All posts by Roger Lipton

THE WEEK THAT WAS, ENDING 8/6 – LOTS OF EARNINGS REPORTS, JUST A COUPLE OF RATINGS CHANGES

THE WEEK THAT WAS, ENDING 8/6 – LOTS OF EARNINGS REPORTS, JUST A COUPLE OF RATINGS CHANGES

REPORTING WERE: DENN, SBUX, YUM, SHAK,  QSR, PZZA, STKS, LOCO, RUTH, CHUY, PBPB,  FRG – Conference Call Transcripts Below:

Denny’s

https://seekingalpha.com/article/4528931-dennys-corporations-denn-ceo-john-miller-on-q2-2022-results-earnings-call-transcript

Starbucks

https://seekingalpha.com/article/4528887-starbucks-corporation-sbux-ceo-howard-schultz-on-q3-2022-results-earnings-call-transcript

Yum Brands

https://seekingalpha.com/article/4529167-yum-brands-inc-yum-ceo-david-gibbs-on-q2-2022-results-earnings-call-transcript

Shake Shack

https://seekingalpha.com/article/4529836-shake-shack-inc-shak-ceo-randy-garutti-on-q2-2022-results-earnings-call-transcript

Restaurant Brands

https://seekingalpha.com/article/4529738-restaurant-brands-international-inc-qsr-ceo-jose-cil-on-q2-2022-results-earnings-call

PZZA

https://seekingalpha.com/article/4529665-papa-johns-international-inc-pzza-ceo-robert-lynch-on-q2-2022-results-earnings-call

STKS

https://seekingalpha.com/article/4531021-one-group-hospitality-inc-stks-ceo-emanuel-hilario-on-q2-2022-results-earnings-call

RUTH

https://seekingalpha.com/article/4530334-ruths-hospitality-group-inc-ruth-ceo-cheryl-henry-on-q2-2022-results-earnings-call-transcript

CHUY

https://seekingalpha.com/article/4530650-chuys-holdings-inc-s-chuy-ceo-steve-hislop-on-q2-2022-results-earnings-call-transcript

PBPB

https://seekingalpha.com/article/4531074-potbelly-corporation-2022-q2-results-earnings-call-presentation

FRG

https://seekingalpha.com/article/4531035-franchise-group-inc-frg-ceo-brian-kahn-on-q2-2022-results-earnings-call-transcript

Only two changes, well after last earnings reports: BRIAN MULLIN downgrades Cracker Barrel to HOLD, and analyst at QTR Global upgrades Wendy’s to Positive.

THE WEEK TO COME:

8-09 Before Market Open First Watch Restaurant Gr FWRG

https://investors.firstwatch.com/news-and-events/events

 

8-09 Before Market Open Dine Brands Global DIN

https://investors.dinebrands.com/investor-overview

 

8-09 After Market Close Sweetgreen SG

https://events.q4inc.com/attendee/520885864

 

8-10 Before Market Open Arcos Dorados Holdings ARCO

https://webcastlite.mziq.com/cover.html?webcastId=028bca42-4be4-464c-ad18-

758de6a5cfe5

 

8-10 Before Market Open Jack In The Box JACK

https://events.q4inc.com/attendee/934017154

 

8-10 Before Market Open Wendy’s WEN

https://events.q4inc.com/attendee/411431711

 

8-10 After Market Close Dutch Bros BROS

https://events.q4inc.com/attendee/452375169

 

8-10 After Market Close Red Robin Gourmet Burgers RRGB

https://viavid.webcasts.com/starthere.jsp?ei=1556370&tp_key=97acdd1700

 

8-11 Before Market Open Carrols Restaurant Group TAST

https://viavid.webcasts.com/starthere.jsp?ei=1552773&tp_key=c32be36b47

 

8-11 After Market Close Good Times Restaurants GTIM

https://events.q4inc.com/attendee/161790178

UPDATED CORPORATE DESCRIPTIONS: ROCKY MOUNTAIN CHOCOLATE (RMCF), DOMINO’S (DPZ), CHIPOTLE (CMG) & CHEESECAKE FACTORY(CAKE)

UPDATED CORPORATE DESCRIPTIONS: ROCKY MOUNTAIN CHOCOLATE (RMCF), DOMINO’S (DPZ), CHIPOTLE (CMG) & CHEESECAKE FACTORY(CAKE)

ROCKY MOUNTAIN CHOCOLATE FACTORY

https://www.liptonfinancialservices.com/2022/06/rocky-mountain-chocolate-rmcf-in-process/

DOMINO’S

https://www.liptonfinancialservices.com/2022/03/dominos-pizza-dpz-updated-writeup-and-conclusion/

CHIPOTLE

https://www.liptonfinancialservices.com/2022/02/chipotle-mexican-grill-cmg-updated-writeup/

CHEESECAKE FACTORY

https://www.liptonfinancialservices.com/2022/03/cheesecake-factory-updated-write-up/

 

FAT Brands, Inc. (FAT) REPORTS Q2’22 – SUBSTANTIAL PROGESS TOWARD $90-95M EBITDA RUN RATE

FAT Brands, Inc. (FAT) REPORTS Q2’22 – SUBSTANTIAL PROGESS TOWARD $90-95M EBITDA RUN RATE

FAT Brands, Inc., having absorbed a large number of franchised restaurant systems over the last three years, is now beginning to demonstrate the royalties and EBITDA as projected in the course of assembling their portfolio. (Our previous reports on this subject can be accessed using the SEARCH function on our Home Page.)

Recall that FAT Brands now owns a total of seventeen restaurant brands, the largest of which (in chronological order of ownership) are Fatburger, Hurricane Grill & Wings, Johnny Rockets, Round Table Pizza, Twin Peaks and Fazoli’s. Since Johnny Rockets was acquired in late 2020, and the last three were subsequently acquired in the midst of the Covid, company guidance has consistently been based on the respective pre-Covid performance, projecting growth from that level once Covid has passed. On that basis, the total portfolio of seventeen brands, consisting of over 2,300 locations generating over $2.2 billion of systemwide sales has been projected to generate $90-95M of annual EBITDA. The long-term debt over $900M has been secured by the various royalty streams and carries an average interest rate of about 7%, obviously absorbing a large portion of projected cash flow. However, though rates have risen lately, the Company continues to expect that the debt can be refinanced at a materially lower rate of interest as operating performance is demonstrated. As CEO, Wiederhorn, pointed out on the conference call, the volatility in debt markets may delay this process by 3-6 months, making it a Q1-Q2’23 event, rather than late in ’22, but still has the potential to save approximately 200 bp, or $18-20M annually.

THE SECOND QUARTER OF ‘22

Cutting right to the EBITDA chase: FAT Brands generated $29.5M in Q2’22, naturally up very dramatically from only $2.1M in Covid driven Q1’21, and before owning Round Table Pizza, Twin Peaks, Fazoli’s and several smaller brands. More relevant was the sequential quarterly improvement, almost doubling the $15.1M of Adjusted EBITDA in Q1’22.

Income from Operations grew sequentially from $485K in Q1 to $13.2M, driven by higher royalties, higher sales and lower expenses at company operated locations (primarily Twin Peaks), lower corporate G&A, and modestly higher sales with lower expenses at the dough manufacturing factory. The GAAP net loss was $8.2M, down sequentially from $23.7M in Q1’22. The improved results were a function of 5.6% same store sales in Q2, on top of 26 new locations opened in Q2. The total new units through the end of June was 53 and 9 more opened during July. In this regard, it is important to note that there are over 900 locations represented by long term development agreements, bought and paid for by over $20M of deferred franchise fees on the balance sheet. Management has reiterated that 120-122 new locations are in the planning stage for the current year, and the 900 long term additions could add 50% to EBTDA.

The reconciliation from GAAP Net Loss to Adjusted EBITDA adds back Interest Expense and Depreciation to get from $8.2M Net Loss to $22.0M of EBITDA. The material additions from there are $1.9M of Share Based Compensation Expense and $4.3M of Litigation Costs, bringing Adjusted EBITDA to $29.5M in Q2.

Relative to the litigation expense, the lawsuits and investigations (“L&I”) relate almost entirely to FAT’s relationship with its previous majority stockholder, Fog Cutter Holdings, and the fairness of the merger between them. As described in the quarterly 10-Q, the pertinent L&I “do not assert any claims against the Company” and “we believe that the Company is not currently a target….”. Because the Company indemnifies officers and directors, legal fees are accrued since “an unfavorable outcome may exceed coverage provided under our insurance policies….”. FAT management has made it clear that they are vigorously defending themselves, at the same expecting that such costs are expected to decline from this point forward and that insurance should ultimately reimburse a large portion of the expense. We obviously cannot predict legal outcomes but, even if the legal expense continues, the apparent exposure does not seem to change the long-term reward/risk equation of this investment situation.

OPERATIONAL PROGRESS

In addition to the progress relative to same store sales and unit growth, the Company is working to create synergy between the platform and the brands. Dual branding is starting to take place, combining Round Table Pizza with Fatburger, Johnny Rockets with Hot Dog on a Stick, or Mable Slab Creamery and Great American Cookie. The dough manufacturing facility (operating at 30% of capacity) has begun to grow sales and generate EBITDA, while supplying FAT’s various brands with products 20% cheaper than possible elsewhere.  A “bolt-on” relatively small acquisition of 85 Nestle Toll House Café by Chip stores will be rebranded as Great American Cookies, the first to open in September. With over $600M of portfolio purchasing power, franchisees have been able to save 2-3% of Cost of Goods. From a financial standpoint, planned is the redemption of $135M of Series B Preferred Stock, which will reduce FAT’s cost of capital. It is worth noting that the quarterly dividend was increased from $0.13 to $0.14, creating a current yield of over 6%, implying a confident outlook by management and the Board of Directors. Lastly, a multi-brand national convention, taking place in late August in Las Vegas is going to bring together all seventeen of FAT’s franchised systems. About 2,000 attendees will spend almost three days, getting “charged up” and, from the franchisor’s standpoint, bringing best practices more broadly to the portfolio.

THE OUTLOOK

FAT Brands (FAT) seems well on their way to an EBITDA annual run rate of $90-95M by the end of calendar ’22. Unit growth of 110-120 new locations in ’22 will amount to about 5%, on top of which there should be same store sales progress. Though the most recent quarterly Adjusted EBITDA obviously annualizes to well over the projected $90-95M run rate by the end of ’22, the macro-economic uncertainty justifies maintenance of the previous guidance. At the same time, it appears that fundamentals are set up to generate well over $100M of Adjusted EBITDA in calendar ’23.

CONCLUSION:

The long-term vision of FAT Brands’ management has been supported by the results of the last six months. The 16.5M fully diluted shares, at $8.75/share, only amount to $145M of equity value, very modest relative to the $900M of long-term debt and $135M of Preferred Stock. The $100M of projected Adjusted EBITDA in calendar ’23 would obviously pay the interest and leave $20-30M of free cash flow, and that’s why about $11M. representing over 6% yield, can be paid on the common stock. The potential upside comes into play with the prospect of unit growth accompanied by same store sales, and potential acquisitions as well. If the current debt can be re-rated, the near-term cash flow could immediately become more than 50% higher. Over five years or so, the 900-store development pipeline, implying an additional $50M of incremental EBITDA, would obviously change the world for FAT investors. Long term debt on the order of 10x EBITDA is substantial, to be sure, so investors correctly look for signs that management is up to the (leveraged) task. For those who correctly question the wisdom of operating under the burden of debt that is 10x the operational cash flow: within this multi-brand portfolio are at least a few brands with solid long-term records and excellent prospects. It is always a possibility for management to monetize one brand or more, in the process deleveraging the balance sheet. Management at FAT Brands has demonstrated sufficient financial creativity that we can expect them to react accordingly as strategic and operational alternatives present themselves.

Roger Lipton

THE WEEK THAT WAS, ENDING 7/29 – lots of maintained ratings, two downgrades. ANOTHER BUSY WEEK TO COME

THE WEEK THAT WAS, ENDING 7/29 – lots of maintained ratings, two downgrades. ANOTHER BUSY WEEK TO COME

THE FOLLOWING COMPANIES REPORTED: McDonald’s, Chipotle, Cheesecake Factory,  Noodles, Wingstop,  FAT Brands, Yum China, Bloomin’ Brands.

Subsequent to prior weeks’ reports, BRIAN MULLAN maintained BJ’s, YUM BRANDS AND JACK IN THE BOX at BUY.

THIS PAST WEEK:

NOODLES REPORTED: ANDREW STRELZIK maintained at MARKET PERFORM.

https://seekingalpha.com/article/4526676-noodles-and-company-ndls-ceo-dave-boennighausen-on-q2-2022-results-earnings-call-transcript

CHEESECAKE REPORTED: JEFF BERNSTEIN maintained at UNDERWEIGHT. DENNIS GEIGER and LAUREN SILBERMAN maintained at NEUTRAL.

https://seekingalpha.com/article/4526657-cheesecake-factory-incorporated-cake-ceo-david-overton-on-q2-2022-results-earnings-call

MCDONALD’S REPORTED: LAUREN SILBERMAN, ERIC GONZALEZ, JEFF BERNSTEIN, ANDREW CHARLES and CHRIS CARRILL maintained OVERWEIGHTS. JON TOWER  maintained  NEUTRAL and BRIAN MULLAN downgraded to HOLD.

https://seekingalpha.com/article/4525838-mcdonalds-corporation-mcd-ceo-chris-kempczinski-on-q2-2022-results-earnings-call-transcript

CHIPOTLE REPORTED: everybody maintained positions. EVERYBODY IS LIKING IT, except BRIAN MULLAN and JEFF BERNSTEIN,  who are NEUTRAL.

https://seekingalpha.com/symbol/CMG/earnings/transcripts

WINGSTOP REPORTED: CHRIS O’CULL downgraded to HOLD. JOHN GLASS and DENNIS GEIGER are NEUTRAL, EVERYBODY  ELSE  is POSITIVE at this price.

https://seekingalpha.com/article/4527123-wingstop-inc-wing-ceo-michael-skipworth-on-q2-2022-results-earnings-call-transcript

TEXAS ROADHOUSE REPORTED: JOHN GLASS maintained EQUAL WEIGHT and NICK SETYAN maintained OUTPERFORM.

https://seekingalpha.com/article/4527287-texas-roadhouse-inc-txrh-ceo-jerry-morgan-on-q2-2022-results-earnings-call-transcript

THE WEEK TO COME SHOWN BELOW:

THE WEEK TO COME:  another busy week

8-02 After Market Close Denny’s Q2 Confirmed
8-02 After Market Close Starbucks Q3 Confirmed

8-03 Before Market Open Yum Brands Q2 Confirmed

8-04 Before Market Open Shake Shack Q2
8-04 Before Market Open Portillos Q2
8-04 Before Market Open Restaurant Brands Intl Q2
8-04 Before Market Open Papa John’s International Q2

8-04 After Market Close The One Group Hospitality Q2
8-04 After Market Close Joint Q2
8-04 After Market Close El Pollo Loco Holding  Q2
8-04 After Market Close European Wax Center Q2
8-04 After Market Close Chuy’s Holdings Q2
8-04 After Market Close Potbelly Q2
8-04 After Market Close Franchise Group Q2

2022-08-05 Before Market Open Ruth’s Hospitality Group RUTH Q2 Confirmed

 

 

FAST Acquisition II – WRITING A NEW BOOK WITHIN THE “SPAC” SPACE

FAST  Acquisition Corp. II – WRITING A NEW BOOK WITHIN THE “SPAC” SPACE

Prologue:

It is obvious that the excitement surrounding Special Purpose Acquisition Companies has waned. After hundreds of BILLIONS were raised over the last several years, there were zero SPACs funded last week. The average SPAC that accomplished a Business Combination is trading down something like 35% from the $10 issue price. Still, according to Nomura Securities, there are 132 SPACs trying to get funded, to the tune of $22B. and there are 580 SPACs seeking acquisition targets, with $152 Billion in trust. This bankroll, with leverage, could produce well over $500 billion in purchasing power, however:

Since the general market, most notably the speculative sector, is down substantially, current SPAC shareholders may be tempted to cast a negative vote relative to a proposed deal and retrieve their capital completely, which would be a “win” in this environment.

FAST II ACQUISTION CORP (FZT.U AND FZT) – ADJUSTING ACCORDINGLY

Our readers know that we have consistently been skeptical of the activity in the SPAC space, but “help is on the way”. In particular, the Sponsors of FAST Acquisition Corp. II (FZT and FZT.U) have made some material adjustments to the basic structure of their prospective Business Combination, all of which are materially beneficial to the public shareholders. We have followed all three SPACs (FST, FZT and VELO) that were formed by this Sponsorship Group and their holding company, &vest, since we have known some of &vest’s principals for decades. The just announced proposed deal between FZT and Falcon’s Beyond is intriguing, to say the least, and we will report on the fundamentals over time. Relative to the SPAC space, and the new less speculative stock market, the SPAC structure, as reformulated by FZT principals, is worthy of description. Beneficial as it is for shareholders, therefore useful as it will prove to be for SPAC sponsors, it is described below. References to the FZT/Falcon’s Combination are intended to be illustrative of the new SPAC “structure”, not a detailed description of this particular deal. We will report more regarding the operating fundamentals of the proposed Business Combination as time goes by.

A BETTER STRUCTURE FOR INVESTORS

If you can forgive the metaphor: Everybody knows that the SPAC castle has burned down, but from the ashes an ember sometimes continues to burn. Our readers know that we are not generally a fan of SPACs because too often:

  • The credentials of the Sponsors are often more of a “celebrity” than an operating nature and the operating principals at the selling company are sometimes selling and/or leaving.
  • The resultant starting valuation is many years ahead of the near-term fundamentals.
  • There is uncertainty as to whether the SPAC investors will agree to the proposed Business Combination, and the presence of their funds may be necessary for a closing.
  • There is substantial downside risk if the earnings are late or less than expected, because the starting point may be more of a “plan” than a “existing business”.
  • There is often substantial dilution of the public shares by earnout incentives that depend on short term stock price rather than longer term results. If there is a short term move in the stock, the dilution can take place though the stock price quickly falls back and the fundamentals are still far in the future.

In this case, at this time with so much disillusionment regarding SPACs, the Business Combination between FZT and Falcon’s Beyond provides a number of fundamentally attractive features. Moreover, Sponsors and Underwriters of FAST Acquisition Corp. II have adjusted the deal structure to help eliminate the above negatives:

  • The Sponsorship group and proposed Board of Directors have outstanding brand building credentials in the hospitality/restaurant/retail industries. Included are &vest’s Doug Jacob (co=founder of &vest), Bill Hinman (partner of &vest and  former  Director of the SEC’s Division of Corporate Finance), Sandy Beall (partner of &vest, founder of Ruby Tuesday’s, founder of Blackberry Farm and Blackberry Mountain) and others. The operating partnership with prestigious Melia’ Hotels speaks for itself. Furthermore, the “sellers” are accepting stock and staying, putting their entire business careers into the new venture. Lastly, an affiliate of the seller will contribute up to $60M to the new company, $20M of which is already in place.
  • The first project, in Punta Cana, Dominican Republic, opens in early 2023, within months of the Business Combination and calendar 2024, with $150M of projected EBITDA, will be little more than a year away. Melia’ Hotels will be contributing existing hotels, situated on attractive resort real estate, as part of their contribution to the 50-50 jV, providing brick and mortar value to the new Company. Lastly, even if projects should be delayed for some reason, indications of success will not be long in coming as the Punta Cana project inaugurates the new effort in a very few months.
  • This transaction will likely move forward, even with substantial SPAC redemptions. The projects are largely pre-funded, an affiliate of the seller will provide up to $60M, and Melia’ operating credibility and contribution of brick and mortar should provide a range of financing alternatives.
  • The risk is fundamentally less than normal here because brick and mortar hotels will be contributed by Melia’ as each project moves forward. In addition, the downside risk is reduced because half of the public’s common shares will be exchanged into an 8% convertible preferred stock.The Sponsor is also forfeiting 20% of their “promote”, to be reallocated between Private Placement and non-redeeming public investors. Depending on redemptions, the effective discount (stock dividend) will be from 6.1% to 8.1% from a theoretical $10.00 purchase price.
  • The potential dilution from earnout shares is a non-factor because that would take place only after one year, triggered in tranches at the much higher levels of $20, $25, and $30/share, at which point public shareholders will have already made substantial returns.

CONCLUSION:

It’s possible that the FZT/Falcon’s Beyond deal would take place with or without the adjustments detailed above. In our mind, however, the new structure provides a much more balanced approach between “organizers”, operating principals and the public investors and is no doubt a function of &vest’s  navigation of the SPAC market over the past few years. There is less of a “promote” for the organizers and underwriters, the exit for the operating principals is longer term in nature so more dependent on building the business, not just the stock price, so the reward/risk profile is far more attractive for public investors. We look forward to following the progress of the above described transaction as well as developments in the general SPAC space.

Roger Lipton

 

CHUY’S: A COMPELLING OPPORTUNITY OR A “VALUE TRAP”?

CHUY’S: A COMPELLING OPPORTUNITY OR A “VALUE TRAP”?

We wrote recently that restaurant stocks are very inexpensive, compared to the historical range of valuations, and perhaps the worst of the trends in traffic, commodity prices and labor are adequately discounted. In the course of bringing the numbers within our “Corporate Descriptions” up to date we were a bit surprised that CHUY’s has become as inexpensive as it is. (Our readers should check out “Corporate Descriptions”. It’s a lot of work for us but a great tool.)

As of 3/31/22, CHUY had $90M of cash on the balance sheet relative to an equity market cap of about $400M and an Enterprise Value of a little over $300M. Moreover, EBITDA has grown from $35M in 2018 to $64M in 2021, an obviously very impressive improvement and the Enterprise Value (w/o lease obligations) now is only about 4.75x TTM EBITDA. With that as a starting point, we take a further look.

Large Cuts in Staffing Drive the Large Increase in EBTIDA from 2018 to 20

In spite of revenue in 2021 being relatively the same compared to 2018 ($396M in FY21 vs. $398M in FY18), the EBITDA rose from $35.2M to 64.4M. The EBITDA margin rose 750bps from 8.8% to 16.3%, a remarkable increase in such a short period of time. The obvious next question: “Are current EBITDA margins sustainable?”.

A closer look at the income statement shows that the $30.7M decline in labor costs drove the entire increase in EBITDA. As a percentage of revenue, the company was able to lower labor costs from 36.2% to 28.7%. The company has stated that they are operating at about 80-85% staffing levels compared to where they believe will maintain quality customer service.

CHUY 10Ks provide a significant amount of useful historical information to help investors understand the drivers of the company’s business. Since 2014, the company has made significant cuts to the number of managers and hourly employees in each store. Remarkably, the company employs approximately the same number of managers and hourly employees today that it did in 2014, with 37 FEWER stores. This nearly 40% reduction in staffing is very unusual in the industry and we believe it is unsustainable. In this regard: On the Q1 FY22 conference call, management stated that it believed that staffing would return to 90-95% of 2019 levels, implying that 10-12 more employees per store are needed.

The significant reduction in employees per store (some of which management attributes to more efficient use of technology, especially at the manager level), reduced labor costs as a percentage of revenue from 36.2% to 28.7%. This reduction is in stark contrast to the trend experienced by many of its peers over the same period of time. As shown in the table below, most peers showed an increase in labor as a percentage of sales of 80-100bps. Darden has been able to lower its labor costs slightly over that period of time.  Since 2015, labor costs as a percentage of revenue have averaged 33.5% at CHUY. We believe that this percentage is a more reasonable level of future costs than the current run rate and there was, in fact, a 140 bp increase in labor costs in Q1’22 on revenue up by 14.6%. While management suggested that the labor situation is starting to normalize and “help is on the way”, the table below shows that other full-service operators are not showing the same degree of abnormality.

“NORMALIZED” EBITDA POTENTIAL COULD BE AS LOW AS $44M

 We continue to focus on the labor situation at Chuy’s because long term macro trends suggest that other costs, such as operating, occupancy, marketing and G&A will probably not decrease in the foreseeable future. It is important to note that, in spite of closing 18 locations (16% of the 114 there would have been) in the last six years, AUVs have declined from $4.87M in 2014 to $4.20M in 2021. At the same time, net cash investment per new store has increased from $1.8M to $2.5M, which has lowered the AUV/Net Investment ratio from 2.71X to 1.68X. More worrisome is the decline in customers per location per year from 36K in 2014 to 24K in 2021.  Since CHUY can only raise prices so much to offset this steady decline in traffic (3.3% long-term trend), we believe that the other costs of running the business will stay close to current percentages of revenue, highlighting the importance of labor costs.

Wall Street is estimating $425M of revenue and $51M in EBITDA for FY22 and $475M in revenue and $58M in EBITDA in FY23. Simply taking the recent percentage of revenues of all costs except labor and increasing labor a modest 130bps to 30% of sales (and exclude pre-opening costs) our EBITDA estimates come close to analysts estimates. However, considering the factors we discussed above, we feel that 30% labor costs as a percentage of revenue could be too low. If labor costs rise to 32% of revenue, which would still be 150bps below the long-term average and many of its peers, EBITDA drops to $44M-$49M or almost 30% below the current run rate.

OTHER CONSIDERATIONS

(1) Officers and Directors own less than 2% of the outstanding shares.

(2) Margins were shrinking for several years prior to COVID, “adjustments” were in process.

(3 ) Company sold 3.04M shares at $15.86/sh (19% dilution) in ’20, after purchasing 90K shs             at $15.57. In ’21 repurchased 462k shs at $31.45/share. In retrospect…..sad.

(4) Non-operating Impairment Charges – $53.3M from ’18, ’19 and ’20.

CONCLUSION

The above discussion provides more questions than answers. We have no visibility as to what will provide a predictable, sustainable growth trajectory. Our conservative view is that EBITDA in 2022 will more likely approximate $44M than $65M and we are concerned that the Chuy’s basic dining experience may continue to lose traffic. On that basis, we would rather bet on restaurant companies that are in a stronger competitive position.

Roger Lipton