CRACKER BARREL OLD COUNTRY STORE (CBRL)
MISTER CAR WASH (MCW)
REGIS CORPORATION (RGS)
GOOD TIMES RESTAURANTS (GTIM)
BT BRANDS (BTBD)
RAVE RESTAURANT GROUP (RAVE)
ANNUAL – per Yahoo/Finance
QUARTERLY – Per Yahoo/Finance
ENTERPRISE VALUE/TTM ADJUSTED EBITDA per Lipton Financial Services
MOST RECENT CONFERENCE CALL TRANSCRIPT
COMPANIES PREVIOUSLY REPORTING:
TWO DOWNGRADES (STARBUCKS TO MARKET PERFORM AND PLANET FITNESS TO NEUTRAL, as long time CEO unexpectedly resigns)
TWO UPGRADES (WINGSTOP TO OUPERFORM AND EUROPEAN WAX CENTER TO OVERWEIGHT)
Restaurant Brands:Three firms remain positive
Driven Brands:Three firms remain positive.
Starbucks: Other than the One downgrade to Market Perform, one firm remains Neutral
Wingstop: One firm remains Positive, One Upgrades to Positive, One stays Neutral.
Chipotle: Two firms remain Positive.
McDonald’s: Two firms remain Positive.
Planet Fitness: CEO steps aside, One firms downgrades to Neutral, Two firms stay Positive
Dutch Bros, Brinker & Jack in the Box maintain Neutral ratings at one firm each.
Yum Brands, Yum China & Mister Car Wash maintain Positive ratings at one firm each.
European Wax Center gets Upgrade to Overweight.
COMPANY REPORTING DURING WEEK: ONLY (Best of Breed) DARDEN: TWO ANALYSTS CONTINUE TO BE NEUTRAL, OVERWHELMED BY SEVEN POSITIVE FIRMS
Conference call transcripts are below for all companies reporting in prior weeks with ratings changes (Starbucks, Planet Fitness, Wingstop, European Wax Center) or initiations (Dutch Bros), or companies reporting in THE WEEK THAT WAS (Darden).
Planet Fitness (PLNT) – announcement below, regarding “management transition”
European Wax Center (EWCZ)
Dutch Bros (BROS)
REPORTING IN THEWEEK TO COME: NOBODY SCHEDULED TO REPORT
ANNUAL – per Yahoo/Finance
QUARTERLY – Per Yahoo/Finance
ENTERPRISE VALUE/TTM ADJUSTED EBITDA – per Lipton Financial Services
CONFERENCE CALL RELATIVE TO Q2’23 IS AVAILABLE BY WAY OF COMPANY WEBSITE
Macro-economic indications are not encouraging. While the Federal Reserve PHDs review the historical data, Yogi Berra suggested “You can observe a lot by watching”, presumably more in real time. Kroger, the largest US supermarket chain reports that “inflation, high interest rates and reduced government benefits are stretching shoppers’ budgets. Lower-income customers are buying smaller and cheaper products, with spending patterns influenced by payroll and food-stamp schedules. Food manufacturers are getting more aggressive with deals to increase their sales volumes. Promotional levels are nearing pre-pandemic levels.” Within QSR land, in just the last two weeks pre-Covid style low priced promotions are appearing: 25% Off Everything at Burger King, the $1, $2 and $3 Menu is back at McDonald’s, and you get a second sandwich for $1 at Wendy’s. While food inflation has moderated to low single digits, that is small consolation with energy prices on the rise again, record consumer credit card debt, a 10 year high in auto delinquencies, higher housing expense and the pending October resumption of student loan repayments.
Restaurant profit margins in the first six months of ‘23, while often compared to ’22 (when labor and commodity inflation were rampant) remain challenged compared to pre- Covid 2019, largely affected by lackluster traffic and changes with dine in/off-premise consumer patterns. The most recent six months provided only a handful of publicly held restaurant companies with better YTY operating margins (store level EBITDA reduced by corporate G&A expense). There is invariably a “story” behind the success of companies such as Darden, Chuy’s, Chipotle and The One Group Hospitality. More typical are the results of well-established and financially secure companies such as BJ’s, TX Roadhouse, Cheesecake, Shake Shack, Cracker Barrel and Noodles, whose operating income percentages are below those of 2019. It is no wonder that, considering the macro influences outlined above, combined with questionable traffic expectations, still higher labor costs and ongoing commodity uncertainty, management is almost always guiding conservatively. It buys them nothing to promise better traffic or operating margins.
Dave & Buster’s is doing a lot better than recently described in a prominent restaurant industry publication. The article reported that “Dave & Buster’s is hardly the only eatertainment company struggling with traffic (in Q2’23). Data from Gravy Analytics supposedly revealed that Dave & Buster’s was down (a shocking) 39% this quarter, similar to Topgolf and Bowlero in the eatertainment space, which declined 30% and 56% the same quarter, respectively…….attributing this to a shift in consumer behavior toward at-home entertainment”. Business writers should know enough about their subject to recognize a ridiculous premise. Comp sales at Dave & Buster’s (including the Main Event stores) were down 6.3% vs. ’22 and up 5.8% vs. ’19. I don’t know where that 39% number came from. FWIW, TopGolf comp sales were up 1% vs. ’22 and up 9% since ’19. Bowlero had comp sales down 2.6% vs. ’22 and up 29.3% vs. ’19. The misleading quotes from Gravy Analytics aside, the excerpts of management commentary were almost equally misleading. Per CFO, Mike Quartieri: “What has us at this point is we can’t control the macroe-economic factors that are driving traffic numbers.” Per CEO, Chris Morris: “even though the leadership team analyzed its business to figure out where the SSS decline was coming from, they came to no meaningful conclusion, other than a shift in consumer behavior”. Finally, after quoting the impossibly large D&B declines above, and portraying management as having no clue, the author provided managements’ six part strategic plan to increase EBITDA from under $600M annually to over $1 billion within “several” years. Though sales and traffic are down modestly versus last year Adjusted EBITDA was $140M in Q2’23, (up 21% from Q2’22), after generating $182M in Q1 (up 30%). The Company has bought back $200M worth of stock already this year (11% of the capitalization) and has just authorized an additional $200M. The Enterprise Value is under 5 times the estimated Adjusted EBITDA for calendar ’23.
Common Shares Outstanding is not as simple a concept as it seems. It turns out that three companies, out of over 60 restaurant and franchising companies that I cover within my website, have made creative use of Class A, Class B (convertible), and Class C (or Convertible Preferred) shares. In Mid-’21, Exponential Fitness, Inc. (XPOF), BRC Corp. (Black Rifle Coffee Company) (BRCC), and European Wax Center (EWCZ)) came public. GET THIS. The B and C (or Convertible Preferred) shares are convertible into Class A common at the option of the holder, but since they “have no current economic interest” or are “anti-dilutive” when losses are reported, the ultimate dilution is not shown except deep in the footnotes. Exponential Fitness shows 33M “Basic Class A” shares outstanding, but there are almost 60M shares fully diluted. BRC Corp shows 59M “Basic Class A” shares, but there are 211M fully diluted shares. Not as extreme, European Wax Center (EWCZ), which reports 50M Class A common shares, has 62M fully diluted shares. There is a more complete discussion of this matter on my website. When one has been in the investment business as long as we have, we sometimes think we’ve seen most every “creative” approach. Obviously not quite.
CAVA GROUP (CAVA)
GEN RESTAURANT GROUP (GENK)
ARK RESTAURANTS (ARKR)
NATHAN’S FAMOUS (NATH)
ROCKY MOUNTAIN CHOCOLATE FACTORY (RMCF)