UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S (DENN), WINGSTOP (WING), CHEESECAKE FACTORY (CAKE), SHAKE SHACK (SHAK), BJ’S (BJRI) and CHUY’S (CHUY)
UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S (DENN), WINGSTOP (WING), CHEESECAKE FACTORY (CAKE), SHAKE SHACK (SHAK), BJ’S (BJRI) and CHUY’S (CHUY)
SEVEN RESTAURANT COMPANIES PRESENT TODAY & TOMORROW AT JEFFERIES (VIRTUAL) WINTER CONFERENCE
The following companies present at the indicated times. We have provided the links to the investor relations section of their website.
Portillo’s (PTLO) – Monday, 1/24, 11:30 EST
Noodles (NDLS) – Monday, 1/24 – 3:00 EST
First Watch (FWRG) – Tuesday, 1/25, 9:00 EST
Chuy’s Holdings (CHUY) – Tuesday, 1/25, 10:30 EST
Dave and Buster’s (PLAY) – Tuesday, 1/25, 11:00 EST
Dutch Bros – Tuesday, 1/25 – 12:00 EST
The One Group (STKS) – Tuesday, 1/25, 12:00 EST
Fifty Years Flies By: – August 15th, is the fiftieth anniversary of Richard Nixon “closing the gold window”, eliminating the convertibility of the US Dollar into gold at $35/oz. This kicked off the stagflation of the nineteen seventies, with inflation peaking at about 12% annually and the Fed Funds rate at 18%. The lack of a spending discipline by politicians has run the annual deficit from $100B in 1980 to $3-4T today and the accumulated deficit from $1T to $28T (without considering unfunded entitlements). The economy is six times larger but the deficits are still 5-6 times bigger in constant dollars. If you don’t consider that this lack of monetary discipline is important, consider that, in the last fifty years, the cost of a first-class stamp has gone from $.08 to$.55, a loaf of bread from $0.25 to $2.50, a gallon of regular gas from $0.36 to $3.05, an average car from $2,700 to $40,206, annual healthcare spending from $353 per person to over $10,000, and Harvard tuition from $2,600 to $54,000. It is equally interesting that the Harvard tuition in 1971 was 13 weeks’ worth of the median household’s annual income of $10,285. The 2020 tuition is 36 weeks of the median household income of $78,500, demonstrating how wages have not kept up with the Dollar’s loss of purchasing power.
Gold bullion has gone from $35/oz. in 1971 to over $1800/oz. today, up 51x in value. You would have increased your purchasing power to whatever extent you had capital invested in gold bullion, even more so in the gold miners (which my readership knows I have favored for some time).
The good news for restaurant operators is that people have to eat and menu board pricing can change, carefully, as often as necessary. One piece of advice to growing restaurant chains is to make sure your rent escalation clause allows for no more than the rise in the government’s Consumer Price Index, CPI, (hopefully somewhat less). The CPI is consistently understating the real inflation (and the rise in menu prices) so your operating margin should “leverage” your sales increase by way of lower occupancy expenses, if nothing else.
FST/FERTITTA – WITH TILMAN IT’S NEVER BORING!
We wrote here last month about “the room where it happened”, why and how Tilman Fertitta sweetened the deal for investors in his hospitality empire, soon to merge with FAST Acquisition Corp (FST).
A few days ago, it was announced that DraftKing (DKNG) is going to buy/merge with Golden Nugget Online Gaming (GNOG) (46% of which is owned by FEI). DKNG has been one of the very successful SPACs offered over the last several years, and Fertitta sponsored GNOG has done well also. DKNG is much bigger in terms of its equity capitalization, $21.1B vs. $1.4B for GNOG, with higher sales as well, $297M in its most recent quarter, almost 13x the $23.1M of GNOG. DKNG has not been profitable yet, and is estimated to remain unprofitable through 2022. GNOG has been profitable the last two quarters but is currently expected to be unprofitable through 2022.
Both parties are predictably excited about the combination, guiding to $300M of synergies. We will likely be writing more about this situation because the FST/FEI combination, when and if completed, will create a hospitality company with revenues approaching $10B and $800B of annual EBITDA.
Our interest at the moment is how this DKNG/GNOG transaction affects the still pending business combination of FST and FEI. While FEI has agreed not to sell their $700B worth of DKNG for at least a year, the premium added to GNOG shares and the enhanced liquidity is clearly a positive. Recall that the recently sweetened deal, as we described here last month, increased the current annualized EBITDA run rate to $800M, up from the previously expected $648M for 2022. This additive adjustment was no doubt provided by Fertitta to create more investor comfort with the $3B of debt and the DKNG/GNOG merger should further alleviate concerns. Tilman Fertitta rarely sits still.
Chuy’s Holdings – 2nd Quarter Report is Instructive –
Chuy’s Holdings, Inc. (CHUY) recently reported results for the quarter ending 6/30/21, at which point all stores were open again. As background, CHUY continues to be a well-run, debt free Company, though their results have flattened since 2016. Absent a tax credit in 2017, EPS has been around $1.00 per share as comps weakened and margins sagged, offsetting new store openings. At this point, setting aside YTY comparisons, we were struck by the dramatic improvement in Q2’21 vs. Q2’19 and scrutiny illustrated the ongoing uncertainty within the restaurant industry. The dramatic two-year comparisons actually started in Q3’20 with EPS coming in at $0.31/share vs. $0.21. That improving trend has continued and $0.62 in Q2’21 compared to $0.37 in Q2’19. Sales, BTW, were $108M, down from $113M so what the heck is going on? Answer: Cost of goods was down 200 bp. Labor was down 650 bp. Income before taxes was therefore up 720 bp, with after tax net income almost doubling. It’s all about the slimmed down menu and less labor necessary to serve off-premise consumption. BTW, prices are 4.8% higher YTY, which helps also. The instructive part is that management, on the conference call, expressed uncertainty as to how everything sorts out over time. They guided to a less dramatic 300-350 bp of improvement over 2019, but admitted uncertainty and were not providing formal guidance. Off Premise sales in Q2 were 27%, down from 61% in 2020, and up from 13% in 2019. The Street consensus is for $1.75/sh In ’21, up from $0.84 in ’20, then a decline in ’22 to $1.56, still well above that five year $1.00 plateau. Aside from uncertain sales, an unpredictable mix between dine-in and off-premise, a labor crisis, and possibly volatile commodity prices, it’s all very clear.
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.
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Chuy’s Holdings, Inc. (CHUY) – No Place to Hide
CHUY reported earnings for Q4’16 two days ago, missing Street estimates of revenues, earnings, and earnings per share. The details below are not intended to criticize the management of CHUY, which can be commended for an excellent record of growth, maintenance of a strong balance sheet, and continued opportunities for unit expansion and earnings growth. This is more a commentary on the current headwinds affecting even the better managed restaurant companies, likely to reduce the rate of corporate progress at least for the foreseeable future.
Fourth Quarter Report
Chuy’s reported a comp sales decrease of 1.1% in Q4’16 which, combined with an increase of 1.3% in average check, demonstrated a traffic decline of 2.4%. The Company pointed out that weather and the calendar shift of Xmas from Friday to Sunday cost about 120 bp, and new stores that entered the comp base but were still in their honeymoon period cost about 40 bp. Notwithstanding these explanations, this was the worst traffic trend at least since 2010. It should be noted that comps have steadily declined over the last six quarters, finally going negative recently.
Earnings per share were reported at $0.14 per share, versus an estimate of $0.17 and compared to $0.01 per share a year earlier. There were “non-recurring” expenses in both years, so “adjusted” earnings per share were reported as “increasing” to $3.1M ($0.18) versus $3.0M ($0.18) year to year in Q4. “Impairment and closure costs” were $1.1M in Q4’16 vs. $4.4M in Q4’15 which affected the GAAP numbers, obviously reducing the year earlier earnings to only $0.01 per share. It is noteworthy that Q4’16 was charged a tax rate of only 15.6% versus 28.9% for all of ’16 and an expected effective tax rate of 29-31% in ’17. Above the tax rate line, adding back the impairment charges to before tax income provides operating earnings of $3.9M for the quarter, down about 9% from $4.3M. Adding back D&A, we get $8.0M, down from $8.7M. It is important to note that the largest change in operating expenses was the labor line, with was up 180 basis points in the quarter.
Relative to Q1’17 to date, analysts predictably posed the question on the Q4 conference call. Management responded…”we’re basically flat to a little down as we’ve rolled into the year right now”.
Earnings per share for the year were reported at $1.02 versus $0.77. Comps were up 0.8% for the year, no doubt reflecting a modest traffic decline, which accelerated through the year. The tax rate helped in ’16, 28.9% versus 30.8% in ’15. Income before taxes was up 30.3% but when we add back the lower impairment charges this year, the gain (before impairment) was only 12.1%.
While there are other fourth quarter operating details we could describe, including cannibalization of a couple of stores, intensified efforts relative to takeout and delivery sales, and expanded G&A needs, investors are most concerned with prospects going forward. The Company guided to $1.11 to $1.19 for ’17, but pointed out that ’17 is a 53 week year, which will contribute about $.05. Cannibalization in two Austin, TX locations will likely cost about $.03 per share. Larger office space will cost $400,000 per year, or about $.015 after taxes. The Company says that the $1.11 to $1.19 compares against “diluted adjusted net income per share of $1.08. If we add the $0.05 per share from the extra week to $1.08, we get essentially flat earnings per share just below the middle of the range provided. That is understandable, and appropriately conservative since there are no expense lines that are expected to decline materially. “We would expect labor pressure to continue in ‘17”, “the expected year over year growth in G&A dollars is greater than our historical run rate…2017 guidance includes…office space expansion, senior level personnel and several technology upgrades”…additional professional fees associated with becoming SOX compliant”….”pre-opening…looks to be a little bit higher on a per restaurant basis for 2017”….”flat to slightly up from a commodity inflation standpoint”. Bottom line: the bottom line on a percentage basis is unlikely to improve, and could likely suffer from here.
The last important ingredient is the performance of new stores. The Company provides us with full year revenues from comping stores, at $330.6M, spread over 3879 operating weeks, calculating to $4.43M annualized per store. 22 new restaurants opened during and subsequent to fiscal 2015, with 596 operating weeks, contributed $47.0M, annualizing at $4.1M. While the Company has expressed satisfaction, though lower than described a year earlier. The Company pointed out that $4.1M is down only 4.8% from 2014, still generating “targeted” 30% cash on cash returns. The Company said further: “that AUV is still over $4M and we expect it to settle in that $3.7M range”. Among the 12-14 locations planned in 2017, new markets will include Denver, Chicago and Miami, in our mind a bit riskier than existing successful markets. It seems safe to say that, for the moment at least, revenues at the newest stores are not accelerating.
Our conclusion: As stated at the outset, almost all of the variable described above are typical of many, if not most, operators in the restaurant industry. Sluggish traffic trends (especially for dine-in locations), higher labor costs, commodity costs that have probably seen their best levels, competitive pressures, and occupancy expenses that continue to edge higher are not a happy combination. If the headwinds are substantial enough long enough, even better companies are finally affected.
WITH CHUY’S HOLDINGS (CHUY) REPORTING Q3 ON TUESDAY, OUR LATEST RESEARCH WRITEUP HAS BEEN SELECTED FOR RE-PUBLICATION AT SEEKING ALPHA, LINK BELOW:
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