MOST RECENT CONFERENCE CALL TRANSCRIPT
UPDATED CORPORATE DESCRIPTIONS: BLOOMIN’ BRANDS, DENNY’S, STARBUCKS, YUM BRANDS, SHAKE SHACK, PORTILLO’S – with transcripts
BLOOMIN’ BRANDS (BLMN)
YUM BRANDS (YUM)
SHAKE SHACK (SHAK)
UPDATED CORPORATE DESCRIPTIONS FOR: BLOOMIN’ BRANDS, KRISPY KREME, TEXAS ROADHOUSE, CRACKER BARREL, ARK RESTAURANTS AND NOODLES – with conference call transcripts
BLOOMIN’ BRANDS (BLMN)
KRISPY KREME (DNUT)
TEXAS ROADHOUSE (TXRH)
CRACKER BARREL (CBRL)
ARK RESTAURANTS (ARKR)
THE WEEK THAT WAS, ENDING 1/28 – A FEW RATINGS CHANGES, EARNINGS REPORTS ABOUT TO BEGIN
ERIC GONZALEZ maintains DIN, CMG and MCD at Overweight – OTR Global downgrades YUMC – Brian Vaccaro maintains DIN, CMG, CAKE, EAT at Outperform, BLMN at Strong Buy -G0RDON HASKETT upgrades CMG to Buy -ANDREW CHARLES maintains DPZ at Outperform – Jeff Bernstein maintains MCD at Overweight.
No new transcripts on above companies.
EARNINGS SEASON ABOUT TO BEGIN
2022-02-01 After Market Close Starbucks
2022-02-02 Before Market Open Brinker International
2022-02-08 Before Market Open Portillos – unconfirmed
2022-02-08 Before Market Open Nathan’s Famous – estimated
2022-02-08 After Market Close Luby’s – estimated
2022-02-08 After Market Close Yum China Holdings
2022-02-08 After Market Close Chipotle Mexican Grill –
2022-02-09 After Market Close RCI Hospitality Holdings – estimated
2022-02-09 Before Market Open Yum Brands – estimated
2022-02-10 Wendy’s – Estimated
2022-02-11 Krispy Kreme – Estimated
FEEDBACK FROM BLOOMIN’ BRANDS (BLMN) – REGARDING OFF PREMISE SUCCESS AND CORPORATE BREAK EVEN POINT
We continue to look for new data points that will help us understand which restaurant chains have the best chance to survive, then prosper, and when.
We’ve previously asked the question as to how much of the new off-premise business will be retained as the dining room activity rebuilds, and that jury is still out. We’ve suggested that store level margins will suffer as dining rooms are only 25-50% open and operating expenses (especially labor and new sanitizing requirements) burden the bottom line. Our article in mid-May, describing developments at Darden (Olive Garden and Longhorn Steakhouse) suggested that YTY same store sales have to get back to something like down 25% to approximate corporate cash flow break even. All of that is confirmed by commentary from Bloomin’ Brands on May 5th, as well as highly qualified Michael Halen, at Bloomberg Intelligence, just this morning, 5/29.
From Management Conference Call, May 5th:
“Have to get back to down 20-25% to be cash flow breakeven…. For our brands, we talked a lot about Outback and things and Carrabba’s on off-premises. But Bonefish and Fleming’s have taken it from virtually nothing. Bonefish had some, Fleming’s had hardly anything…..So I think at Bonefish, we’ve seen it. We’ll see what happens at Fleming’s…As of May 5th: 2/3 takeout, 1/3 delivery (half and half third party/in house).”
As described below by Michael Halen, off-premise revenues at Outback and Carabba’s had tripled, from an average of 18%, so we figure overall sales were running down YTY an average of approximately 46%. Management also confirmed, above, that sales have to recover to roughly a negative 20-25% to approximate corporate cash flow breakeven.
Per: Michael Halen at Bloomberg Intelligence, on 5/29/20
“Bloomin’s same-store sales may drop double digits in 2020 as dining-room closings and high unemployment hurt sales, yet a strong off-premise business at Outback will mitigate losses. We see Outback’s in-house delivery service as a competitive advantage as it has wider margins, control of service and access to customer data.
“Off-Premise Sales as % of Total Before Coronavirus
(Bloomin’ Brands)Outback Steakhouse 15% & Carraba’s 21%, Cheesecake Factory 17%, Cracker Barrel 9%,Applebee’s 13%, IHOP 10%,Olive Garden 17%, Brinker (Chili’s&Maggiano’s 17% Texas Roadhouse 7%
“Bloomin’s decision to prioritize direct delivery over third-party aggregators created a competitive advantage over casual-dining peers, as we see it. This includes wider margins, access to customer data — which allows for personalized marketing — and significantly faster delivery times (35 minutes). According to management, 74% of customers prefer self-delivery for the superior service and safety it provides. “Delivery is profitable, with more than 630 units offering the service. Bloomin’s recent partnership with DoorDash complements the existing self-delivery platform and expands the company’s reach to new customers.
“Delivery sales are now split evenly between in-house and third-party providers. Off-premise sales almost tripled from the beginning of March into the end of April. (05/29/20)”
Aside from the typical description of off-premise sales building rapidly through April and early May, and the confirmation of corporate breakeven for full service casual diners around a negative 20-25%, we think the movement to self-delivery may prove to be an important new development. We are all aware of the extra expense, management challenge and corporate liability of self-delivery. However, control of “the last mile”, more complete customer interaction and the elimination of delivery charge from third parties could make self-delivery an increasingly attractive option. The 74% surveyed preference of customers toward self-delivery could prove to be “anecdotal” but might also be an important indicator. Self delivery might especially appeal to regional chains, as opposed to multi-national giants, for whom The Brand is an important competitive advantage.
RESTAURANT INDUSTRY TURMOIL – NEW SKILLS ARE NECESSARY, STARTING WITH THE BOARD OF DIRECTORS, AND I’M AVAILABLE !!
The questions are numerous. The problems are obvious. The solutions are not so easily manufactured. We don’t know what sales will be, what labor will be required to service customers that have new requirements. Cost of goods is not the biggest problem, but distortions in the supply chain could create price volatility as well as product shortages. We will have lots of new “other” expenses, necessary to deal with health concerns of employees and customers. There has to be negotiation with landlords, convincing them that you are here to stay, but need their help. You must economize at the executive level, but the needs are broader and deeper than ever before. You have to maintain a strong balance sheet somehow, but financing is more difficult, and more expensive than ever with the fundamental uncertainty. With all of this, management is working for reduced pay and Board compensation has been reduced or eliminated.
It’s no wonder, then, that something like a dozen publicly held companies, have had changes at the Board level, sometimes suggested (or imposed) by activist investor groups. Roark has invested $200M in Cheesecake Factory (CAKE) and KKR now owns over 8% of Dave & Buster’s (PLAY). Vintage Capital owns over 10% of Red Robin (RRGB) and is represented on the Board. Among smaller companies, Kanen Capital Management has taken major positions and is represented on the Boards of both BBQ Holdings (BBQ) and The One Group Hospitality (STKS). Shake Shack (SHAK), Bloomin’ Brands (BLMN), Cheesecake Factory, Dave & Buster’s and others have raised money publicly at what most would consider to be distress prices. It’s clear, therefore, that management and the Board must be capable of evaluating strategic financial alternatives. We wonder, for example, how and why Bloomin’ Brands was able to raise capital at much better terms than Cheesecake Factory.
Investment bankers are beating the bushes to “write tickets”, but their possibilities must be evaluated from a realistic standpoint. We heard of a highly regarded investment banking firm suggesting (this past weekend) to a privately held chain that they could still get a multiple of historical EBITDA close to what was considered reasonable before the pandemic. This chain, by the way, is a big box casual dining company. Their sales are currently down 50% YTY, and the chain is, predictably, cash flow negative. That particular Board won’t likely go down that fruitless road, because they have at least one very smart Board member (my friend), but other companies might not know better and could be forced to do a very unattractive deal at the last minute with a gun at their head.
Now comes the commercial: I’M AVAILABLE ! Two of my most recent Board involvements have ended recently, one of them very successfully, the other a privately held company that required refinancing and the new lender didn’t know that he needed me:)
I was on the Board until just recently of publicly held Diversified Restaurant Holdings (SAUC), which we took private on 2/25/20 (how’s that for timing?) at a price over 100% higher than the stock had been trading. SAUC was operating 65 franchised Buffalo Wild Wings locations, clearly a troubled restaurant system even before the pandemic. They had about $100M of debt, which they were servicing as required, but the net cash flow after debt service was non-existent. I was on the Special Committee and, with the great help of Darren Gange of Duff & Phelps, we found the “needle in a haystack” private equity buyer. Parenthetically, while we were negotiating with the ultimate buyer on virtually a daily basis, an activist investor (and shareholder) was screaming his desire to “help us out”, at what turned out to be about half the price we sold for. It was tedious but we closed the deal for an Enterprise Value of about 7.5x the “run rate” of Adjusted Cash Flow. Intense and lengthy as the negotiations were, it was stimulating and satisfying, especially since it was very successful.
The other recent Board position was a 17 unit big box privately held casual dining company that required new financing. The chain was, and is, very successful in their home state, but geographically remote locations, opened before my arrival, proved to be their undoing. I’ve always been predisposed to keep operations “close to home”, suggesting expansion outward from the base so there is always brand awareness and maximum ability to adjust when necessary. I learned from Norman Brinker forty years ago that “running a restaurant chain is like managing a military campaign”. You want your troops “massed”, for strength and speed and flexibility. It was the old formula that Shoney’s used so successfully decades ago, finally running out of steam when the third or fourth generation of managers that followed founder Ray Danner allowed the operating standards to slip too far.
I’m well aware that compensation for Board members has been suspended in many cases, reduced at the least. I can, fortunately, afford to work for the “going rate” along with other Board members. My major requirement is that the chain has the corporate culture that provides the foundation for long term success. I would naturally like to work with colleagues that enjoy the hospitality industry as much as I and are committed to the task at hand.
Other than reminding all of you that I have a good education, operated my own chain of fast casual restaurants many years ago, and have had four decades of investment banking experience relating to the restaurant/retail industry, more details are provided at the “About Roger” section of this website (from the Home Page)..
So much for the pitch. Publicly held or “Up & Coming” privately held companies can respond, and we’ll talk. I can be reached at email@example.com or call 646 270 3127. Please leave a message if I don’t pick up, there is so much spam these days.
Along with you, I will be closely watching developments within the restaurant/retail industries over the critical coming months. There will be lots of closings, but some operators will emerge stronger than ever. We will remain in touch with all of you, doing our best to contribute to your thought process.
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.
Welcome! To view this writeup from “home page”, click through at “publicly held companies”. Thank you.