mining stocks, which I feel represent the best long term value among all asset classes. Their performance has been terrible the last ten years, even as gold bullion has gone from $900 to $1600, so they have never been cheaper and the opportunity is that much greater. The gold mining companies now have strong balance sheets, improved management, mining costs are coming down with lower energy prices, and they are already reporting sharply higher earnings.  I expect gold to be north of $5000 per ounce in the next few years, and the gold miners could (and should) go up by 10-20x in value. Everybody knows that gold is a great inflation hedge (it went from $35 to $850 in the inflationary 1970s), but it is also a safe haven in a deflationary world. In the deflationary depression of the 1930s, the publicly held mining stocks went up by something like 10x in value. I could go on, obviously, but I know you’ve been reading about my opinion on this subject for years.

I can’t help but suggest that a modest participation (perhaps 5-10%) in gold mining stocks, as a hedge, and the chance of a very big move on the upside in the next several years. There are lots of ways to do that, and one way is through my investment partnership. My timing has admittedly been less than ideal :), since I transitioned the fund six or seven years ago into this approach, but it looks like a monstrous amount of spending and stimulus (many trillions of dollars) is in our future, so I could finally be vindicated. Funds can come into my Partnership on the first of any month. We are about 90% invested in gold mining companies, with 8-10% in a few non-gold “special situations”. The fee of 1% annually, plus 10% of gains is a lot less than the standard “2 and 20”. I’m the largest investor, always have been, and that’s the end of my “pitch”.

More important are my thoughts, above. I may be the only money manager you will meet that says “money isn’t everything”. Nobody knows what the “end game”, as a result of forty years, especially twenty years, and most especially the last ten years, of financial promiscuity, will look like. The best we can do is to stay flexible and healthy: financially, physically, emotionally, be in a position to respond to events as they unfold.

Roger Lipton
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We started our work on this situation several weeks ago, prior to the developments relative to the coronavirus and the extreme volatility in the capital markets. The transaction, as described below, is currently scheduled to be completed by way of a shareholder vote on 3/26/20. Circumstances can obviously change between now and then and we present the following analysis based on currently available information. We intend to update this analysis as appropriate.


The TGI Fridays brand has been around for over half a century and the results the last five years have been clearly been less than their private equity owners and management would have liked. The TGIF system is about to fold into publicly held Allegro Merger Corp. (ALGR), a Special Purpose Acquisition Corporation (SPAC) that raised about $150 million in 2019. The current private equity owners of TGIF, according to the planned transaction, will be converting almost all (86%) of their equity into shares of Allegro/TGIF.

Since the restaurant industry is so transparent and it is no mystery that TGIF has not seen the best of times recently, analysts are already chiming in with (often well considered) opinions. Since we view the risks as fairly obvious, and the valuation seems to reflect most of the perceived problems, we admit to paying more attention here to what might go right than further wrong. In particular, a modest in size, but high value portion of the business, is the steadily expanding licensing business, currently generating a $13 million revenue base, truly “asset light”. Much larger in terms of current cash generation is the international franchising portion of the business (446 locations) which has been stable over the last five years and seems poised to improve. The 385 TGIF US locations (209 franchised, post the Q1’20 Company buyback) have obviously been challenged in recent years but recently recruited management is qualified by experience at TGIF and elsewhere.

Our objective view of the situation might be concisely stated as “there is a lot of low hanging fruit”. Without minimizing the job at hand, a reasonable effort on the part of this management team should at the least, stabilize, and, at best, reinvigorate the brand. From an investment standpoint, the starting valuation at conclusion of the proposed merger is a substantial discount from industry peers, especially interesting since it is based on pro forma results that could prove to be a low point.


There is always a story to be told whenever there is a merger of an operating company into a Special Purpose Acquisition Corporation (SPAC). Our presentation therefore will differ from our typical “corporate description”. We present the following report because this situation may well provide an investment opportunity, as well as a “teaching moment” for analysts and restaurant operators.  Rather than keep our readers, most of whom are financially oriented, in suspense, an operating summary, as provided in the proxy material, is as follows:

The TGI Fridays system, under strain since 2014, is lately beginning to show tangible signs of stabilization and improvement. As of 12/31/19 there were a total of 831 restaurants worldwide, 446 of which were franchised outside of the US and 245 of which were franchised in the US. (79% franchised after the Briad acquisition). The total corporate revenues, including royalties, are about $430M. Domestically, the systemwide AUV has been about $2.7M with an $18 average check per guest. In a nutshell, the international segment has remained relatively healthy through the tough times and it’s the domestic side that has suffered the most and theoretically has the recovery potential.

According to the Investor Presentation filed with the SEC on 2/11/20*, the post merger Enterprise Value, consisting of $275M of net debt and $200M of equity, net of balance sheet cash, will be $475 million, which is:

9.1x calendar 2019 Adjusted TTM EBITDA

8.1x projected calendar 2020 Adjusted TTM EBITDA

6.8x projected calendar 2021 Adjusted TTM EBITDA

*The most recent proxy material, filed on 3/11/20 shows trailing numbers, which we show toward the end of this report, within 1-2% of those assumed above. Readers should not be confused by the table on page 78 of the proxy which shows projections made for the sake of the Fair Value Opinion relating to the Allegro/TGIF merger. That Opinion was provided prior to the Briad acquisition, assumed capex and marketing expenses that may or may not take place, as well as presumably conservative projections of sales and profit margin progress.

There are obviously lots of adjustments and assumptions involved in a transaction of this sort, but it seems clear that TGIF has been generating something on the order of $50M of trailing EBITDA (an average of $58M, according to the proxy material), which provides an Enterprise Value to EBITDA valuation under 10x.

The valuation described just above should be considered relative to the table below showing the enterprise values (as of 3/5/20) of existing publicly held restaurant systems that are 75% or more franchised, all of which are similarly leveraged to the post-merger TGIF. We have not included in the table Wingstop (WING) and Domino’s (DPZ), which (on 3/5) were at 53x and 23.3x EBITDA respectively, which are growing steadily as “best of breed”, nor Papa John’s (PZZA) which on 3/5 was at 35.4x still depressed EBITDA results. The prices shown as of just a week ago, were already down 15-20% from their highs, and might be considered reasonably normalized. The valuations, as of this particular distressed moment in the capital markets are an additional 15-20% lower than those shown below (and are changing rapidly), but are still a premium to the starting point of of ALGR/TGIF. None of the companies shown below is “shooting the lights out” in terms of growth.  In general, they are high single digit growers, average no more than 10% annual growth in EPS and EBITDA, which could be considered a reasonable possibility for TGIF, especially coming off the depressed performance of recent years.

Details follow relative to the history, the current trends, the potential opportunities for improvement and the financial details behind the above summary. The information in this report is largely excerpted from the filed proxy material, augmented by public sources such as Google and Wikipedia.


The first TGI Fridays was opened on First Avenue in Manhattan in 1965, by Alan Stillman, with $5,000 of his own money plus $5,000 famously borrowed from his mother. In 1971 Daniel Scoggin acquired the rights to eight major cities. Stillman and Scoggin merged after the latter opened a highly successful new prototype in Dallas in 1972. They sold the Company to the Carlson Companies in 1975, where Scoggin remained as CEO until 1986. By 1983 there were 100 locations and the first international location opened in the UK (still the largest and most successful market for TGIF) shortly thereafter. It is interesting that the chain’s highest grossing location has historically been at Haymarket Leicester Square, which opened in 1992 in Central London. 45 licensed locations had opened in the UK by 2007 and there are 87 today. By 1989 the system was approaching 300 locations, and then tripled in size in the 25 years ending in 2014.

The next several paragraphs of history are among the most important for today’s investors:

In 2014, Private Equity, represented by Sentinel Capital Partners, and their minority partner, TriArtisan Capital Advisors LLC, paid a reported $890 million for the TGI Fridays company/franchise system, at that point generating about $2.7B in systemwide revenues.

It’s well known that investors love “asset light” companies, franchising companies in particular. Therefore, in less than two years after Sentinel took control of TGIF, by the end of 2015 the franchised percentage of the system had been increased, from about 50% (of 916 stores at 12/31/14) to a much more asset light, over 90%, by 12/31/16. Unfortunately, this form of financial engineering so often employed by private equity owners apparently  involved a poor selection of franchised partners, likely accompanied by insufficient franchisee support, and probably slimmed down attention to the remaining company stores as well. The result was the contraction of the US system from around 500 locations at 12/31/14 to 385 stores at 12/31/19. We have to interject here: it’s tough out there, but not that tough. 2014 through 2019 has shown steady, if modest, economic expansion, throughout that period. The restaurant industry probably remains overstored, but that many stores doesn’t close in a relatively short time without a serious effort 😊.

After almost five years of the above described debacle, Sentinel, for whatever combination of reasons, in 2019 sold their interest to TriArtisan (who moved up to 54% ownership) and new investor, the family office of Michael F. Price (“MFP”, now with 40%).

Importantly, Sentinel, in 2018 had recruited Ray Blanchette, previously President and COO at TGIF between 1989 and 2007, who has since brought back several others, as described below, all of whom had been successful top executives “back in the day” at TGIF.

Blanchette, in particular, has established outstanding credentials within the full service dining industry. After his previously successful career at TGIF he became CEO at Ignite Restaurant Group in mid ’07. As described in industry publications, Ignite’s primary concept, Joe’s Crab Shack, from the fall of ’08, had eighteen quarters in a row of positive same store sales. Blanchette received the “Operator of the Year” award from Nation’s Restaurant News in 2013, while Joe’s Crab Shack’s AUVs were moving from $2.1M to $3.4M under his leadership.

Blanchette, in turn, recruited John Neitzel, COO (global franchising) who was with TGIF from 1982 to 2010, Jim Mazany, COO (corporate stores) who was with TGIF from 1990 to 2005, Bill Alexander, Senior VP & Chief Development Officer, who was with TGIF from 1992 to 2003. Giovanna Koning, CFO, has been with TGIF since April ’17.

We preface the following remarks with the statement that the information provided below is assembled based on the proxy material provided to shareholders of Allegro as well as related SEC filings. We’ve tried to indicate where our commentary becomes editorial in nature.

THE STRATEGY, in summary

Before filling in the details, the strategy, in the shortest possible form, is:

  • Rebuild AUVs at both corporate and franchised locations, including SSS and traffic
  • Buy back and improve poorly run domestic franchised stores
  • Better support and stimulate the still healthy international franchise system
  • Stabilize, then stimulate the domestic franchise system
  • Rebuild the social bar and alcohol beverage sales within the restaurants
  • Increase licensing revenues from TGIF branded products
  • Build Off-Premise sales
  • Enhance Digital/Loyalty Program


Before detailing the various initiatives, it is crucial that proven management has been brought back to the system. This team, as described above, knows the brand and has worked together before, in better times.


Rebuild AUVs at company and franchised locations

The following charts and commentary are excerpted from the Investor Presentation filed with the SEC on 2/11/20. As shown below, sales and traffic trends indicate that both had stabilized and moved higher in Q1’20. A skeptic could point out that it was early in the first quarter of 2020, and the better weather in the US may well have been a contributor to the improvement. On the plus side, however, the trends as far as corporate vs. franchised performance have been moving in the right direction for several quarters prior to YTD Q1’20, and it seems natural that company store results, with programs implemented earlier, would improve first.

Q1’20 System SSS were up 4.5 points compared to Q1’19. Q1’20 Corporate improvement was up 6.3 points YTY, Franchise improvement was 3.1 points YTY. Corporate stores vs franchised improved in each of the last five quarters, achieved, as described in the Investor Presentation, by “strong leadership team, operational focus, marketing/promotion support (Day of Week, TV Media Promotions, etc.”).

Q1’20 System Traffic was up 7.0 points compared to Q1’19. Q1’20 Corporate store traffic was up 11.0 points YTY. Franchise improvement was up 4.1 points YTY.

Buy back and improve previously franchised locations – It’s been done by others…successfully.

*This acquisition, called Briad, consists of 20 on the West Coast (16 in CA, 4 casino locations in NV), plus 16 East Coast locations (NY, NJ, CT, PA), increasing the company owned total to 176. Full year Briad AUV’s of $3.4M are higher than the existing company owned base.

While investors generally approve of going “asset light” and selling off underperforming corporate stores (if they can), on the assumption that a committed franchisee can operate more efficiently, and royalties can at least come close to the cash flow under corporate management, the flip side of the coin also has its logic. Why sell off your stores, your largest asset base, when they are at the low point of the cycle? If improvement is a likelihood, why not get the operating leverage for the company, and sell later at a materially higher valuation? This has been done with notable success in recent years by both Arby’s and Brinker, Int’l.

Adding to the probability of TGIF’s success with this approach: The table above shows the summary of where and when the Company has repurchased underperforming domestic stores, some of the which have once been among the systems strongest units in longstanding core regions. Noteworthy is the  heavy concentration in the Boston to NY northeast corridor and Texas.  Summarizing the geographical makeup, as of 12/31/19: 12.9% (18) of the 140 total company stores were in Massachusetts, 23.6% (33) were in NY State and 17.1% (24) in Texas. The Briad acquisition, as shown in the above table (of 36 more stores) would add 16 more east coast locations.

There are initial signs of progress in regions acquired in January ’19. Operationally and traffic wise, as described in the Investor Presentation of 2/11/20, “40-50% of existing directors of operations and general managers have been replaced over the last 4+ months.  New Management in Boston and Florida regions, acquired at the end of Q1’19, have shown “incremental growth in traffic and sales over the last several months.”

Better support and stimulate the international franchise system

The international franchise system, with 446 restaurants, is the most dominant portion of the total worldwide brand. Though the number of stores has been virtually constant the last few years, it expanded steadily under Carlson ownership and modestly even after the 2014 transition to Sentinel. This segment of TGIF activities contributed $33.3M of revenues in 2019. Considering that there is a significant pipeline of new restaurants to be built, the international activities can be considered the most predictable portion of the TGIF picture. There are 40 franchisees among the 56 countries, with a great deal of concentration in a relatively few strong operators. The top 5 franchisees operate 225 stores. On average, each franchisee owns 11.1 restaurants. All but 31 stores (out of 446) are operated by franchisees with at least 6 locations. The largest market, in the UK (with 87 restaurants) had positive same store sales (0.5%) in 2019 as well as unit growth. The second largest market is the Middle East, with 66 stores “is seeing improved performance” In 2019, after apparent weakness for unspecified reasons. There is a great deal of “white space” available In Mexico (with only 17 stores), Japan (with 14), India (9), Brazil (6), Southeast China (3), and Canada (2).  A 40 store development agreement was recently signed in Brazil, there is a signed LOI for India and Southeast Asia development with new ownership, and a development agreement is being negotiated in Mexico. There is a current total development pipeline for about 100 new units internationally, with 8-12 new countries involved, so there is the obvious possibility of a near term pickup of international unit growth. Combined with an improvement in sales trends, which also seems to be responding to the efforts of the rebuilt franchisor team, this largest portion of TGIF activities seem to have the potential for improved results.

Stabilize, then stimulate the domestic franchise system

The remaining domestic franchise system consisted, as of 12/31/19, of a still substantial 245 restaurants (209 after the 36 unit Briad sale back to the Company). This segment contributed a meaningful $28.5M of royalty revenues to 2018 results. A favorable aspect is that the locations are operated by a total of only 22 franchisees, and the top 5 groups operated a total of 174 restaurants. It can therefore be reasonably assumed that this group is fairly well capitalized and relatively effective operators. Under revitalized management at headquarters, all the “blocking and tackling” that will take place to support the domestic corporate stores can be expected to also benefit the remaining domestic franchise system. This, would presumably support higher sales and increased royalties, perhaps even encourage expansion by existing groups and attract new franchisees at some point. We should note here that the rights to operate stores in Manhattan were sold decades ago to the RIese family. Those locations do not pay royalties, are not counted in the “system”, and may or may not be operated at company standards.

Rebuild Social Bar and Alcohol sales

Almost all casual dining restaurants try to build their percentage of highly profitable alcoholic beverages. TGIF has a competitive edge in this regard, by way of its original “bartending with flair” identity. Prior management may have gone too far in terms of trying to make the concept “family friendly” and the current team is attempting to regain a portion of the original appeal. Fridays’ management team believes that the concept’s bar heritage is a key differentiator and will use its social bar strategy to reinvigorate its restaurants. Historically, alcoholic beverage sales in the dining room amounted to about 30% of revenues. Today that percentage is more like 19%, so there is obvious opportunity in this regard. The new (old) management team has already implemented new happy hour offerings in some markets (to go systemwide domestically in Q2), including $2 beer, $3 cocktails and $12 “endless appetizer” offerings with a choice of five different items. Physical changes including lighting, AV equipment and new seating are also expected to play an important part. Rebuilding alcohol sales will obviously take time, but it is consistent with the brand image, and presumably can be done at the same time as improving the food offerings.

Increase licensing revenues

Investors have to like this most “asset light” segment of TGIF revenues, which should improve the overall corporate valuation. Products such as pre-mixed cocktails, hamburger patties, baby back ribs and center of plate entrees are sold domestically. Frozen appetizers in the UK and refrigerated dips in the US are set for a 2020 introduction. Licensing revenues have grown at a 9% CAGR from 2016 to 2019 to $13 million, and are targeted, including new products, to reach $20M by 2025.

 Build off-premise sales

This area has already been an important focus, off-premise sales increasing from 7% to 13% of sales from 2017 to 2019. Delivery sales, in partnership with DoorDash, UberEats, Postmates, and Grubhub, grew 140% YTY in 2019, to $58M. The delivery segment, for all operators, has become very important, and generally has affected store level margins negatively, but this impact is leveling off throughout the industry and we believe that delivery sales through third party providers  will be less of a margin burden as competition among providers intensifies. As stated in the proxy material: “the Company is in the process of adding additional features to its delivery/off-premise platform which is expected to add incremental sales. Through it’s involvement with PF Chang’s and Hooter’s, TriArtisan is building strategic relationships with the leading third-party providers, which could improve delivery profitability and add marketing support for all three brands.” An improved effort with takeout sales will also be pursued.

Enhance digital/loyalty program

This area is hugely important for all restaurant chains, and TGIF has untapped potential in this area. They have invested $30M over the last several years, building the capability to aggregate and leverage customer data. The existing loyalty program is 60% inactive, has been primarily using email and discounts, which obviously leaves room for improvement in terms of more profitable customer engagement. In this regard, the new mobile ordering platform has been downloaded about 2M times. The plan is to deliver targeted promotions to the loyalty members and add rewards to encourage repeat behavior.  Marketing going forward will no doubt focus on the improvement in this area as well as previously discussed areas.


The following tables sets forth a reconciliation of income (loss) before taxes and noncontrolling interest to Adjusted EBITDA for the fiscal years ended December 30, 3019, December 31, 2018 and December 25, 2017 (in thousands):

There are, by the nature of a merger of this sort, lots of adjustments, in the past, current and future. Precision is not the name of this game. We think it is most pertinent that Adjusted EBITDA averaged about $58M annually the last three years, before the Briad acquisition of 36 relatively high volume locations. The projected “base” of Adjusted EBITDA of $45.3M in the table just below (from the Investor Presentation) is very close to $44.6M in the most recent proxy material ($47.9M minus $3.3M). Management obviously expects to build upon that base, and we have talked about the various levers that could come into play. The following section outlines the contributions to the projected gains in 2020 and 2021, as presented in the Investor Presentation filed in February.

Readers can make their own judgements relative to the above assumptions. Without doubt, the coronavirus situation is affecting the worldwide economy, at the very least on a short term basis. We think the above assumptions are reasonable in a “normalized” situation and the relevant results will be achieved (or not) over time, most likely (at this point) delayed by whatever timeframe the coronavirus changes customer behavior.



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 It’s still very competitive in this segment of the full service restaurant industry but Paul Murphy, new CEO, has a history of success with challenging situations, most recently at Noodles (NDLS) and before that at Del Taco (TACO). Considering that the current Enterprise Value at RRGB is only just over 5x trailing (depressed) Adjusted EBITDA, the upside potential of RRGB could be substantial from this level. Activist investors have periodically circled this situation, attracted by the re-franchising potential, but that’s a lot easier said than done when the stores are doing poorly. On the upside, however, if sales improve, in addition to the earnings leverage from Company locations, re-franchising becomes far more practical. Systemwide unit growth can then be expected as well. We think it is a reasonable bet that Paul Murphy, supported by CFO, Lynn Schweinfurth and the operating team will make progress over time. Without minimizing the challenge of improving an underperforming brand in an unforgiving environment, if they succeed to any reasonable degree, the percentage gain from this stock price could be substantial..


 Red Robin Gourmet Burgers, Inc. (RRGB), founded in 1969, primarily operates, franchises, and develops full-service restaurants in North America. There were 556 locations in total at 12/31/19, 454 of which are Company operated.  Red Robin is famous for serving more than a dozen fresh, never frozen, burgers and Bottomless Fries in a fun environment welcoming guests of all ages. In addition to burgers, which accounted for 66% of their entrée sales in 2019, Red Robin serves an array of other American favorites that appeal to a wide range of guests. The most popular of the non-burger menu items are Red Robin’s Shareable Appetizers and their unique Milk Shakes.

A strategic repositioning of the brand, was implemented in 2019, led by highly respected CEO, Paul Murphy III and CFO, Lynn Schweinfurth. Among the objectives are: improving the service model, streamlining and enhancing the food offerings, strengthening the overall guest experience, better connecting with the guests, all in the hope of increasing frequency and loyalty. Specific operating initiatives include the use of server hand-held point of sale devices and headsets, the partnership with Donato’s pizza (to be installed systemwide) and an increased focus on off-premise sales.


AUV for 2019 of $2,714,000 was virtually flat with that of 2018. COGS decreased 30 basis points in 2019 as compared to the same period in 2018. The decrease was primarily driven by favorable pork and Steak Fry costs, partially offset by unfavorable ground beef costs. Labor Costs increased 70 basis points in 2019 compared to the same period in 2018. The increase was primarily driven by higher average wages and increased manager staffing levels within the restaurants. Other Expenses increased 70 basis points in 2019 as compared to the same period in 2018. The increase was primarily due to higher third-party delivery expense driven by growth in off-premise sales as well as an increase in restaurant maintenance spending. Occupancy Costs remained flat for the year ending December 29, 2019 due to Red Robin’s fixed rate contracts.

Store Level EBITDA decreased 110 basis points primarily as a result of the increase in Labor Costs of 70 basis points and an increase in Other Expenses of 70 basis points offset by the 30 bp decrease in COGS.


 During fiscal 2019, Red Robin Company-operated restaurants refranchised 12 locations and closed 18 underperforming locations for a Company-operated end of year total of 454 units. The franchise community opened 1 new location for a franchise-operated end of year total of 102 locations. Net total restaurant locations for fiscal year ending 2019 was 556 units.


Restaurant comparable sales at Company-operated restaurants declined (0.6%) in fiscal 2019. The decline was partially offset by a 4.7% increase in check average and a 1.8% increase in menu pricing. It was partially offset by a 3.4% decrease in guest count. Quarterly same store sales are shown in the statistical table at the top of this report.

 RECENT DEVELOPMENTS: per Q4’19 report and conference call

 There was measurable progress in Q4’19 in terms of implementing the new strategic plan. Comp sales were up 1.3%, the second quarter of positive sales. The lower level of discounting was reflected by the 1.1% increase in menu mix, a 1.8% increase in pricing, a 1.8% increase from lower discounting and a 3.4% decrease in guest counts. Off-premise sales increased 26.9% to 13.9% of restaurant revenues. The GAAP loss per diluted share was $0.60 compared to a loss of $0.82. Adjusted loss per diluted share was $0.36 compared to a profit of $0.43. Importantly, Adjusted EBITDA in Q4 was a positive $26.7M vs. $28.4M.

Q4 results, line by line: Cost of Sales (primarily due to lower pork and steak fry costs, partially offset by higher beef costs) was down 60 bp to 23.0%. Labor (due to lower group insurance costs, partially offset by wage rates and higher manager staffing levels) was down 20 bp to 34.5%. Other Operating expenses (primarily due to third party delivery fees and higher restaurant technology costs) were up 110 bp to 14.7%. Occupancy (primarily due to higher general liability costs, partially offset by lower rent due to closures) was up 20 bp to 8.9%. Restaurant level EBITDA was down 50 bp to 18.9%.

Below the store level EBITDA line, depreciation was down 40 bp to 6.8%. G&A was up 40 bp to 6.4%, Selling expense was down 30 bp to 5.4%, Other Charges was 1.4%, bringing Income from Operations to 0.5%. After Interest of 0.6% and Income Tax Expense of 2.4%, the Net Loss was (2.5%).

It is worth emphasizing that Depreciation on 454 Company operated stores was a substantial $20.7M (in Q4), much more than the GAAP loss. Also, there remains very substantial earnings per share leverage (which works both ways) at RRGB, with $1.3B of Restaurant Revenues and only 13M fully diluted shares outstanding. One comp point of $13M could conservatively add (or lose) 30-40% or $4-5M, on the pretax bottom line and change the EPS picture substantially.

Paul Murphy commented in the release on the unwinding of product discounts and the focus of staffing, training and retaining of Team Members. The beginning of the Donato’s rollout took place, a new service model was installed, and off premise/digital was an important focus. The positive sales trend is continuing into Q1’20.

Guidance going forward includes comp revenue growth in the low single digits, potential restaurant level increased EBITDA to be offset by pre-opening expenses, marketing and growth initiative expenses, Net Income at least $2M (including a $10-12M tax benefit), Adjusted EBITDA approximately flat at $101M, Capex of $50-60M (including restaurant support and maintenance, Donato’s, technology and growth initiatives). There could be margin pressure in the first half, then less in the second half of 2020, due to the various initiatives and the Donato’s rollout.

On the conference call, Murphy talked about improving, and building upon, the loyalty program, one of the largest in the industry with more than 9M members, and which represents 30% of sales. Turnover of store level management and staff is trending downward, and guest satisfaction is improving. Off-premise sales (up 26.9% in Q4 to 13.9% of revenues) is a key part of the plan, including catering (up 12% in Q4, but  only 1.5% of sales) and delivery (about 5% of sales), which is ordered directly through Red Robin but provided by a third party. The To-Go portion of sales is about 6.7%. Donato’s is being received well, fits into the delivery side of the business, as well as the appetizer portion of the menu, and sales (a 3.5% lift) seem to be largely incremental.

Lynn Schweinfurth discussed the balance sheet changes in Q4. $24.2M was spent on capex, primarily related to information technology, facilities improvement and the rollout of Donato’s ($145K/store plus 20K pre-opening expense). The rollout of handheld POS terminals was also completed in Q4. At 12/31/19, there was $30M of cash on the B/S, with a lease adjusted leverage ratio of 4.72. After drawing $18M on the revolving credit facility, there was debt of $206M in addition to letters of credit of $7.5M. In early January, a new $300M five year credit facility was put in place, which provides ample liquidity through 2025. The intention is to use at least 50% of free cash flow to delever the balance sheet and repurchase stock under the existing $75M authorization. In Q4, $1M of common stock was bought back.

CONCLUSION: Provided at the beginning of this article.

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February was a very volatile month, most noticeably the last week of the month, apparently driven by the worldwide concern about the coronavirus. We say “apparently” because we view the coronavirus to be the catalyst for an overdue decline, rather than the real cause. The cause will prove to be the distortions (over the last forty years, even more the last twenty years, and especially the last ten years) of normal monetary supply and demand created by promiscuous central banks around the world.  In any event, the selling was emotional and indiscriminate, especially last week. Gold bullion and the gold miners were both doing nicely, up over 3% and 7% respectively until the panic selling of everything last week. Gold bullion closed the month down a fraction of one percent and the miners closed down more than 10%. This kind of price action in gold and the gold miners is disconcerting for sure but not surprising in a market panic almost unprecedented.

We wrote our normal month end letter to investors in our investment partnership the first day of the new month, and, at 2 pm yesterday, after talking about how bad February had been,  I wrote  “For better or worse, we report as of the month end, which in this case could be the low point. For what it’s worth, as I finish this letter, gold bullion is up 1.3% today and our portfolio is up almost 4%.”   If I were to write the letter right now I would say that gold bullion is up 6% we are up 12% for the first day  and a half of the month.

So much for short term trading commentary. More importantly:

All the fundamental developments in the worldwide economy point to much higher gold prices and much, much higher prices of the gold mining stocks. We look back, below, at the price action of the precious metals sector in the last crisis, that of ’08-’09.

The two charts below, that of “GLD”, the ETF that tracks gold bullion, and “GDX”, the ETF that tracks the gold mining sector. The chart shows the price performance from the middle of 2008, through the bottom of early ’09, and then the recovery through the end of ’11. You can see that GLD and GDX both declined, with the stock market, until the fall of ’08, started recovering before the general market bottomed in March ’09. From the bottom, over the next two years, GLD went from about 70 to 180, up 157%, and GDX went from 18 to 62, up 244%.

It is important to note that the monetary stimulus that supported the worldwide economy ten years ago, and drove the price of gold and the gold miners so much higher, will of necessity be dwarfed by today’s needs.

In the fall of ’08, the five year US treasury note was at about 3% and the two year was around 2%. The Fed drove them down to about 0.7% and close to ZERO, respectively, while printing about $3.5 trillion. The starting point today is about 0.7% for both the five year and two year treasury, interest rates can’t be lowered by much. It therefore falls to the printing press to provide the stimulus and it will likely be a lot more than the last $3.5 trillion. By the way, the Federal Reserve Assets in ’08 were only $1T, ending at $4.5 trillion which were supposed to be reduced in a stronger economy. The economy got just a bit stronger (averaging 2.3% GDP growth) but the Fed balance sheet only was reduced to about $3.7T. It then was expanded again, through bond purchases last fall (which coincided with a strong stock market), then stopped growing in January, which may have foreshadowed the stock market collapse in February.

Today’s starting point for the Fed balance sheet is just over $4T and the ending point could be $10T. It always takes more (financial) heroin to maintain the (monetary) high. The last installment of this unprecedented monetary adventure took gold and the gold miners up well over 100% (the miners more than the bullion). The next trip should be even more dramatic, especially for the gold miners. As we’ve said before, while gold is down about 18% from it’s high of 1900 in 2011, the gold miners are down well over 50%. At the same time, the gold mining companies are far better managed, strategically positioned, and with stronger balance sheets than ten years ago.

The US Fed Reserve’s aggressively lowered the Fed Funds Rate by 50 bp a couple of hours ago. It is an interesting commentary that the stock markets rallied, but have now given up their gains and are down for the day. Our conviction is that the Fed, and the other Central Banks around the world have become impotent. Each round of stimulus the last twenty years has been increasingly less effective in stimulating growth. It is called a “diminishing marginal return on investment”. Monetary stimulus has run its course. It then falls back to the need for more fiscal stimulus, in the form of tax cuts, etc. That will have a limited effect, also, but will explode the deficit.

All of the above is supportive of much higher gold prices, and much much higher prices for the gold mining stocks.

Stay tuned.

Roger Lipton


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I really like Starbucks. It’s my social life in the morning. Everyone in the store knows my name (Roger that!) and my drink (a grande’ soy latte’, no foam, costs $6.04 in Manhattan, including tax). It therefore costs me $2200 annually of after tax money, so it costs well over $3,000 per year, pretax, for my morning coffee experience.

On the other hand………..

As you may have heard, Panera is now offering a monthly coffee program, whereby I can get unlimited coffee for the month for $8.99, any size, any flavor. (no soy for that price, admittedly)

Burger King has been offering, since last March, a monthly coffee subscription for $5.00 per month.

McDonald’s has been offering any size coffee for $0.99. You can also get two breakfast sandwiches for $4.00, so two people can have a McMuffin and cup of coffee for $6.00 plus tax.

Wendy’s is aggressively rolling out a new breakfast program, starting today. They have been promoting “two for $4” sandwich deals for some time, so we can expect the breakfast offerings to be similar. They are planning to spend $40-50M on advertising of the introduction so we can assume they will be aggressively pricing the coffee.

Dunkin’ Brands, with an extensive selection of donuts and other pastries, sells their coffee at $2.00 a cup, more or less, a little less for a “regular”, a little more for “large”.

All these companies are clearly hoping that the customer will buy something else besides the coffee, as long as they are at the store. However, without question, the pricing environment for our morning cup of coffee is getting more competitive..


Away from the publicly traded companies, perhaps Panera, with their established reputation for the quality of their breakfast offerings, combined with their “community gathering place” comfort (pioneered by Starbucks) will see the largest incremental positive effect of their new breakfast program. The publicly held companies will be fighting each other for market share, since nobody has a  “moat”.

Relative to Starbucks: This can’t be a plus. Will it cripple them? Certainly not, but we suggest that the comps will slow rather than accelerate. If only one out of twenty customers makes a switch, it will be noticeable, and there is likely to be at least one of their competitors fairly nearby. They could sell more food but that’s already been the strongest part of their comp growth the last ten years. Their competitors sell food as well, and Starbucks doesn’t have a material edge in that regard. Stocks sell, by the way, based on the “second derivative”, the change of pace of the growth rate, still growing but  how fast?

If there were a Panera or McDonald’s between “my Starbucks” and my office, I would be sorely tempted to adjust, even if I have to make new friends. I could afford to spend another day or two on the golf course 😊

Roger Lipton

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