Tag Archives: CHUY

UPDATED “COMPANY DETAILED ANALYSES” (SUBSCRIBERS log in to view writeups on over 60 restaurant/franchising companies – PLANET FITNESS, BLOOMIN’ BRANDS, PORTILLO’S, CHUY’S, PAPA JOHN’S, FIRST WATCH – with relevant transcripts

PLANET FITNESS (PLNT)

https://www.liptonfinancialservices.com/2023/08/planet-fitness-inc-plnt/

BLOOMIN’ BRANDS (BLMN)

https://www.liptonfinancialservices.com/2023/08/bloomin-brands-updated-write-up/

PORTILLO’S  (PTLO)

https://www.liptonfinancialservices.com/2023/08/portillos-ptlo-in-process/

CHUY’S (CHUY)

https://www.liptonfinancialservices.com/2023/08/chuys-holdings-updated-write-up/

PAPA JOHN’S (PZZA)

https://www.liptonfinancialservices.com/2023/08/papa-johns-pzza-corporate-description/

FIRST WATCH (FWRG)

https://www.liptonfinancialservices.com/2023/08/first-watch-fwrg-in-process/

UPDATED CORPORATE DESCRIPTIONS: CHUY’S, THE ONE GROUP HOSPITALITY, NATHAN’S FAMOUS, RUTH’S CHRIS, FIRST WATCH – with relevant transcripts

CHUY’S HOLDINGS –  (CHUY)

https://www.liptonfinancialservices.com/2022/08/chuys-holdings-updated-write-up/

THE ONE GROUP HOSPITALITY (STKS)

https://www.liptonfinancialservices.com/2022/08/the-one-group-hospitality-stks-in-process/

NATHAN’S FAMOUS (NATH)

https://www.liptonfinancialservices.com/2022/09/nathans-famous-nath-in-process/

RUTH’S (CHRIS) HOSPITALITY  (RUTH)

https://www.liptonfinancialservices.com/2022/08/ruth/

FIRST WATCH (FWRG)

https://www.liptonfinancialservices.com/2022/08/first-watch-fwrg-in-process/

 

UPDATED CORPORATE DESCRIPTIONS: – RESTAURANT BRANDS, PAPA JOHN’S, THE ONE GROUP, EL POLLO LOCO, CHUY’S with transcripts

UPDATED CORPORATE DESCRIPTIONS: – RESTAURANT BRANDS (QSR), PAPA JOHN’S (PZZA), THE ONE GROUP HOSPITALITY (STKS), EL POLLO LOCO (LOCO),  CHUY’S (CHUY) – with transcripts

RESTAURANT BRANDS

https://www.liptonfinancialservices.com/2022/05/red-robin-gourmet-burgers-inc-rrgb-updated-writeup-inflection-point-could-be-at-hand/

PAPA JOHN’S

https://www.liptonfinancialservices.com/2022/05/papa-johns-pzza-corporate-description/

THE ONE HOSPITALITY GROUP

https://www.liptonfinancialservices.com/2022/05/the-one-group-hospitality-stks-in-process/

EL POLLO LOCO

https://www.liptonfinancialservices.com/2022/05/el-pollo-loco-holdings-updated-write-up-with-conclusion/

CHUY’S

https://www.liptonfinancialservices.com/2022/05/chuys-holdings-updated-write-up/

CHUY’S: A COMPELLING OPPORTUNITY OR A “VALUE TRAP”?

CHUY’S: A COMPELLING OPPORTUNITY OR A “VALUE TRAP”?

We wrote recently that restaurant stocks are very inexpensive, compared to the historical range of valuations, and perhaps the worst of the trends in traffic, commodity prices and labor are adequately discounted. In the course of bringing the numbers within our “Corporate Descriptions” up to date we were a bit surprised that CHUY’s has become as inexpensive as it is. (Our readers should check out “Corporate Descriptions”. It’s a lot of work for us but a great tool.)

As of 3/31/22, CHUY had $90M of cash on the balance sheet relative to an equity market cap of about $400M and an Enterprise Value of a little over $300M. Moreover, EBITDA has grown from $35M in 2018 to $64M in 2021, an obviously very impressive improvement and the Enterprise Value (w/o lease obligations) now is only about 4.75x TTM EBITDA. With that as a starting point, we take a further look.

Large Cuts in Staffing Drive the Large Increase in EBTIDA from 2018 to 20

In spite of revenue in 2021 being relatively the same compared to 2018 ($396M in FY21 vs. $398M in FY18), the EBITDA rose from $35.2M to 64.4M. The EBITDA margin rose 750bps from 8.8% to 16.3%, a remarkable increase in such a short period of time. The obvious next question: “Are current EBITDA margins sustainable?”.

A closer look at the income statement shows that the $30.7M decline in labor costs drove the entire increase in EBITDA. As a percentage of revenue, the company was able to lower labor costs from 36.2% to 28.7%. The company has stated that they are operating at about 80-85% staffing levels compared to where they believe will maintain quality customer service.

CHUY 10Ks provide a significant amount of useful historical information to help investors understand the drivers of the company’s business. Since 2014, the company has made significant cuts to the number of managers and hourly employees in each store. Remarkably, the company employs approximately the same number of managers and hourly employees today that it did in 2014, with 37 FEWER stores. This nearly 40% reduction in staffing is very unusual in the industry and we believe it is unsustainable. In this regard: On the Q1 FY22 conference call, management stated that it believed that staffing would return to 90-95% of 2019 levels, implying that 10-12 more employees per store are needed.

The significant reduction in employees per store (some of which management attributes to more efficient use of technology, especially at the manager level), reduced labor costs as a percentage of revenue from 36.2% to 28.7%. This reduction is in stark contrast to the trend experienced by many of its peers over the same period of time. As shown in the table below, most peers showed an increase in labor as a percentage of sales of 80-100bps. Darden has been able to lower its labor costs slightly over that period of time.  Since 2015, labor costs as a percentage of revenue have averaged 33.5% at CHUY. We believe that this percentage is a more reasonable level of future costs than the current run rate and there was, in fact, a 140 bp increase in labor costs in Q1’22 on revenue up by 14.6%. While management suggested that the labor situation is starting to normalize and “help is on the way”, the table below shows that other full-service operators are not showing the same degree of abnormality.

“NORMALIZED” EBITDA POTENTIAL COULD BE AS LOW AS $44M

 We continue to focus on the labor situation at Chuy’s because long term macro trends suggest that other costs, such as operating, occupancy, marketing and G&A will probably not decrease in the foreseeable future. It is important to note that, in spite of closing 18 locations (16% of the 114 there would have been) in the last six years, AUVs have declined from $4.87M in 2014 to $4.20M in 2021. At the same time, net cash investment per new store has increased from $1.8M to $2.5M, which has lowered the AUV/Net Investment ratio from 2.71X to 1.68X. More worrisome is the decline in customers per location per year from 36K in 2014 to 24K in 2021.  Since CHUY can only raise prices so much to offset this steady decline in traffic (3.3% long-term trend), we believe that the other costs of running the business will stay close to current percentages of revenue, highlighting the importance of labor costs.

Wall Street is estimating $425M of revenue and $51M in EBITDA for FY22 and $475M in revenue and $58M in EBITDA in FY23. Simply taking the recent percentage of revenues of all costs except labor and increasing labor a modest 130bps to 30% of sales (and exclude pre-opening costs) our EBITDA estimates come close to analysts estimates. However, considering the factors we discussed above, we feel that 30% labor costs as a percentage of revenue could be too low. If labor costs rise to 32% of revenue, which would still be 150bps below the long-term average and many of its peers, EBITDA drops to $44M-$49M or almost 30% below the current run rate.

OTHER CONSIDERATIONS

(1) Officers and Directors own less than 2% of the outstanding shares.

(2) Margins were shrinking for several years prior to COVID, “adjustments” were in process.

(3 ) Company sold 3.04M shares at $15.86/sh (19% dilution) in ’20, after purchasing 90K shs             at $15.57. In ’21 repurchased 462k shs at $31.45/share. In retrospect…..sad.

(4) Non-operating Impairment Charges – $53.3M from ’18, ’19 and ’20.

CONCLUSION

The above discussion provides more questions than answers. We have no visibility as to what will provide a predictable, sustainable growth trajectory. Our conservative view is that EBITDA in 2022 will more likely approximate $44M than $65M and we are concerned that the Chuy’s basic dining experience may continue to lose traffic. On that basis, we would rather bet on restaurant companies that are in a stronger competitive position.

Roger Lipton

 

 

UPDATED CORPORATE DESCRIPTIONS: POTBELLY (PBPB), GOOD TIMES RESTAURANTS (GTIM), CHUY’S (CHUY), RUTH’S HOSPITALITY (RUTH), RCI HOLDINGS (RICK), FIRST WATCH (FWRG) – with transcripts

UPDATED CORPORATE DESCRIPTIONS: POTBELLY (PBPB), GOOD TIMES RESTAURANTS (GTIM), CHUY’S (CHUY), RUTH’S HOSPITALITY (RUTH), RCI HOLDINGS (RICK), FIRST WATCH (FWRG) – with transcripts

POTBELLY (PBPB)

https://www.liptonfinancialservices.com/2022/01/potbelly-pbpb-in-process/

GOOD TIMES RESTAURANTS (GTIM)

https://www.liptonfinancialservices.com/2021/12/good-times-restaurants-inc-gtim/

CHUY’S (CHUY)

https://www.liptonfinancialservices.com/2022/03/chuys-holdings-updated-write-up/

RUTH’S HOSPITALITY (RUTH)

https://www.liptonfinancialservices.com/2022/03/ruth/

RCI HOSPITALITY (RICK)

https://www.liptonfinancialservices.com/2022/02/rci-hospitality-rick-in-process/

FIRST WATCH (FWRG)

https://www.liptonfinancialservices.com/2022/03/first-watch-fwrg-in-process/

UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S, WINGSTOP, CHEESECAKE, SHAKE SHACK, BJ’S and CHUY’S

UPDATED CORPORATE DESCRIPTIONS FOR DENNY’S (DENN), WINGSTOP (WING), CHEESECAKE FACTORY (CAKE), SHAKE SHACK (SHAK), BJ’S (BJRI) and CHUY’S (CHUY)

Denny’s

https://www.liptonfinancialservices.com/2022/01/dennys-corporation-denn-new-writeup/

Wingstop

https://www.liptonfinancialservices.com/2022/01/wingstop/

Cheesecake Factory

https://www.liptonfinancialservices.com/2022/01/cheesecake-factory-updated-write-up/

Shake Shack

https://www.liptonfinancialservices.com/2022/01/shake-shack-inc-shak/

BJ’s

https://www.liptonfinancialservices.com/2021/11/bjs-restaurants-2/

Chuy’s

https://www.liptonfinancialservices.com/2022/01/chuys-holdings-updated-write-up/

 

 

MON. & TUES. – SEVEN RESTAURANT COMPANIES PRESENT AT JEFFERIES CONFERENCE: PTLO, NDLS, FWRG, CHUY, PLAY, STKS, BROS

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

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=porti&url=https://wsw.com/webcast/jeff222/porti/2026350

Noodles (NDLS) –  Monday, 1/24 – 3:00 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=ndls&url=https%3A//wsw.com/webcast/jeff222/ndls/1848225

First Watch (FWRG) –  Tuesday, 1/25, 9:00 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=fwrg&url=https%3A//wsw.com/webcast/jeff222/fwrg/1855350

Chuy’s  Holdings (CHUY) –  Tuesday, 1/25, 10:30 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=chuy&url=https://wsw.com/webcast/jeff222/chuy/1859625

Dave and Buster’s (PLAY) – Tuesday, 1/25, 11:00 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=play&url=https://wsw.com/webcast/jeff222/play/1855350

Dutch Bros – Tuesday, 1/25 – 12:00 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=bros&url=https://wsw.com/webcast/jeff222/bros/1855350

The One Group (STKS) – Tuesday, 1/25, 12:00 EST

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=stks&url=https://wsw.com/webcast/jeff222/stks/1876725

 

 

ROGER’S 8/15/21 MONTHLY COLUMN IN RESTAURANT FINANCE MONITOR – Fifty years of inflation, update on Tilman Fertitta, Chuy’s 2nd qtr.results

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?

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 🙂

CONCLUSION

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.

Roger Lipton