Government fiscal/monetary reports have been confusing at best, discouraging at worst. The recently enacted Fiscal Responsibility Act seems to be more like Irresponsibility, eliminating the debt ceiling for two years, until (conveniently) after the ’24 election. It is therefore guaranteed that the $32 trillion of US debt will be at least $36 trillion in two years, and annual interest on the debt will be something like one trillion dollars, about 15% of the US total spending, reducing more productive pursuits. The reportedly stronger jobs numbers (largely accounted for by the PHD designed “birth/death” model) is inconsistent with reported higher unemployment, the stagnant participation rate, a lower household job survey, lackluster business formation, and higher Q1’23 savings rate as a percentage of disposable income. The latter, which peaked in the low 30s at the beginning of Covid-19, has gone from 6.1% in Q3’22 to 9.4% in Q4’22 to 15.3% in Q1’23. Putting all the fancy surveys aside, those of us in retail land know that consumers are cautious. Price/value driven Cracker Barrel, which should be benefiting from strong travel trends, reported sluggish traffic in April and May. Among value oriented retailers: Target, with flat comps in Q1, cut their forecast for Q2 and said shrinkage (theft) will cost $500M more than last year. Macy’s adjusted forecasts downward after a lackluster spring season and (phenomenal) Costco reported US comps up 0.9% in April and down 1.5% in May. To be fair, WalMart was an outlier on the upside, as US comps were up 7.4%, led by a 27% eCommerce increase. Capital markets are anxiously awaiting the Fed’s decision this week as to whether or not to raise rates by 25 basis points. Whether they raise or “rest”, we are closer to the end than the beginning of Fed driven higher interest rates. Our bet is that, despite the Fed’s best intentions, before the stated inflation rate gets anywhere near the 2% objective on a YTY basis, a new stimulus program will be put in place, re-igniting inflation. The use of diluted less valuable dollars, is, after all, the only way the debt can be serviced.
The IPO window seems to be opening. CAVA Mezze Grill and GEN Restaurants have joined Fogo de Chao’ with S-1 Registration filings, and CAVA may be trading (probably up in price) by the time you read this. The investment community’s admiration of CAVA Chairman, Ron Shaich, is a good start toward a warm reception, and CAVA’s business model is promising as well, Shaich’s reputation is about as good as it gets, since he co-founded (with the late Louie Kane) Au Bon Pain, which purchased St. Louis Bread (with 20 stores) in the mid 1990’s, renamed it Panera and spearheaded the growth to over 2,000 stores today. Panera became be by far the biggest winner in the restaurant space over the two decades of public ownership, helping to justify the apparent CAVA IPO valuation of approximately $2B, which represents an Enterprise Value of just under 30x the “run rate” of Adjusted EBITDA in Q1’23.
Putting a resurgence of restaurant IPOs in context: From mid to late ’21, five IPOs were done, all well received by the marketplace, though some observers (including ourselves) thought they were fully priced. From Krispy Kreme’s IPO in July ’21, to Dutch Bros in September ‘21, to Portillo’s and First Watch in October ‘21 to Sweetgreen in Nov ’21, all increased substantially from their IPO prices. Dutch Bros & Portillo’s & Sweetgreen each surged more than 100% at first but reality has intruded and 18-20 months later the five are now down an average of 11% from their IPO prices. Only Dutch Bros is up, by 21.7%, though down 60% from it’s high. Portillo’s and First Watch are almost exactly the same as they started, though down 60% and 18% from their highs. Sweetgreen takes the prize for volatility, down 80% from its high and 64% from the IPO. Our analyses, at the time of the IPOs, are available at www.rogerliptoncom and have stood the test of time pretty well.
Taking nothing away from (1) CAVA’s attractive unit level model, (2) the well designed strategic growth plan, and (3) the credentials of Chairman Shaich and the operating team led by Brett Schulman, Adjusted EBITDA in calendar ’22 was $12.6M, down from $14.6M in ’21, surging to $16.7M in Q1’22 vs.($1.6) in Q1’22. At this juncture, with due respect as stated above, and the midday crowd at CAVA around the corner from our office, we believe $2 Billion is currently more than adequate. In terms of trading, CAVA will likely rise from the offering, and we would buy some if we could at the IPO price. In terms of a material long term investment, we expect a more opportune time for purchase. Almost invariably it requires some courage to step up, if and when a short term problem presents a buying opportunity, but investors will have learned a great deal more about the realistic opportunities and challenges by that point, so that is usually a better gamble than chasing the latest shiny object.
