THE WEEK THAT WAS – ANALYST RATINGS CHANGES, CONFERENCE CALL TRANSCRIPTS AFTER EPS REPORTS
Jack In The Box
THE WEEK THAT WAS – ANALYST RATINGS CHANGES, CONFERENCE CALL TRANSCRIPTS AFTER EPS REPORTS
Jack In The Box
INCOME STATEMENT BELOW PROVIDED BY YAHOO/FINANCE
MOST RECENT CONFERENCE CALL TRANSCRIPT
THREE FINE RESTAURANT COMPANIES: CAKE, CBRL, & CHUY PROVIDE UPDATES, WHAT CAN WE LEARN?
CHEESECAKE FACTORY (CAKE)
There are 294 total company operated restaurants in US and Canada, @ 12/31/19, including 206 Cheesecake Factories CAKE, 23 under the North Italia brand, 50 within Fox Restaurant concepts, 13 under Grand Luxe Café, 1 under RockSugar Southeast, and 1 under the Social Monk Asian Kitchen brand. The Fox Concepts and North Italia comprise 28.3% of 12/19 assets and 3.7% of consolidated revenues (or only about $90M, as North Italia and the remainder of Fox were completed on 10/2/19). There are also 26 CAKE restaurants operating internationally under licenses, as well as the bakery subsidiary. Comps for Cheesecake Factory restaurants, for the two months ending 5/31, were down 63%, including 87 full or partial closures. Stores that are opened without dining rooms are doing about $4M annualized.
It is worth noting that off-premise activity represented 22% of Q1 sales, more than at most of their full service casual dining competitors, a solid base on which to build. In April CAKE amended their credit line with covenant relief, reduced operating costs, suspended the dividend and stock repurchases, and raised $200M from a convertible preferred equity raise. The cash balance was $260M as of 4/30.
As of 6/2, CAKE has reopened about 25% of all 294 (that would be about 73 locations), of which 34 are Cheesecake Factories (out of 206), restaurants under COVID-19 capacity restrictions. They hope to have 65% of dining rooms opened, with limited capacity, by mid-June. They began reopening dining rooms the second week of May. The (17% of) Cheesecake Factories that have so far opened their dining rooms have recaptured about 75% of last year sales average. Stores that are opened without dining rooms are doing about $4M annualized.
We suspect that the 17% (34 of 206) Cheesecake Factories that have opened are those most easily accessed by today’s stay at home customers. Time will tell how successfully average sales will build as the system openings proceed. Recovery of profit margins will be inhibited by delivery expenses and increased packaging costs, like everybody else, and also by fewer high-margin drink sales.
Also, while Cheesecake Factory is clearly the dominant brand within the portfolio, other than pointing out that North Italia has a lot of growth potential and Fox is an incubator of new brands, there has been no update on how they are doing. They do, after all, represent 28% of corporate assets and hundreds of millions of dollars of annualized sales (as of Y/E ’19).
CRACKER BARREL (CBRL)
CBRL reported its financial results for the third quarter ending May 1, 2020 and provided an update relative to COVID-19. For the third quarter of fiscal 2020, through April, all 664 Cracker Barrel stores remained open, comp restaurant sales declined 41.7% and comparable store retail sales declined 45.5%. However, all stores were operating in an off-premise-only model with no dine-in service from late March through late April, with incremental dine-in openings initiating thereafter. It is noteworthy that off-premise sales only represented 9% of the mix prior to COVID-19. A relatively old customer base, with breakfast representing 25% of sales, are relevant factors in the rebuilding process.
Since the end of Q2, the table above shows the weekly progress over the last four weeks for all comparable stores. The Company points out In the week ending May 29, 2020, when compared to the comparable period in 2019, comparable store restaurant sales for stores with limited dine-in service For the full week (434 out of roughly 664, about 2/3 of the system) decreased approximately 32% compared to approximately 76% for stores that were limited to an off-premise-only business model. The Company points out that, as of 5/29, 505 stores had limited dine-in service, and the Company expects that substantially all stores will have limited dine-in service by the end of June. It can be expected that the system restaurant comps will move closer to the negative 32%, and hopefully improve from there over time. Retail comps have been steadily improving and will presumably move higher as restaurant activity brings more customers inside.
CBRL had a strong balance sheet ahead of the pandemic, has not raised equity capital but drew down its full revolving credit line in Mid-March and net debt to trailing twelve month EBITDA rose to 2x as of 4/30/20, vs. 1x three months earlier.
Once again, however, a negative 32% or 22% or even a negative 12% doesn’t bring profitability back to previous levels. Labor is higher, protein is costing more (at least temporarily) and sanitizing efforts provide an additional expense line.
CHUYS HOLDING – (CHUY)
Prior to their June 1 release, the Company had provided a Q1 (3/31) updates, with subsequent events as well. They indicated that off-premise revenues had tripled from 14-15% of sales to 45-50% of (old) sales, roughly 20 percent of that from delivery. Online ordering was 45% of off-premise activity, compared to 18% before the pandemic. The weekly burn rate was $200,000 by end of May, compared to $500k/wk in April. They had cancelled non-essential capex, temporarily suspended rent payments, continued to work with landlords. As of 5/17, they had $27M of cash on hand and they announced on 6/1 their intention to sell $50M of common stock. Amid the pandemic, they furloughed 80 pc of hourly employees, 40% of store management, 40% of corporate and administrative staff. Non-furloughed workers had salaries reduced by 25-50 pc, senior mgt. took pay cuts of 50-75% and Board of Director compensation was suspended. They continued paying health premiums for eligible furloughed employees.
As reported on June 1st, for the second quarter (two months) through May 24, 2020 comparable restaurant sales decreased approximately 49.8% from the same period last year. The following table shows selected weekly comparable restaurant sales and average sales, for the 92, out of 101 system-wide locations that are open.
The Company commented that: “during the eight-week period ended May 24, 2020, we remained current with all of our vendors but deferred a majority of our lease obligations and as allowed under the Coronavirus Aid, Relief, and Economic Security Act deferred the payment of our employer social security taxes. Had we fully paid these expenses during such period, we estimate that we would have had approximately $27 million of cash and cash equivalents as of May 24, 2020 (down from actual current $32M).
“In response to the business disruption caused by the COVID-19 pandemic, during the eight-week period ended May 24, 2020, we transitioned our restaurants to a more limited menu and a primarily off-premise operating model with reduced labor, operating expenses, marketing and corporate overhead expenses, along with the cancellation or postponement of all non-essential planned capital expenditures. At the end of the eight-week period ended May 24, 2020, we were operating 18 restaurants in to-go only format, 74 with limited dine-in seating and nine were temporarily closed. Based on our operations over this eight-week period, we estimate we achieve positive EBITDA (1) with average weekly sales above approximately $43,000 after taking into account all restaurant operating costs, including rent, and G&A expenses. As we expand our operations by increasing our dine-in capacity and reducing the off-premise operating model for our restaurants, we expect to incur additional restaurant operating expenses and G&A expenses. With the increased expenses resulting from such expanded operations, we estimate we achieve positive EBITDA (1) with average weekly sales above approximately $54,000.”
Management actions, to get through these challenging times, have been commendable. We accept the fact that the cash burn has been reduced, and that the cash flow breakeven point has been lowered, for the time being. However: the new fully loaded (with corporate G&A) EBITDA breakeven point as described may be optimistic. $54,000/week annualizes to $2.8M per store, or about $290M system-wide. In calendar 2019, CHUY reported $426M of revenues, with income from operations of $3.4M. Adding back $20.7M of D&A, $14.2M of Impairment and closing costs, $0.6M of legal settlement, and $2.9M of pre-opening costs, provides Adjusted EBITDA of $41.8M. That means that ($426-290M) $136M of sales above “break even” last year generated only $41.8M of Adjusted EBITDA, or a 30.7% “flow-through”. That’s not much “leverage” from the higher sales. We believe cash generation from the incremental sales should be 40-50%. (Cost of sales, 26%, is variable, Labor, 35.4% is perhaps half variable, Operating Expenses, 15%, is perhaps half variable, Occupancy, 7.5% is mostly fixed, G&A, 5.6% can’t by leveraged by more than a point, so 26 + 17 + 8 + 1 = 52% variable, ballpark). That leaves 48% theoretical flow through. Especially since there is no expense line that is expected to help, our conclusion is that the average weekly sales need to be $60-65k/wk. to generate positive corporate EBITDA. It’s interesting that $60-65k/week is 74%-80% of the previous sales that we suggested in our recent Darden (DRI) analysis as the approximate EBITDA breakeven range for full service casual dining restaurant chains. Let’s watch 🙂
CAKE, CBRL, and CHUY are all well run restaurant chains, strongly positioned competitively, supported by strong balance sheets, with admirable operating histories. The reports described above show definite sequential progress over the last two months. There is, however, a lot of “wood to chop” before profit margins recover and an attractive return on capital can be earned. We stand by our prior reasoning that year to year sales comparisons have to recover to a negative 20-25% to provide a breakeven corporate EBITDA. While companies in all industries like to report “Adjusted EBITDA”, for old school analysts and investors that consider GAAP earnings relevant: GAAP breakeven (depreciation is not “free cash flow”, and interest expense will be higher than before) will require 10-15 points more of revenues. That means that GAAP breakeven will require sales to be down only 5-15% YTY, 10% as the midpoint. Above this GAAP pretax breakeven point, the last 10 points of revenues will generate perhaps 4 points of pretax profits, 3% after tax.
It is a new world, on many levels.
CRACKER BARREL REPORTS Q3 – stock up at first – giving it back a day later – A METAPHOR FOR THE RESTAURANT INDUSTRY
Cracker Barrel Old Country Store, Inc. (CBRL) reported their third quarter yesterday morning, with earnings beating estimates by $.02, announcing a $50M share repurchase, increasing the quarterly dividend from $1.25 to $1.30/share, and declaring a special dividend of $3.00 per share. Sounds great, and it’s not bad, but this well run company with a strong balance sheet, providing great value to their customer base, is fighting, like everyone else, the battle for market share. The following template shows some of the historical operating details, as well as analyst estimates going forward.
RECENT DEVELOPMENTS, PER Q3’19
Here are some of the details you should know. While same restaurant sales were up 1.3%, traffic was down 1.8%, outperforming the casual dining industry, to be sure, with the average menu price up 3.1%. Comp retail sales were down 2.6%.
For the third quarter: A reduction in the cost of goods offset other higher line items. Cost of goods was down 90bp, labor was up 50 bp, other store operating expenses was up 30 bp, store operating income was barely up, by 10bp. G&A offset that by 10bp, so operating income came in flat at 8.8% of revenues, up 2.8% for the year. Below the operating line, interest expense was 10 bp higher, income tax was 10bp lower, Net Income After Taxes was flat at 6.8%, generating $2.09 per share fully diluted, up from $2.03.
For the three quarters to date, ending April: cost of goods was down 30bp to 30.8%, labor was up 50 bp to 35.1%, other store operating expenses were up 40bp to 20.3%, store operating income was down 60bp to 13.8% (after depreciation), G&A was flat at 4.9%, operating income was down 60bp to 8.9%, pretax income was down 60bp to 8.4% and Net Income After Taxes was down 150 bp to 6.9%.
Company guidance for the full year is essentially unchanged. Comp store restaurant sales will be about 2%, retail comps will be flat to slightly negative, food commodity inflation will be about 2% for the year, operating income will be 9.0-9.3% of sales (so the fourth quarter will help), EPS expectations are unchanged at $8.95-9.10 (compared to $10.29 in ’18, which reflects an accounting adjustment and 52 weeks this fiscal year vs. 53 in ’18.
On the conference call:
National TV supported sales in the quarter, highlighting the food and value. The newest food platform revolves around Southern Fried Chicken (read our article from two days ago relative to healthier eating by way of meatless products). There was apparently quite a bit of training involved with this new platform, and the Company declined to break out how much of the labor increase was related to that but said that most of the labor increase was wage related. National TV and new creative on the billboard system will continue to be employed. Off premise sales increased 110 bp as a % of total sales, up over 15% YTY, but the total % was not mentioned. Retail sales were disappointing but inventory optimization and control of shrink improved gross margin (CGS was 48.8% vs. 51.1% in ’18). Unfavorable weather cost them about 30bp. EBITDA for the quarter was up 6%.
Commodities, beyond ’19, are expected to be a bit more volatile and a bit of a headwind, pork (about 10% of the commodity mix), in particular. From a retail standpoint, an effort is predictably being made to diversify away from Chinese suppliers. New unit productivity upticked a bit, especially with higher menu prices on the West Coast. Wage inflation continues to be a challenge, but it is hoped that guests will benefit from higher disposable income. The use of tablets with the POS system is helping to control labor costs. Menu price increases are targeted at about 2% per year. Delivery is being expanded, now in about 350 stores (out of 660), using Doordash. Other vendors may be used, chosen market by market. They believe this business is “highly” incremental.
The Bottom Line:
We view CBRL as one of the most consistently managed and well positioned casual dining chains. It is safe to assume that less well situated chains are having even greater difficulty in their attempts to build market share and increase cash flow and earnings. We note that there are quite a few restaurant companies that can be considered strong cash flow generators, and some of that will be “returned to shareholders” through dividends and stock repurchases. These days, however, very few restaurant companies can be considered attractive growth vehicles over the foreseeable future. Investors like to see a growth rate in earnings per share of at least 50% of the P/E multiple, which generally ranges in the high teens. Very few companies are predictably growing earnings per share close to 10% annually.
CRACKER BARREL REPORTS Q4 – A METAPHOR FOR THE INDUSTRY
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”.