SHAKE SHAKE (SHAK)
BJ’S RESTAURANTS (BJRI)
CHEESECAKE FACTORY (CAKE)
BLOOMIN’ BRANDS (BLMN)
WINMARK CORPORATION (franchisor of ‘second hand’ concepts) (WINA)
ROCKY MOUNTAIN CHOCOLATE FACTORY (RMCF)
Fat BRANDS (FAT)
BJ’s RESTAURANTS (BJRI)
UPDATED CORPORATE DESCRIPTIONS: McDONALD’S, YUM CHINA, TEXAS ROADHOUSE, WINGSTOP, BJ’S RESTAURANTS
YUM CHINA (YUMC)
TEXAS ROADHOUSE (TXRH)
BJ’S RESTAURANTS (BJRI)
UPDATED CORPORATE DESCRIPTIONS: BURGERFI (BFI), MERITAGE HOSPITALITY (MHGU@OTCQX), BJ’S RESTAURANTS (BJRI)
MERITAGE HOSPITALITY (MHGU@OTCQX)
BJ’S RESTAURANTS (BJRI)
UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S (DENN), WINGSTOP (WING), CHEESECAKE FACTORY (CAKE), SHAKE SHACK (SHAK), BJ’S (BJRI) and CHUY’S (CHUY)
BJ’s RESTAURANTS – (BJRI) – DOWN ONLY 10% FROM PRE-PANDEMIC LEVEL – WHAT TO DO?
We published an analysis on October 22nd, showing almost all the publicly held restaurant companies, comparing their current valuations to those before the pandemic. That chart is provided below, with prices updated to midday on 11/17. Based on the 2/15/20 (pre-pandemic) estimate of 2020 earnings, and today’s estimate of 2021 earnings, it appears that BJ’s Restaurants (BJRI) is substantially overvalued, which suggests that BJ’s is somehow in a much better fundamental position coming out of the pandemic than going in.
Let’s take a more complete fundamental look at BJRI. Back on February 15th, BJRI was selling at about $41/share, with earnings expected in calendar 2020 in the area of $2.40/share. Trailing EPS, for calendar 2019, had been $2.20/share. This fairly mature, well managed billion dollar company, operating 209 large box casual dining units averaging over $5M of revenues annually, had experienced several years of relatively flat operating results. Comp sales had been as follows, flattening in calendar 2019, after a relatively strong 2018 that followed a weak 2017:
The table below, from Bloomberg LP, shows the historical EPS trend, as well as the current 2021 consensus EPS estimate, obviously still restrained from working through the pandemic burden.
The operating earnings were actually down over the period, as shown in the following table, but stock buybacks ($460M since 2014) allowed for earnings per share to increase between 2016 and 2019. The long term debt increased modestly during the period, from about $100M to $140M, allowing for modest unit expansion as well as shrinkage of the share count.
In the early years of its growth, from the 1990s to 2006, BJRI was a spectacular winner, but the last ten years it has traded essentially in a range from $30 to $70, with a brief dip in March of this year to under $10/share.
The steady cash generation over the long term allowed BJRI to enter the pandemic in relatively strong financial shape, with trailing Adjusted EBITDA of $129M in calendar 2019, down slightly from $140M in 2018. The historically consistent cash generation attracted, in Covid-19 panicked late April of this year, Act III Holdings (controlled by Panera’s legendary CEO, Ron Shaich) and T.Rowe Price advised investors, who invested $70M, at $20/share. In addition to the 3.5M shares of common stock, the new investors received a warrant to purchase 875k shares at $27.00 per share and one directorship. It is worth noting that, at $20/share, the Enterprise Value was less than $600M, something like 5x the Adjusted EBITDA in 2018 and 2019, so Shaich’s interest was understandable, and courageous under the circumstances. This vote of presumably long term confidence by Shaich and company has no doubt been instrumental in allowing BJRI stock to approximately double from 4/30 when the deal was announced. This price performance is much better than almost all other company operated casual dining operators have experienced.
The above background brings us to the current situation, and an evaluation of today’s Enterprises Value in relationship to reasonable expectations of future performance. BJ’s has predictably suffered this year from the same circumstances as other casual diners. Management has reacted, in their own fashion, similarly to companies such as Darden, Bloomin’ Brands, Chuy’s, Chili’s and others. Starting with at only about 10% of the historical $108k average weekly volume from off-premise sales, they have built outdoor patios, encouraged curbside pickup and delivery, slimmed down the menu to reduce labor, partitioned indoor dining areas, enhanced digital ordering (now 80% of off-premise activity), introduced group meals (now 20% within the catering effort), and most recently introduced a beer subscription service. The third quarter, with comps down 30.2%, a $12.7M loss from operations, an 8.3% store level Adjusted EBITDA margin (vs.13.5% YTY) and a $6.6M positive Adjusted Corporate EBITDA was a huge improvement from Q2 when comps were down 57.2%. (The details of the disastrous Q2 operating results are not important at this point.)
The most important thing now is the current level of average sales per store, the current margins and the possibility that further improvement is in the cards. Average sales per restaurant rebounded steadily through Q3, from $64k in July to $78k in September. Most importantly, according to management on the Q3 call, average sales in October were above $83k per week, but not expected to increase much in the remainder of Q4’20 or Q1’21. There are too many patios that will be affected by colder weather, social distancing that will limit revenues during the holidays, the national tendency to roll back Covid-19 easing, and 62 out of 209 stores in California, perhaps the state most aggressively locking down again. Margins, management indicated, could improve by a couple of points to 10-11% of sales at the store level, with sales per store in the $80-85k area (still down almost 20% from pre-pandemic levels) but visibility beyond that is too difficult at this time.
BJRI common stock was trading before Covid-19 with an Enterprise Value of 10-11x the run rate of EBITDA, not especially high, but far from a bargain for a chain that could be considered fairly mature. The Enterprise Value today, with 22M shares outstanding, a $38 stock price, and $65M of long term debt net of cash, is about $900M. That level is only about 7x the $129M of calendar 2019 Adjusted EBITDA, but it is impossible to know when, or if, the Company can do that again. There are a host of management initiatives, but the degree and timing of success is uncertain. The price level at which Shaich and Co. entered this situation should work out well for them because this too (the Covid) will pass. (Parenthetically: Shaich and Co. are not locked in. A double’s not bad.) For new investors at the current level, the reward risk ratio over the next several years is not nearly as attractive.
RESTAURANT Q4’19 – SALES, TRAFFIC, MARGINS @ TXRH, CAKE, RUTH, BJRI, BLMN – A LOT TO LEARN !!
In the last few days, five prominent restaurant companies, with company operated locations, have reported fourth quarter results. These data points give us a reasonably accurate view into current trends, and allows us a best guess as to what 2020 might look like. While franchising companies such as Wingstop and Domino’s have also reported, with excellent results it so happens, precise store level margins are not reported and we are not commenting here on those results. We have also not included Chipotle, which has become very much of a “special situation”, still recovering from the problems of several years ago, at the same time establishing themselves as a leader with off-premise sales, and it’s the four wall economics that primarily concerns us here.
The table just below shows the five companies listed above, with their Q4 results at the store level. We will fill in the other blanks later, with full updated writeups on these companies, but a quick look at four wall economics can tell us a lot quickly.
We’ve been saying for some time that a couple of points of comp sales is not enough to overcome higher store level expenses, wage inflation most notably but also higher occupancy and other store expenses. That conclusion is pretty clearly demonstrated by these results.
Only Texas Roadhouse (TXRH) improved same store sales materially (+4.4%), and that was accompanied by the best traffic trend among the five companies (+1.5%). That allowed TXRH to leverage the sales trend into a 117 bps increase in their store level margin. The other four companies , even with slightly better comp sales, suffered material deterioration of store level EBITDA margin. Labor Expense was higher by varying degrees, most notably at BJ’s, with Texas Roadhouse, again, being the only company to hold the line in this regard. Cost of Goods was not much changed across the board, except at RUTH with their heavy dependence on beef costs.
We have indicated also, at the bottom of the table, the indication as far as Q1’20 sales to date, or guidance for 2020. Once again, Texas Roadhouse leads the pack with a 6.4% comp sales increase in Q1 to date. BJ’s gave us a 1.7% number for Q1 to date. The others provided guidance for 2020 as a whole, very much in line with the modest recent increases. It is worth noting that the weather this winter so far has been fairly good on a comparative basis, and each of us can make our own judgements as to what effect this is having on Q1 results to date and management’s guidance for 2020.
In summary, there is no tangible reason to expect a material change in operating trends at company operated restaurant chains. Outliers can exist at special situations, but the overriding factors that have challenged the industry are still in place.
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