All posts by Roger Lipton


Download PDF


If anybody thinks it is getting any easier out there, Cracker Barrel’s report this morning should provide a dose of reality.

The conference call doesn’t take place for a couple of hours, but we know enough to comment. Comp sales declined 0.4% in Q4, ending 7/31, but the average check increased by 3.5% (menu price increase was 2.7%) , so traffic was down about 3.5%. The trend of the comps, on a monthly basis was very consistent: -3.8% in May and July, -2.7% in June.

Operating income in Q4 was 10.2% of revenues, down 100 bp from a year earlier, negatively affected by increased labor (60 bp) as well as cost of goods (110 bp) , partially offset by reductions in “other operating expenses” (20 bp) and G&A (50 bp).  Diluted EPS  was $2.55 vs $2.23, but adjusting for the extra week this year, EPS was down $.04 Importantly, the tax rate was only 21.8% this year, compared to 32.7% last year, which, combined with the extra week, provided the increase in EPS. The fourth quarter basically mirrored the full year, ending 7/31.

The brief commentary in this morning release, regarding sales trends, said “”the traffic was challenged, particularly with light er users and during the dinner daypart, some of which was attributable to our menu and marketing promotion not delivering…..While our results did not meet our expectations, I am confident that our initiatives and plans for ‘2019 will drive improved performance.”

Guidance for ’19 includes comp sales of 0 to 1% positive, for both restaurant and retail segments.  Commodity inflation of 2% is expected (which reverses the benefit of recent years). Operating income margin will be about 9.3% of sales (vs. 9.7% in ’18). The tax rate will be 17-18% (vs. 11.1% in ’18). EPS will be $8.95-$9.10 (vs.$8.87 in ’18). This is a reduction from the previous Street estimate of $9.69.

This quick update is not intended to analyze CBRL as a stock, but presented as a commentary on how a well run restaurant company is coping with today’s environment.

Bottom line: As a regular customer of Cracker Barrel, when I have visited my daughter in Birmingham, ALA, the value for the money is extraordinary and the service has always been just fine.  I don’t think any customer, analyst, or investor would argue that Cracker Barrel is dropping the ball from an operating standpoint.   Relative to the reported results, it is worth noting that commodity prices have turned higher, a significant change from the help this line item has provided in the last couple of years. Also, the materially lower tax rate this year, and next at CBRL, is not going to be a recurring benefit in future years. This affects all US companies, not just those in the restaurant industry. The challenge for all restaurant/retail companies, especially those with a very large footprint,  is how to “differentiate your commodity”.  It continues to be tough out there in restaurant/retail land, in spite of the bullish commentary about how the economy is “booming”.

Roger Lipton

Download PDF


Download PDF


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

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

The most pertinent details of the Q1 report are as follows:

Comp store sales were down 2.4% (estimates were for down 2.7%), on top of a 1.1% increase in ’17. “adjusted” earnings per share was $0.84 vs. $0.59 a year earlier and $0.67 which was the latest analyst estimate.  Adjusted Corporate EBITDA was  up 7.4% on a comp week basis, excluding a litigation settlement in 2017. The comp store decline was driven by 2.6% decrease in walk-in sales, 0.1% increase in special events, negative 1.2% in Amusements and Other, and negative 4.1% in Food & Beverage. Since there were price increases of 1.1% in Beverages and 1.9% in Food, traffic in F&B was negative by 5.5-6.0%.  On a line by line basis: Total cost of sales was 10 bp higher in Q2, reflecting a decline in both F&B and Amusement margins, but helped by the higher percentage of the more profitable Amusement sector. Amusements and Other comprised 59.2% of total revenues up 150 bp YTY, continuing the long term trend toward becoming an Amusement Park rather than a Restaurant. F&B costs were 40 bp higher, Cost of Amusement and Other was 30 bp higher. Payroll and Benefits was 10 bp higher, at 23.1%, due to “deleverage in our comp stores (on the lower comps), the unfavorable impact of about 4% wage inflation and incremental payroll supporting the Virtual Reality launch”. This was partially affset by YTY improvements in the non-comp store set.” Other store operating expenses were up 40 bp, due to higher occupancy costs at non-comp stores, slightly higher marketing expenses that include tests in the digital media space. Management pointed out on the conference call, explaining the slightly higher labor component, that “newer stores tend to be less efficient from a labor  perspective relative to mature stores”. We have to interject here that this has been the case for many years now, and the number of stores opening (versus the mature base) is not rising. We conclude that new stores are therefore costing more per store in opening “inefficiencies”, probably including heavier marketing. Indeed, the strong performance of the newest stores, as described by management, has been a positive recent feature of this situation, and, overall, that’s a good thing. Overall store level EBITDA was down 60 bp YTY, resulting in a still very impressive 29.8%

Wrapping up the P&L discussion of Q2, it seems to us that the fundamentals were “acceptable”, modest sequential improvement, most impressive because of the estimate “beat”. In essence, actual results beat expectations for relatively flat operating income.

Of course, the introduction of the new Virtual Reality platform, the reception of the ride/game, and the general effect on the overall business were very much on everyone’s mind. On the conference call, management indicated that “guest response has been strong and bodes well for future game releases on this platform”. Just as we, and some other observers, had predicted, the Jurassic Park based Virtual Reality ride/game only seemed to help by a point or so (two at the most), and if guests stayed longer, came more frequently, or spent more, neither the Amusement or F&B comps demonstrated it.   We stand by our discussions over the last six months, to which we have linked below, that Virtual Reality is unlikely to be a “game changer” and materially change the lackluster trajectory of comp sales. The Company confirmed what we pointed out months ago, that there is a labor content to this ride/game/platform  because the attraction must be attended to with at least one crew person. The profitability of  this offering may or may not enhance overall margins, because higher margin activities would be taking place in the same space, and it may take more than a point or two of incremental sales to offset the higher labor component. The Jurassic Park Virtual Reality experience was introduced midway through Q2, and Q2 showed higher labor expense. Our observation, about which we have written before, is that the VR platform is one of the quieter places in the  facility. Even when occupied by “riders”, there is very little “energy” in the immediate vicinity, compared to almost all of the rest of the Amusement area. We also question the notion, as suggested by management, that the ride doesn’t have to be attended to at all times. Our observation is that, most of the time, the ride/game has to be “sold” by a well trained attendant. The attendant (or two) that manage this platform, has to be personable, attentive, and diligent in efficiently loading and  unloading riders, as well as cleaning the viewing goggles and seats.

Also on the Conference Call, an intensified focus on the F&B side of the business was described, including a fast casual taco concept that will be installed at a Dallas location this fall. It makes sense to us that many PLAY customers don’t want to sit down for a full fledged meal, but could respond to a taco offering, “on the run”.  It’s possible that  a “food court” of sorts could replace at least part of the current “Bar & Grill” area, and success with this experiment would be a major positive development.

Other than the above, it is more or less “business as usual”, opening stores as planned, the latest class of stores doing well, more Virtual Reality games (and others) to come, more effective promotions, better training. No details were provided as far as the cost of developing Virtual Reality or other games,  the incremental traffic necessary to justify that expense, or the expected lifespan of these offerings. Clearly, though, as we have described before, PLAY is more of an Amusement Park than a Restaurant. With Amusements & Other at almost 60% of total sales, and Alcoholic Beverages about a third of the remaining 40%, only 26-27% is from Food. Since a great deal of capital (the amount not disclosed) is being spent on “proprietary” game content, PLAY becomes dependent on the ability to correctly predict gaming trends, an order of magnitude more risky, than most restaurant/retail operations we can think of.

Conclusion: Stated at the beginning of this discussion

Below are links to our most recent writeups on PLAY





Download PDF


Download PDF


About a year ago, two high priced acquisitions were made, namely Panera Bread and Popeye’s Chicken. We said at the time that these two deals were not harbingers of a broader trend. Panera was a strategic acquisition by a deep pocketed European buyer (JAB) . Popeye’s (PKLI) was a another franchise vehicle for the highly leveraged financial engineers at Restaurant Brands (QSR). Inexpensive capital (i.e.very low interest rates) and highly valued paper (QSR equity was trading at over 20x trailing EBITDA, with access to billions of debt) allow for some abnormal risk taking. Some have called it “misallocation of capital”.

It’s a year later, and two more highly priced deals are now on the radar screen. Zoe’s Kitchen has been bid for by Cava Grill, joined by Ron Shaich of Panera fame. ZOES is trading above the $12.75 suggested price, in the expectation that a higher bid could emerge. You can find our most recent description of Zoe’s, from our website article here:


We are not going to comment further  on this situation, at the current time, other than to alert our readers that it is an interesting case study.

Dunkin’ Brands Group, a much larger company, has been recently touted as an acquisition target, perhaps by Coca Cola (KO), and DNKN is trading at an all time high. The latest writeup, from our website, on DNKN is provided here:


Our attitude here is that, Coca Cola, or anyone else, would be paying an unnecessarily high price for a Company that is not the industry leader. The Dunkin’ brand has been lagging the dominant Starbucks by a large measure, clearly losing market share, and there is no reason to believe that will change in the foreseeable future. While Dunkin’ works to refresh it’s approach, Starbucks is more aggressive than ever as it works to overcome the “law of large numbers” and cope with industry headwinds such as the increasing cost of labor.

DNKN trades today at about 18x trailing twelve months EBITDA,  twenty seven times estimated earnings for 12/31/18, and it is difficult to project more than high single digit earnings growth in ’19 and beyond. If DNKN remains public, stock buybacks might take EPS growth into low low double digits, but DNKN has already leveraged its  balance sheet to about 5x trailing EBITDA, so stock buybacks won’t do too much more than cover executive options. Few investors are enthused about paying 25x forward earnings, and 18x TTM EBITDA,  for a company building earnings something like 10%. This is especially true in the case of DNKN, where a cash can be made that much of the free cash flow should be re-invested in the system. New and improved products, marketing, mobile order and pay, and other obviously lagging elements of the system are overdue to be addressed. The franchisees have been fighting the daily battle while the Company has bought back over a billion dollars worth of stock, and new highs in the stock have enriched the franchisor’s executives.

Asset light franchisors, with their supposedly free cash flow (because franchise systems have to be supported) are very desirable properties. Furthermore, Coca Cola, or another deep pocketed strategic acquirer could make the case, as Warren Buffet has often made, that one can afford to pay a fair price for a high quality asset run by proven dedicated executives, and the long term success will overcome the initial premium price. In this case, however, we don’t believe that DNKN has either a dominant industry position, nor is the management team outstanding.

Lastly, if KO or someone else is determined to get into the franchised coffee shop business, we suggest that this USA economic expansion and stock market boom is closer to its end than its beginning. A more opportune time to purchase almost anything may not be far away. We wouldn’t want to own DNKN at this valuation because the Company’s performance doesn’t support the stock price. We suggest, further,  that potential purchaser’s of DNKN would be better advised to play another day.

Roger Lipton

Download PDF


Download PDF

Diversified Restaurant Holdings, Inc. (SAUC) – ROGER LIPTON appointed to BOARD

About Diversified Restaurant Holdings, Inc.

Diversified Restaurant Holdings, Inc. is one of the largest franchisees for Buffalo Wild Wings with 64 franchised restaurants in key markets in Florida, Illinois, Indiana, Michigan and Missouri. DRH’s strategy is to generate cash, reduce debt and leverage its strong franchise operating capabilities for future growth. The Company routinely posts news and other important information on its website at

Diversified Restaurant Holdings Announces Board of Director Changes

SOUTHFIELD, MI, September 6, 2018 — Diversified Restaurant Holdings, Inc. (Nasdaq: SAUC) (“DRH” or the “Company”), one of the largest franchisees for Buffalo Wild Wings® (“BWW”) with 64 stores across five states, announced that effective August 30, 2018, Gregory J. Stevens has resigned from the Company’s Board of Directors in order to focus his efforts on his other businesses.  Concurrently, the Board announced that Roger Lipton has been appointed as an independent director and will replace Mr. Stevens on the Compensation Committee.

“On behalf of the Board of Directors and management team, I would like to express our sincerest gratitude to Greg for his outstanding contributions to DRH since our inception.  We wish him all the best in his future endeavors,” commented Michael Ansley, Executive Chairman.

Mr. Ansley added, “Roger is an accomplished investment professional who brings very relevant skills and experience to our Board.  His unique perspectives and deep expertise in the restaurant industry will be extremely valuable at a time when DRH is positioning itself for its next stage of growth.”

Mr. Lipton is an investment professional with over four decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. He earned a B.S. in Mechanical Engineering at Rensselaer Polytechnic Institute and an MBA at Harvard. After working as an auditor with Price, WaterhouseCoopers for two years, he began a career on Wall Street, where he focused on the restaurant and franchising industries, from which he then moved on to build and operate  a chain of fast casual restaurants in Canada.  He subsequently spent 13 years at Ladenburg, Thalmann & Co., Inc. where he managed the Lipton Research Division, specializing in the restaurant industry.  While at Ladenburg he sponsored an annual restaurant conference for investment professionals.  He formed his own firm, Lipton Financial Services, Inc. in 1993, to invest in restaurant and retail companies.   Mr. Lipton currently serves on the board of Barfly Ventures, operator of the Hopcat chain of casual dining restaurants.

Download PDF


Download PDF


The general equity market was up in August, gold bullion was down about 3%. The mining stocks fared worse, with the two largest mining ETFs, GDX and GDXJ, down 12.9%.  Strange as it may seem, the apparent reason for the relatively poor performance of the miners may be a turning point. On July 31st, Vanguard announced it was “restructuring” its $2.3 billion Precious Metals and Mining Fund, and the newly named “Global Capital Cycles Fund” will start its new strategy in late September. Moves like this from a major institution are often a sign of “capitulation”, evidence of extreme negative sentiment, and marking a bottom as positions are liquidated. In particular, back in 2001, Vanguard removed the world “gold” from what was then its “Gold and Precious Metals Fund”, which coincided with a low in gold before a ten year rally. So, we’ll see.

If the facts had changed, we would have changed our strategy, but the underlying reasons are intact. The rampant creation of currency, and monstrous increase in debt, around the world, can do nothing but cause inflation in the long run, because it’s the only way out for the politicians who can’t admit to spending their constituents into financial oblivion. The amount of gold held by major central banks, relative to their circulating currencies, is approximately the same level as it was in 1970, before gold went from $35/oz. to $850/oz. There will be a “catch-up” again.

We believe, also, that the relationship between the price of gold and the US debt is valid, and the debt obligation as shown on the chart below is understated, not including monstrous unfunded entitlements. The price of gold moved in lockstep with the growing US debt, from 2000 until 2009, and for decades before that. In 2009, after a steady 9 year rise, because markets anticipate, gold ran sharply ahead when it became clear that the Obama administration was going to sharply increase the annual deficit. The price of gold diverged on the downside from late 2011 until the bottom of 2016, likely, because the annual reported deficits were lower, even though the debt steadily increased from “non-budgeted” spending. For example, this fiscal year ending September, the reported deficit will be about $800B but the increase In debt is already over $1 trillion. We think another inflection point is at hand, as the annual deficit and cumulative debt are accelerating again.

The gold mining stocks have fared even worse than bullion recently, down more than 50% since gold was at the current level four or five years ago.  That 100% catchup could be on top of the leveraged move that the mining companies, as operators, make when bullion changes price.  Financial markets can make shockingly rapid moves at certain times, as illustrated by the recent volatility in BItcoin, first up by over 20x and down by two thirds more recently. We believe this will again be the case with gold bullion, much more so with  the mining stocks, this time on the upside.

Roger Lipton

Download PDF


Download PDF


Noble Roman’s, Inc. (NROM) is forty six years old as an Indiana Corporation, having operated, franchised and licensed versions of the “Noble Roman’s Pizza” brand. Founder and Chairman, Paul Mobley, formed NROM in 1972, still leads the company from a strategic standpoint, plays an active CFO and shareholder relations role, and his son, Scott, is President and CEO. Locations selling NROM Pizza today include 50 states plus D.C., Puerto Rico, the Bahamas, Italy, the Dominican Republic and Canada. While the company has operated and franchised stores with varying degrees of success over the years, the underlying reputation for serving a high quality product has been generally maintained. This is evidenced by the most recent commentary in social media (Yelp and Facebook) relative to the openings of Noble Roman’s Craft Pizza and Pub locations (NRCPP), the most recent incarnation of the brand.

Though customers of Noble Roman’s mostly remember the brand with the nostalgia of their youth, the long operating history has included a number of starts and stops. In particular, the six years ending in ‘17 were burdened by losses related to the unsuccessful effort to build a “Take ‘N Bake” version of Noble Roman’s, and the Company paid a predictable price for the failure. We describe below, when discussing the improved balance sheet, some of those costs.


Noble Roman’s today has three primary areas of focus: (1) Licenses to sell Noble Roman’s products within grocery stores (2) Franchises/Licenses for “non-traditional” locations, primarily in convenience stores (often affiliated with gas stations) and entertainment facilities.  (3) Expansion of a new generation of NRCPPs, which, following the successful openings of four company operated locations, has recently begun to award franchise rights.

Grocery Store Licensing: Noble Roman’s has licensed, by way of a supply agreement, sales of its products to just over 2,000 grocery stores. The licensed grocery store must purchase proprietary ingredients through a Noble Roman’s approved distributor. The deli department of the grocery store then assembles the products and displays them using Noble Roman’s point of sale marketing materials. The distributors collect for Noble Roman’s a fee in lieu of royalty as they sell ingredients to the grocery stores and remit this amount within ten days of each month end. While the number of grocery stores under license expanded steadily for several years, especially until the end of 2016, the labor requirement within the grocery deli departments has limited further growth, and license revenues from this segment has contracted in the last two years. It is unknown how many of the 2102 grocery locations are currently offering product, especially since some stores sometimes are removed and then later return. NROM management has explored the possibility of assembling the pies at the distribution level, reducing the labor requirement at the individual grocery store, but a solution has not yet been developed.  With two other far more profitable and promising areas for corporate growth, NROM management is concentrating efforts elsewhere. Royalties and fees from grocery store distribution was $1.8M in calendar 2017, down from $2.1M in ’16. In the first six months of ’18, grocery fees were down a more modest 5.7% to $840k, from $891k. A weaker general economy would likely stimulate this business since grocery stores would find more available labor.

Non-Traditional Franchising: The company has franchised about 750 units, including convenience stores, travel plazas, entertainment venues, hospitals, most recently several Wal-Mart and Circle K locations.  A prototype counter top unit was introduced in early ’16 and  has generated steady growth in the last 18-24 months. There is obviously a time lag from when a new license is signed to when a location opens for business. This steady source of revenues amounted to $4.5M in ’17, up from $4.4M in ’16. Revenues from this segment were down slightly YTY in Q1’18, up about the same in Q2, flat for six months. Since signings have been going well in ’18 and there have been hardly any closings, revenues from this segment can be expected to grow again. While units have opened within Circle Ks and WalMarts, those retail systems are difficult to quickly penetrate for a number of reasons and we expect independent operators to be the more predictable source of growth. The pace of signings has clearly picked up over the last eighteen months, and could be capable of, at least offsetting the current slippage in the previously described grocery channel. The initial franchise fee is $7,500, except for $10,000 at hospitals. The ongoing royalty is 7% of sales, with no advertising contribution since customers in these locations are mostly on the premises for other reasons.

Noble Roman’s Craft Pizza and Pub.”: – This is by far the most attractive expansion opportunity for the Company. The fast casual restaurant features two styles of crust, both thin and Deep Dish Sicilian, with their famous breadsticks served with spicy cheese sauce,  specialty salads, four pasta dishes, all “designed to be fast, easy to prepare and delicious to eat.” New pizza oven technology provides bake times of only 2.5 minutes for the regular crust, 5.75 minutes for Sicilian, with the dough preparation room visible to customers.

The concept as we would describe it is: similar to Blaze, MOD, and so many other participants in the fast casual pizza segment, but “evolved” and “differentiated” in major ways. NRCPP serves personal size pies as well as family sized, serves traditional crust as well as Sicilian (for the same price), serves a limited number of salads, sandwiches, chicken wings, and desserts. Wine & Beer (including Craft Beers) is served at a modest but comfortable bar, where you can also dine. Half a dozen TV sets create a low key sports bar “vibe”.  Anecdotally, we have personally been to all four locations, several times to the first of them, and have been impressed with the quality of operations that has been taking place.  Social media commentary, including Yelp and Facebook, confirms our reaction, and the public’s view of The Brand seems to be a combination of nostalgia combined with admiration of the current updated approach. The hospitality quotient provided so far should presumably be replicable in the foreseeable future because the company operated stores, as well as initial franchised locations, will continue to be in NROM’s “back yard”. The first location (Westfield) opened  1/31/17. A second location (Whitestown) opened 11/17/17. The third location (Fishers) opened 1/18/18 and the fourth (Carmel) opened 5/29/18.  The Company has shown an ability to open these four stores, at budgeted cost, in only 3-4 months after lease signing. Naturally, the speed of future openings is dependent on lease negotiations, real estate variance requirements, and the configuration of the proposed site.


The locations are about 4,000 square feet, cost about $600,000 (including about $50,000 of pre-opening expenses). The targeted average annual volume has been $1.35M (26k/wk.) with a first year store level EBITDA of 22%. Cost of Goods combined with Labor (including fringe benefits) is expected to average no more than 50% of sales. These parameters provide an immediate 50% cash on cash return, allowing for a two year cash payback. The first four locations have collectively exceeded all these targeted parameters on an annualized basis, though only the first (Westfield) has been open for more than one year. It is important to note that many successful restaurant franchisors project targeted cash on cash returns in year three much lower than shown above (and don’t include pre-opening expenses in their calculation), obviously far less attractive than the indicated fully loaded immediate returns of NRCPP. Since company, as well as the first of the franchised locations, will be located near Indianapolis, pre-opening costs and initial opening inefficiencies should continue to be minimized.


While four locations in Indiana (the first of which is seventeen months old) does not imply worldwide expansion opportunities, NROM management has many years of multi-unit operating, and franchising, experience and there are very few concepts in the restaurant industry that have generated the returns as described above. Average Unit Volumes (AUVs) could build further as the Indiana market is penetrated, or perhaps be cannibalized, but there has so far been no effort at delivery, introduction of a mobile app or many other typical operating and marketing initiatives. Greater Indianapolis alone could support at least 20 units, the State of Indiana many more, so an obviously unlimited growth runway is in place. The Company, operationally led by President and CEO, Scott Mobley, has done an admirable job of getting NRCPP off and running. Noble Roman’s brand is known, to varying degrees, in all 50 states, and could no doubt succeed in well run, properly situated locations almost anywhere, but Indiana and the immediately surrounding geography represent the most obvious expansion opportunities.

The franchising strategy is to sign single unit, experienced, operators close to home. Further away, only very well capitalized operators, fully committed (operationally, financially, psychologically) to building out markets, will be enrolled. Since an operating organization is in place at NROM that can support local franchisees in their startup phase, and multi-unit franchisees will pay non-refundable up front franchise fees that should more than offset support services, the franchising effort should contribute incremental profits and cash flow to NROM at even the earliest stage. The initial franchisee fee is $30,000 for a single unit, $25,000 for the second, $20,000 thereafter. Ongoing royalties are 5%, plus a 2% contribution to a creative marketing fund.

The first franchisee has recently been signed, a highly regarded Indiana based Dairy Queen franchisee, Holly and Patrick O’Neil, who currently operates nineteen DQ locations. Since they have been expanding their number of DQ locations in recent years, they seem to have the financial and operating resources to open additional NRCPPC locations if the first location is successful. The excellent reputation of Holly and Patrick (who has been head of the DQ franchise association) will no doubt be encouraging to other potential franchisees. They could also provide operating expertise to the NRCPP system. Nobody has all the answers and every successful franchisor has learned a great deal from their experienced franchise partners. In terms of further franchising, Peter Ortiz, an experienced and successful franchise salesman, previously with NROM ten years ago when they were actively building out their non-traditional store system, has just recently returned.


During ’15, ’16 and early ’17, as the Take ‘n Bake version was winding down, and the NRCPP version was incubating, the Company was burdened with short term debt carrying a simple interest rate over 20%, especially burdensome when the company was still reporting operating losses from termination of the Take ‘N Bake adventure. $2.4M was raised in late 2016 and early 2017 in the form of 10% debentures, maturing in December 2019 and January 2010, convertible at $0.50/share, with 1.2M warrants attached @1.00. It is worth noting that both Paul Mobley, Chairman, and Marcel Herbst, Director, participated in this private placement. While the terms of the convertible debt were not pretty, it was a lot better than what had been in place. More importantly, in September ’17 the Company put in place $4.5M of conventional bank debt, maturing in September 2022, at an interest rate of LIBOR plus 4.25%. Additionally, a $1.6M Development Line of credit facility was established to fund three new company operated locations.  Each tranche of the Development Line is repaid starting four months after being drawn, on a seven year amortization schedule. As described earlier, the rapid cash on cash returns from the new locations are easily capable of servicing the Development Line and generating excess cash as well. Overall, the new financing arrangements have provided NROM with adequate financial flexibility, allowing steady further development of NRCPP locations, building a franchise operation, also further developing the two other segments. Calendar 2018 results will have benefited from about $500k of cash interest savings YTY. It is also important to note that NROM has a Deferred Tax Asset on their balance sheet of $5.5M, sheltering about $15M of pretax earnings at a 30% tax rate.


Operating results over the years, including the last few, have been burdened with lots of unattractive moving parts. While the apparent EBITDA has been about $3M annually in each of the last several years, the free cash flow has been much less due to losses from the aborted Take ‘N Bake operation, exorbitant interest charges, and legal expenses associated with license fee collection. Since the Take N’ Bake location is gone, the interest savings from the newly structured balance sheet should save about $500k annually in interest, and legal fees are coming down, we think a reasonable base of EBITDA could conservatively be $1.5M-$2.0M before allowing for cash flow from new company operated stores or franchising of same. Calendar 2018 will include the contribution from the first three new NRCPP locations for virtually a full year, plus over half a store year from the fourth. At the targeted levels, which the Company is so far exceeding, EBITDA of 22% on average sales of $1.35M, for 3.5 store-years would generate an incremental $1.05M of EBITDA in calendar ’18. The Company has made no comment regarding further openings, but we believe that at least two more company locations could open by early ’19, perhaps another store or two by late ’19, which would allow for a contribution of at least six store-years for calendar ’19, or a total targeted EBITDA addition of $1.8M on the ’17 base. Obviously, these ballpark numbers are based on the targeted AUVs of $1.35M, average store level EBITDA of 22.0%, could be better (or worse) than we’ve suggested,  and exclude benefit or penalty from the other activities. Very important: these possible improvements do not include any contribution from NRCPP franchising. Ten franchised locations, for example would generate $250-$300,000 up front, and, $675,000 annually of franchise royalties at the targeted volume.


There is currently about $7.2M of total debt, and about 21M shares currently outstanding. The debt consists of $5.1M bank debt, including the development line, and $2.0M of convertible debt (at $0.50/share). Between now and late 2019 and early 2020, the $2.0M of convertible debt will either turn into 4.6M new shares, be extended in maturity (if bond holders agree), or be refinanced (likely at less than the current 10% interest rate), one of which we believe will be practical, considering the successful development of NRCPP locations.  There are 2.4M warrants, that were attached to the convertible debentures, at $1.00 per share, which would obviously bring in $2.4M of equity if exercised. There are about 1M additional shares due to various options and warrants, which would bring in roughly $500k if exercised. In total therefore, about 27M shares would be outstanding, fully diluted, but that would have brought in over $5M of equity, obviously reducing the current $7.5M of current debt very substantially. We can therefore consider that the total enterprise value of NROM is something like ($0.65/share x 27M shares) plus $2.5M of remaining debt after cash generated from exercise of all options and warrants, or a total enterprise value of about $20M.


We need not make precise projections in terms of cash flow and earnings, other than presenting the rough parameters above. Our statistical template at the beginning of this descriptive article assumes only a continuation of the four company operated stores that are in place, maintenance of the other two operating segments, and no surprises, positive or negative. Substantial progress has been made over the last two years, both operationally and in terms of balance sheet restructuring. Time will obviously tell as to what extent this management team capitalizes on the current opportunity, but it seems like the necessary pieces are in place to take this reincarnated brand a great deal further. Noble Roman’s is an infant compared to some of the more mature participants in the fast casual pizza segment such as Blaze, MOD, or Pieology, but seems equipped to compete effectively.

Roger Lipton

Download PDF


Download PDF



We wrote several articles on this subject, last summer and again in December. Our first cautionary notes were written 8/15/17 and 9/5/17 provided here, with Bitcoin trading just south of $5000:

Our last analysis was written 12/19/17, within a day of the high price above $19,000, provided here:

In a nutshell, not today, not tomorrow, but over a few years from now, it’s over. Blockchain technology no doubt has its applications but cryptocurrencies will fade into oblivion, with most of the fundamental flaws previously described in the articles linked above. We are not always right, and sometimes we are right or wrong, but for the wrong reasons. In this case, we’ve got it right for the right reasons. For heaven’s sake, don’t get seduced now, just because Bitcoin is down from $19,000 to $6,000. It is still $6000 too high.


Gold bullion has hit a new low for the year, with the gold mining stocks following along, leveraged as usual to the price of gold. As we have previously written, there are all kinds of reasons that gold should be spiking higher, rather than lower, and it is only a few months ago that gold was on the verge of an upside breakout. Best we can figure, in addition to a very strong dollar, the downside pressure on the gold price has been from Central Bank selling, a result of turmoil in Turkey in particular.  We believe this will run its course shortly, if it hasn’t already.

Turkey’s commitment to gold had already been demonstrated to be less consistent than every other important Central Bank. While most other Central Banks have been steadily buying (or maintaining holdings) in recent years, Turkey’s holdings declined from 504 tons in July 2015 to 377 tons in Jan 2017, then built up steadily to 582 tons in Mid 2018. The most recent report shows they only hold 236 tons in July, so they have apparently liquidated 342 tons in the last couple of months.  The good news is that they don’t have much left, perhaps nothing by now.

Recall that the Central Banks in total have been steady buyers over the last nine years, in the range of 300 tons annually, up 36% YTY in ’17 to 366 tons, and running up 42% in Q1’18, the highest first quarter since 2014. Turkey’s disposition in Q2 will obviously skew that quarter’s result.

Let’s go through today’s top ten sovereign gold owners, and their change in reported holdings over the last several years. We say reported because China, in particular, is likely understating their holdings in a major way. The highlights are that the US, with over 8,000 tons is nearly as much as the next three countries combined. For six consecutive years, Russia has been the largest purchaser, increasing its holdings by 224 tons in 2017 and  overtaking China  to hold the fifth spot. Not every central bank is a buyer. For the second year in a row, Venezuela was the largest seller, 25 tons in 2017 apparently sold to pay off debt. Total  sales declined by 55% in 2017, the lowest since 2014, obviously overcome by purchases since the total net increase was 366 tons. This nine year old trend is obviously demonstrating that central banks consider gold to be an increasingly important store of value and safe haven asset.

India is the tenth largest holder, with 560 tons, representing 5.5% of their foreign reserves. This has been virtually constant since 2015. It is well known that the Indian public believes in gold as a long term store of value, with gold jewelry often part of a bride’s dowry.

Netherlands, at #9, owns 612.5 tons, representing 68.2% of their foreign reserves, constant since 2015. Interesting that the Dutch Central Bank recently repatriated a large amount of its gold from the U.S.

Japan, at #8, owns 765.2 tons, only 2.5% of its foreign reserves, constant since 2015. Interesting that they have been one of the most aggressive money “printers”, with interest rates in January 2016 below zero, helping to fuel worldwide demand for gold.

Switzerland, at #7, owns 1040 tons, 5.3% of its foreign reserves, constant since 2015. Interesting that while Switzerland for many years was a hub of gold trading with European counterparties, much of today’s trading is done with the increasingly important Hong Kong and China bullion markets.

China, at #6, reports 1842.6 tons, representing a mere 2.4% of its $3T of foreign reserves. After not reporting since 2009, the People’s Bank of China reported 1708 tons in mid 2015, up over 60 % in 6 years. Monthly reports were then provided for about a year, with an increase to 1842 tons with no change reported since the end of 2016. Since China is the largest miner of gold in the world, about 400 tons per year, and no gold seems to leave China, most observers believe that various government agencies are absorbing a great deal. It is not hard to conclude that the 1842 tons may be understating the true holdings controlled by the government by thousands of tons. The government has also encouraged public ownership with gold backed bank savings accounts.

Russia, at #5, reports 1909.8 tons, representing 17.6% of foreign reserves. The Russian Central Bank has been the largest buyer of gold for the past six years, just last year overtaking China’s reported holdings. They bought 224 tons in 2017, at the same time selling a large portion of its US Treasuries.

France, at #4, reports 2,436 tons, representing 63.9% of foreign reserves, constant since 2015. There has been political pressure to not only put a formal freeze on selling, but also to repatriate the entire amount from foreign vaults.

Italy, at  #3, reports 2,451.8 tons, representing 67.9% of foreign reserves, constant since 2015. European Central Bank President, Mario Draghi, was the former Bank of Italy governor. He has described gold as “a reserve of safety”, adding, “it gives you a fairly good protection against fluctuations against the dollar.”

German, at #2, reports 3,371 tons, representing 70.6% of foreign reserves, virtually flat, down 9 tons since 2015. Last year, Germany completed a four year repatriation program to move 674 tons from France and the US back to its own vaults.

United States, at #1, reports 8133.5 tons, the highest percentage, at 75.2% of foreign reserves, holdings constant since 1971 when Richard Nixon closed the hold window. It is interesting, to us at least, that the value of our gold holdings, as a percentage of US monetary aggregates, is almost exactly where it was in 1971 before gold went up over 20x in value.

Taking the above into consideration, there is every indication that Central Banks other than Turkey, along with Chinese agencies in addition to the PBOC, and public buyers, in China, India and elsewhere will absorb Turkish sales (if they haven’t already). Especially in the case of China, India, Japan, and Switzerland, with low single digit percentages of their reserves invested in gold, obviously aware of the worldwide debasement of paper currencies, and the danger in most other asset classes, it makes sense to increase their gold allocation. We continue to believe that  gold will again emerge as a store of value and a safe haven. Gold bullion and gold mining stocks will catch up with the ongoing price inflation of virtually every other asset class. Money printing and deficit spending does not create long term prosperity.

Roger Lipton



Download PDF


Download PDF


Darden Restaurants, Inc. is a full-service restaurant company based in Orlando, FL As of May 2018, the Company owned a total restaurant count of 1,746 divided among two Fine Dining restaurant chains: Eddie V’s Prime Seafood and the Capital Grille; and six Casual Dining restaurant chains: Olive Garden, Longhorn Steakhouse, Bahama Breeze, Season’s 52, Yard House and Cheddar’s Scratch Kitchen (the latter having been acquired on April 24, 2017).

As of May 28, 2018, Darden also has 71 restaurants operated by independent third-parties pursuant to area development and franchise agreements (franchise locations listed below).

The following table details the number of Darden owned and operated restaurants as well as those operated under franchise agreements as of May 28, 2018.

Combined the Company generated $8.1 Billion in revenue in FY-2018 (ending May 2018) (see Annual Segment Breakdown).

The restaurants are organized into four segments: Olive Garden, Longhorn Steakhouse, Fine Dining (The Capital Grille and Eddie V’s) and Other Businesses (Yard House, Seasons 52, Bahama Breeze and Cheddar’s Scratch Kitchen).


Olive Garden – The largest full-service dining Italian restaurant operator in the United States and is the largest and most mature of Darden’s concepts. It offers a variety of Italian fare, including: Classic Tuscan favorites and a broad selection of Italian wines; all presented simply with a focus on flavor and quality.

Most dinner entrees’ prices range from $10-$20, lunch entrees’ range from $7-$15. During FY-2017 check average was $17.50 (up 50¢ YOY) of which 6.8% was for alcoholic beverages.

Longhorn Steakhouse – Restaurants are located primarily in the eastern United States. Operating in an atmosphere inspired by the American West and features a variety of menu items including: Signature Steaks, as well as Chicken, salmon, shrimp, ribs, pork chops, burgers and prime rib.

The price range of dinner entrees is $12-$25; lunch entrees range from $7.50-$15.50. The average check in Longhorn’s restaurants in FY-2017 was $20.50 (up 50¢ YOY) of which 9.6% was for alcoholic beverages.

Fine Dining Segment:

The Capital Grille – Fine dining restaurants with locations in major metropolitan cities featuring relaxed elegance and style in a private club-like setting. It specializes in nationally acclaimed dry-aged on premises steaks. The Capital Grille is also known for fresh seafood flown in daily and culinary specials created by its chefs. The restaurants feature an award-winning wine list offering over 350 selections. Dinner entrees range in price from $10-$62; lunch entrees range from $12-$39. The average check in The Capital Grille restaurants in FY-2017 was $77 (up $2 YOY; includes one Capital Grille Burger Restaurant in fiscal 2018 opened in March 2018 in Washington D.C.) of which 29.1% was for alcoholic beverages.

Eddie V’s – Also a fine dining restaurant located in major metropolitan areas with a sophisticated and contemporary ambiance featuring live nightly music in the V-Lounge. Eddie V’s is the only Darden concept that does not offer a lunch day part. The menu is inspired by the great classic restaurants of New Orleans, San Francisco and Boston emphasizing prime seafood flown in daily from around the world, USDA prime beef and chops, and fresh Oyster Bar selections, Dinner entrees price range from $20-$61. The average check in FY-2017 was $91 (up $1 YOY) of which 31.2% was alcoholic beverages.

Other Business Segment:

Seasons 52 – A sophisticated casual fresh grill and wine bar concept operating primarily in the eastern United States. It offers a seasonally changing menu inspired by the appeal of a local farmer’s market. The menu includes an international collection of more than 100 wines with 52 available by the glass. Most dinner entrees are priced between $14-$32 and most lunch entrees range in price from $10-$32. During FY-2017 the average check was approximately $45 with alcoholic beverages accounting for 25.2%. Season 52 maintains different menus across its trade areas to reflect geographic differences and customer preferences.

Bahama Breeze – A full service concept operating primarily in the eastern United States that offers guests the feeling of a Caribbean escape with food and drinks and atmosphere found in the islands. The menu features distinctive Caribbean inspired fresh seafood, chicken and steaks as well as handcrafted tropical cocktails. Most lunch and dinner menu entrees are priced between $7.50-$30. During FY-2017 the average check was $28.50 with alcoholic beverages accounting for 23.8%.

Yard House – A full service restaurant designed to be a gathering place for lunch, happy hour, dinner and late night for a younger crowd offering a classic “Rock” ambiance. It operates in major metropolitan areas across the United States with an American menu that includes 100 chef driven items, along with a wide range of appetizers, snacks, burgers, steaks, street tacos, salads, sandwiches, fresh fish and a wide selection of beers. Lunch and dinner entrees prices range from $9-$33. The average check for Yard House in FY-2017 was $31.50 of which 37.3% was alcoholic beverages.

Cheddar’s Scratch Kitchen – DRI’s newest acquisition that was completed April 24, 2017 is located primarily in the South and East United States. The casual dining menu features modern classics and American favorites cooked from scratch. Most lunch and dinner menu entrees’ prices range from $5.99-$19.99. Of its 165 locations, 25 are franchised. Historically, DRI has declined to franchise its brands domestically; but, management has not detailed its franchising plans for Cheddar’s.

Internationally, the Company franchises Olive Garden, The Capital Grille and Longhorn Steakhouse. Currently, there are approximately 40 locations with Area Development Agreements for about 150 in such countries as Puerto Rico, Malaysia, Mexico and Qatar.


Darden believes they are capable operators of strong multi-unit brands and that the breadth and depth of their experience and expertise sets them apart in the food service industry. Aside from the obviously required restaurant operating expertise, included in the specifics of this is brand management, maintaining strong supply chain, and information technology. With this philosophy as a backdrop, Darden’s strategy is focusing on by providing an outstanding guest experience rooted in their culinary inheritance and innovation, attentive service, engaging atmosphere and integrated marketing.

To achieve these objectives, Darden’s strategic goals, as they state them, are:

Growing Same Store Sales:  They are focused on improving culinary innovation and execution inside each of their brands, delivering attentive service to each and every one of their guests, and creating an inviting and engaging atmosphere inside the restaurants. Darden supports these priorities with smart and relevant integrated marketing programs that resonate with their guests. By delivering on these operational and brand-building imperatives, they expect to increase their market share through new restaurant and same-restaurant sales growth and deliver best-in-class profitability.

The Darden Support Structure helps in (1) driving advantages in supply chain and general and administrative support; (2) applying insights collected from their  significant guest and transactional databases to enhance guest relationships and identify new opportunities to drive sales growth; (3) driving operating efficiencies and continuous improvement, operating with a sense of urgency and inspiring a performance-driven culture; and (4) their commitment to rigorous strategic planning.

Darden Seeks to Increase Profits by: leveraging their fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate operations and assess financial performance, Darden monitors a number of operating measures, with a special focus on two key factors:

  • Same restaurant sales – which is a year-over-year 52-week comparison of each period’s sales volumes for restaurants open at least 16 months, including recently acquired restaurants, regardless of when the restaurants were acquired; and
  • Segment profit – which is restaurant sales, less food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (sometimes referred to as restaurant-level earnings.


The current dividend yields 2.68% to shareholders at this price. The Company has consistently bought back shares in recent years, $27M in Q4’18 and $235M for all of ’18, and a new $500M program has just been implemented. In fiscal ’18, $550M was “returned to shareholders” between dividends and share repurchases, $1.5B over the past three years. Though the stock has gone through periods of lackluster performance over the more than twenty years it has been publicly held, it has done exceptionally well over the long term. DRI is up close to 40% in the last twelve months, up around 250% in the last five years, more than quadrupling since its lows of ’08-’09.

 RECENT DEVELOPMENTS (Per Q4’18 and Y/E’18 Reports, Q4 Conf. Call)

 Darden continued its strong performance, especially relative to its peers, in Q4 and the full fiscal year ending 5/18. Same store sales were up for almost all brands in both periods, the consistent results especially impressive considering the broad portfolio of brands. All but Cheddar’s performed about the same for Q4 as for the full year. The two most important concepts, Olive Garden and Longhorn Steakhouse were up about 2.5%. Capital Grille was up in the high 2s. Eddie V’s was up about 4%, Yard House was up a little more than 1%, Seasons 52 (my favorite) was flat. Only the recently acquired Cheddar’s was down, 4.7% in Q4 and 2.0% for the year.

On the conference call, management discussed their operating initiatives brand by brand.

Olive Garden is targeting their marketing, simplifying operations and the promotional calendar, emphasizing a weekday lunch offering. Dinner offerings included Giant Stuffed Fettuccini and Giant Meatball. Off premise sales grew 9% to 13.8% of total sales for the quarter. Discussion about Delivery as a long term opportunity to build on that number were set aside by management as an area that still requires a great deal of evaluation, in terms of satisfactory representation of the brand, the margin on the business, and the ownership of the names and data. Longhorn had their 21st consecutive quarter of SSS growth. Efforts included menu simplification, reducing operational complexity. The Fine Dining brands, Capital Grille and Eddie V’s continued to do well. Capital Grille is increasing capacity in certain units. Yard House is also simplifying operations, which has improved cost of goods and labor productivity. The concept has four productive dayparts, so there are lots of opportunities to build sales. Bahama Breeze had the 14th consecutive quarter of SSS growth. Seasons 52, with SSS up just modestly, improved traffic by 2.1% in Q4, improving the value perception with a 3-course offering that includes a starter, an entrée, and an indulgence. Cheddar’s is being “integrated”, including a transition to Darden’s proprietary POS system. While this was happening, marketing activities were suspended, no doubt affecting SSS comparisons, especially since Q4 a year ago was heavily promotional. With the integration complete at Cheddar’s, attention is being shifted to the “operational foundation”.

Relative to the Q4 P&L, Cost of Goods was favorable by 60 bp, labor unfavorable by 90 bp. The tax rate was 290 bp lower in Q4 versus last year.

Looking forward, management expects total sales to be up 4-5% in fiscal 2019, ending May. SSS are guided to 1-2% and there will be 45-50 new restaurants, costing $425-475M. Commodity inflation will be 0-1% and Labor inflation 3.5-4.5%. The earnings guidance in the range of $5.50-$5.56 per share includes incremental synergies from the Cheddar’s acquisition of about $13M, an effective tax rate of 11-12%, and approximately 125M average shares outstanding, just slightly less than 126M fully diluted in ’18. The number of shares repurchased could obviously be somewhat accretive.


Download PDF


Download PDF


Papa John’s reported Q2, dismal, as expected. You don’t need us to rehash all the operating details. Everyone knew the results would be poor, that the Company and their founder, namesake, and largest shareholder are having a protracted battle. The questions revolve around how much damage has been done in terms of sales, profits, reputation and future potential. There is widespread speculation that PZZA is a takeover candidate (including by ourselves), and debate continues as to whether the current problems can be overcome or whether the competition (including Domino’s) is just too tough and whether the brand is beyond repair. We refer our readers back to our previous report on PZZA, datedJuly 23rd, which outlined why all the major stakeholders: current management, franchisees, board of directors, stockholders, debt holders, and even John Schnatter, would be best served by a going private transaction, and the current financial parameters could still support that process.

The earnings release and the Conference Call updated observers on the results to date, sales trends through July, guidance for all of ’18 was adjusted downward, operating initiatives were described to rectify the sales trend, and management strongly defended their decision to move aggressively ahead without John Schnatter as corporate spokesperson. Suffice to say that there is a great deal of work to be done to deal with a 4,600 unit franchisee system, including redirection of a marketing effort in an industry segment that is always highly promotional. On the other hand, PZZA has competed, and grown successfully, for many years, and it was less than twelve months ago that the brand was widely admired. We encourage our sufficiently interested readers to fill in further details from the full earnings release and Conference Call transcript. We are trying to provide here a timely interpretation of the most important issues, and present a reasoned conclusion as to how the situation plays out.

Among the most important issues: Sales Trends, Unit Growth Prospects, Debt Covenants

The Same Store Sales Trend

First quarter systemwide North American comp sales were down 5.3%, International comp sales were up 0.3%. In the second quarter, North American same store sales were down 6.1%, International comp sales were down 0.8% so there was a sequential deterioration of about one point. North American comp sales in July (from 7/2 until 7/29) were down approximately 10.5%. When questioned on the Conference Call about the Q2 sequence into July, Management said: “the cadence of comps through Q2 were consistent with the 6.1% Q2 decline….after the July 11 article…we saw a precipitous drop of roughly 4% from the trend…we do think we have stabilized a number there…it’s very early into Period 8…but we do think we have experienced the significance of the decline…have provided our outlook based on the infancy of what we have seen and that’s why we have re-guided to a negative 7-10% for the year.” Our interpretation is that the -7 to -10% implies an assumption that the July negative 10.5% range continues or even worsens to the mid teens in H2. Management, of course, hopes that comps firm up and the year’s result is closer to the 7 than 10. International comps are now expected to be between from -2 to +1% for 2018, several points worse than previously indicated.

Unit Growth

Among the changes of guidance from management, net global unit growth has been adjusted from a positive range of 3-5% to a range of flat to 3%. Virtually all the unit growth continues to be international, and those sales have been far less affected than domestic locations. There was quite a bit of discussion on the Conference Call about unit closings and royalty relief. Management indicated that they are working with franchisees, as always, to alleviate financial problems at specific situations. With the current sales trends, margins are naturalized squeezed for all operators, unit growth can be expected to be slower and closings can even increase. While it is natural to be concerned about the rate openings and closings, there has been very little indication (so far) of wholesale franchisee disillusionment. Internationally there has been steady unit growth with hardly any closings. In the more mature North American market, there were 79 locations closed in H1’18 (42 in Q2), but 44 new locations opened in H1, for a net reduction of 35 on a base of over 2700 units.

Our conclusion here is that it is pretty early to be overly concerned about a collapse of a franchise system that was doing rather well for many years until about nine months ago. This situation could obviously change if the current negative sales trend is not, at the very least, stabilized.

Bank Covenants

The Leverage Ratio is defined as outstanding debt divided by consolidated EBITDA for the most recent four quarters. The Interest Coverage Ratio is defined as the sum of consolidated EBITDA and consolidated rent expense, divided by the sum of consolidated interest expense and rent expense for the most recent four quarters.

Per the 10Q filing for the second quarter, the actual leverage ratio and interest coverage ration in Q2 were 3.4 to 1.0 in each case. The Permitted Leverage Ratio was not to exceed 4.5 to 1.0 at the end of Q1, subsequently decreasing to 4.25, decreasing over time to 3.75. The Permitted Interest Coverage Ratio is not less than 2.75 to 1.0, with no indication that it is structured to change. As the 10Q says:

“We were in compliance with all financial covenants as of July 1, 2018. Based on our revised lower financial forecast, we plan to work with the banks within our Credit Facility to evaluate options with the covenants to mitigate the possibility of violating a financial covenant in the future. If a covenant violation occurs or is expected to occur, we would be required to seek a waiver or amendment from the lenders under the credit agreement. The failure to obtain a waiver or amendment on a timely basis would result in our inability to borrow additionalunds or obtain letters of credit under our credit agreement and allow the lenders under our credit agreement to declare our loan obligations due and payable, require us to cash collateralize outstanding letters of credit or increase our interest rate. If any of the foregoing events occur, we would need to refinance our debt, or renegotiate or restructure, the terms of the credit agreement. ”

On the conference call, management indicated that the leverage ratio is expected to be in excess of 4.0 (stilll OK) at t he end of ’18, no doubt based on the assumptions most recently provided, including N.A. comps negative in the 7-10% range.

While we can’t know the exact definition within all the above ratios, both ratios will no doubt narrow if the second quarter (and July) trends persist, or get worse, and it makes sense that the Company negotiate potential adjustments to the current credit agreement. The bottom line here is that there is still substantial operating cash flow, EBITDA, and free cash flow, by any definition. Absent a very substantial additional decline in sales, the credit situation should be controllable. This, in our mind, seems a compelling reason for all parties involved to negotiate an amicable parting of the ways between the Company and John Schnatter. Even Schnatter’s recent statement that he has the interest of all stakeholders leaves opoen his departure as an acceptable solution once the current emotional atmosphere cools.


We feel that sales will more likely stabilize than deteriorate, followed by at least modest improvement, over the course of Q3 and especially during Q4 when new marketing efforts should take hold and the YTY comparisons get easier as well. We expect that the most important stakeholders in this equation, specifically John Schnatter, current management and the Board of Directors will come to a rational conclusion that toned down rhetoric is in everyone’s interest. Meanwhile, there is a great deal of P/E capital looking for a home, and the valuation of the Company supports PZZA as a buyout candidate. We continue to believe that, over the next six months to a year, there are more ways to win than lose from these levels. If the Company remains publicly held, the stock could rebound sharply with just a stabilization of sales, let alone resumption of positive comps. Chipotle stock is up over 200 points since they hired a new CEO, and sales have yet to improve meaningfully. There’s lots of press coverage right now regarding PZZA, but this too shall pass, and nobody died or went to the hospital with this situation.

Roger Lipton


Download PDF


Download PDF


Before discussing Q2, we refer you to our conclusion from the extensive report we wrote on 5/10. For those readers with an active interest in SHAK, we encourage you to read the full report.

CONCLUSION – From 5/10/18, after SHAK had run up 30% following Q1 report

As you no doubt suspect, while we have the utmost respect for this management team, our conclusion is that SHAK is priced beyond “perfection” at approximately 100x ’18 projected EPS and perhaps 70x what we consider an optimistic view of ’19. If you like EBITDA as a measure, based on “Adjusted Corporate EBITDA” of $65B  in calendar ’17, the $2.2B market capitalization represents 33x TTM EBITDA. Especially considering that store level economics, while still more attractive than many other restaurant companies, are not as alluring as back in the day when Manhattan locations were annualizing at $7.4M and paying for themselves at the store level (before depreciation) in fifteen months. Management here is as good as it gets, but they are not magicians. This is still a people business, serving burgers, not providing a proprietary cancer cure.


The report was generally in line with analyst expectations, which were largely echoing management guidance. Same store sales were up 1.1% (on top of a 1.8% decline a year ago), which might have been a fraction of a percent less than some analysts hoped for. What might have cooled the ardor was that traffic was down again, 2.6% this time. Keep in mind that only 50 Shacks are in the comp base, less than half the company operated system. Also in line with guidance, but a small dose of reality, average weekly sales for domestic company stores declined 3.3% to a still impressive $89,000. Again, as predicted, store level profit (EBITDA) declined 60 bp to 28.2%, or 27.5% normalized for the one time benefit of deferred rent. Importantly, G&A expenses increased to 10.8% of revenues, up from 10.6%, and, especially with the expense of “Project Concrete”, are unlikely to be leveraged by the higher sales in the next year or so. Of course, the tax burden was lower than a year ago, 17.5% versus 29.2%, allowing net income after taxes to be up 29.1%. More indicative of the current operating progress is the operating income that was up a more modest 10.9% and “adjusted EBITDA” that was up 12.9%. Management here is, appropriately, “playing the long game”, investing in corporate functions as well as store level management and crew (with industry leading compensation levels) to build on the admirable operating culture that is  in place.

Guidance for the balance of 2018 was maintained, and that was part of the problem. Analysts were hoping, and the stock price was discounting, an improvement in some of the operating expectations. Cited were some delays in getting the last portion of the stores planned for 2018 opened in time to contribute to results this year.  Other than that, the costs of Project Concrete, to be spread over 2018 and 2019, was increased from $4-6M to $6-8M.

We can’t resist pointing out that management is fortunate that analysts seem willing to treat a substantial “investment” in G&A,  dubbed “Project Concrete” as a non-recurring event, as if additional infrastructure will not be necessary as Shake Shack expands their brand around the world at what we consider a breakneck pace. It’s good to be “king”, with probably the highest  investment community regard (and valuation) among publicly held restaurant companies.

For more background information, we refer readers to our discussions dated May 10th and our full descriptive report dated  12/13/17.

Current Conclusion

SHAK has come down because it has been priced beyond “perfection” and never should have run up after Q1. The concept, as good as it is, can be expected to do an AUV somewhere between $3-3.5M per unit as the system is built out. Store level EBITDA will end up in the 20-23% range. A 23% EBITDA generation on $3.25M of sales would be $747K of EBITDA, or a 37% store level cash on cash return on the $2M investment , an admirable operating model.  If we look down the road a few years to when SHAK has a couple of hundred units, growing not quite so fast, and growing after tax earnings and EBITDA at perhaps 25% annually, the stock might have a 40x multiple on expected after tax earnings. The problem is that the P/E on ’19 EPS estimates (that could be a reach) is twice that. It will therefore take SHAK several years beyond ’19, until 2022, for the fundamentals to catch up with today’s stock valuation of $2B.  Of course, it’s possible that the P/E on next twelve month earnings could be even higher than it is currently, but the P/E range that the stock sells at will likely be contracting as time goes on. This expectation  is under the optimistic assumption that there are no major mistakes along the way, in which case there would obviously be an immediate major adjustment downward.  This discussion may be one reason why there has been almost continuous liquidation of common shares by insiders and private equity owners, to the tune of hundreds of millions of dollars ever since SHAK came public early in 2015.

Roger Lipton





Download PDF