CHUY’S HOLDINGS – (CHUY)
THE ONE GROUP HOSPITALITY (STKS)
NATHAN’S FAMOUS (NATH)
RUTH’S (CHRIS) HOSPITALITY (RUTH)
FIRST WATCH (FWRG)
CHUY’S HOLDINGS – (CHUY)
THE ONE GROUP HOSPITALITY (STKS)
NATHAN’S FAMOUS (NATH)
RUTH’S (CHRIS) HOSPITALITY (RUTH)
FIRST WATCH (FWRG)
MOST RECENT CONFERENCE CALL TRANSCRIPT
Q3 SLIDE PRESENTATION
ROGER’S ARTICLE ON THE DATE OF THE IPO
UPDATED CORPORATE DESCRIPTIONS: POTBELLY (PBPB), GOOD TIMES RESTAURANTS (GTIM), CHUY’S (CHUY), RUTH’S HOSPITALITY (RUTH), RCI HOLDINGS (RICK), FIRST WATCH (FWRG) – with transcripts
GOOD TIMES RESTAURANTS (GTIM)
RUTH’S HOSPITALITY (RUTH)
RCI HOSPITALITY (RICK)
FIRST WATCH (FWRG)
STARBUCKS REORGANIZES AS SCHULTZ RETURNS, BRINKER AND WINGSTOP DISAPPOINT THIS MORNING, THE FOLLOWING ANECDOTAL REPORT ILLUSTRATES THE CHALLENGE!
We wrote our “Hope” anecdote a couple of days ago, to be published as part of our monthly column the 5/15 issue of the Restaurant Finance Monitor. However, in the wake of (1) Howard Schultz’ temporary return to Starbucks, his decision to withdraw guidance for ’22 and invest one billion dollars “to uplift Starbucks’ employees and The Store Experience and (2) the disappointing results reported this morning at Brinker and Wingstop, the following field trip observations are worth thinking about today. There will be conference calls today at 10am for EAT and WING. From an investment standpoint, we have always valued the “transparency” of this industry.
Hope is not a strategy – “Culture”, or “hospitality quotient” as Danny Meyer has put it, seems difficult to define but is recognizable when you experience it.
As a positive example: I visited a First Watch restaurant last week for the first time, around 9:00 am on a Monday morning. As I noticed that the entrance door and adjacent window glass were sparkling clean (the first tell), a young woman with a big smile opened the door and ushered us in. We sadly didn’t see any more of her but the entire service team was equally friendly, made easy eye contact, tried to be helpful (without being intrusive), obviously happy to be there. The menu was appealing and well priced, the coffee included flavored creamers and we both enjoyed the blueberry pancakes. More important than the food, because you can get coffee and pancakes in lots of places, was the dining experience. I came back to NYC and bought the stock (FWRG, trading at about 12x trailing EBITDA).
On the other hand: That same night, we had dinner at a publicly held full-service restaurant chain. There were tables available but we waited for twelve minutes to be seated, so our assumption was that they were short of staff. We were handed menus, a bit worn, as we were seated but it was six or seven minutes before a server showed up to take our drink orders. The appetizer arrived in an acceptable amount of time but the entrees took way too long. As we waited, there seemed to be quite a few service people in the area but it felt like they were a bit confused. The activity was not frenzied but it seemed less than organized or purposeful. After waiting too long for our entrees, and finally making eye contact with our waitress, I said: “So I guess our entrees will be here soon?” Her response: “I hope so”, as she disappeared from view, is as much as we need to know. My basic reaction was one of sympathy, since this girl’s orientation had obviously been far from adequate in today’s labor environment. It must be a daunting challenge to hire, train and motivate the rapidly turning over service staff in a high volume full service restaurant. On top of that, the kitchen staff may not do their part, and the service person who just happens to be on the firing line will get discouraged pretty quickly.
If restaurant management is throwing service personnel out on the floor, to interface with customers (who are increasingly hard to come by these days), “hoping” for a good outcome, there’s some serious work to be done.
P.S. Four and one half years ago, we wrote about Starbucks as follows:
IT’S A ‘BUM RAP”, STARBUCKS DOES NOT SELL “$5.00 CUPS OF COFFEE”
It’s a “bum rap”. The media, and the skeptics like to point to the folly of customers paying $5.00 for a cup of coffee. However, we priced (before tax) Starbucks, Dunkin’, and Horton’s in Detroit (to avoid NYC prices) this morning. Starbucks’ 12 oz.“tall” coffee is $2.20, Dunkin Donuts 10 oz. “small” is $1.75, and Horton’s 10 oz. “small” is $1.58. Per oz., Starbucks costs $.183, Dunkin’ is $.175 and Horton’s is $.158. If you want a latte’, the gap is wider ($.312 per oz. at Starbucks, $.253 at Dunkin’, and a materially cheaper $.222 at Horton’s). A latte’ costs more at Starbucks, but Dunkin’ and Horton’s don’t even offer the Soy Latte’ that I order. I can’t vouch for the “quality” of latte’ at Dunkin’ or Horton’s. You can judge for yourself whether the service component, or the type of coffee, is worth the price premium at SBUX but, in any event, it is not a “$5.00 cup of coffee”, and Starbucks’ prices are not grossly higher than the competition.
THE STARBUCKS DIFFERENCE
In my opinion, what has distinguished Starbucks over the years has been the corporate “culture”, which they have incredibly duplicated in 27,000 stores worldwide. Their employees, selected, trained, and motivated to an unmatched degree in food service, look you in the eye, remember your name and drink if you are anything close to a regular customer, and become part of your daily social life. A couple of years ago, about the time that Chipotle ran into trouble, I asked a SBUX employee if he knew anything about Chipotle. This young man, perhaps 18 or 19 years old, told me he used to work at Chipotle, then gestured kind of frenetically with his hands saying: “at Chipotle it was all about speed. Starbucks makes me a better person”. That’s what Starbucks has been all about, creating a uniquely welcoming retail environment that produces “better persons” of their employees.
THE TIMES THEY ARE A’CHANGIN’
BARRON’S MAGAZINE this morning has a front cover entitled THE FUTURE OF COFFEE (AND RETAIL). The subtitle reads “Starbucks has succeeded where Silicon Valley hasn’t: changing the way consumers pay. The behavioral shift holds big promise for the coffee giant and its stock”.
Not exactly, in my opinion. It is not just about “the law of large numbers”, and the difficulty of satisfying investors by building on profit margins that are well above peers. The business model has changed, and the question becomes whether the new model will match the original. It’s well known that a new loyalty program bothered some customers and also that an increasing number of customers are ordering and paying online, often in advance of entering the store. In the most recent quarter, 30% of US transactions were paid using the smartphone app, up from 25% a year earlier and 20% two years ago. More important, to my view, is that 9% of US orders were ordered and paid for in advance. The company has been discussing the store level congestion for several quarters now, as mobile orders slow down service for customers going through the line. Perhaps it’s just me, but I am put off somewhat when the line at the register (where I like the human contact) is short, but I have to wait while eight or ten orders are pumped out ahead of my own.
MILLENIALS, WHO ARE THE SPENDERS, DON’T VALUE HUMAN CONTACT (AS MUCH)
It’s not so long ago that pundits dismissed the internet as a retail venue. The public was not expected to give out their credit card information, and certainly was not going to buy “touchy, feely” products like apparel or shoes through online channels. The public is not only ordering “everything” through Amazon and others, but relationships are maintained through Facebook and other social channels. As a corollary, customers are increasingly seeking “experiential” retail situations, rather than visit the malls, with their undifferentiated stores and restaurants, most often staffed with poorly trained employees.
WHAT’S IT ALL MEAN TO EMPLOYEES, AND CUSTOMERS?
Relative to Starbucks, their leadership with mobile order and pay, increasingly in advance of the store visit, may well be appropriate and necessary, but the business model has changed. It’s become a production challenge, not a relationship driven enterprise. The employed “people person” who was the star of the previous model, is not going to be as easily satisfied, because most of the employees, for most of their time, are busy pumping out product. It’s going to be harder to find someone as described above who says that Starbucks “is making me a better person”. From the customer side, there are 27,000 stores already existing that are already tightly configured and can’t be reconfigured too much to handle a lot more production. From a customer standpoint, some, like myself (perhaps in the minority these days), who value the human contact, may decide that the local independent shop, or even the home or office kitchen, can provide an adequate cup of coffee at a competitive price without the “tumult”.
I remember when Howard Schultz said that food will never be a material part of Starbucks’ sales. Today, it represents 30% of revenues. Schultz originally envisioned his coffee shops as a “third place”, to hang out other than home or office. That’s a little hard today, in a small busy shop, but we can call this an “unintended consequence” of building one of the still growing premier worldwide brands. Comps and traffic have slowed in recent years, due to the “law of large numbers”, the natural limitations of small stores that were not originally built to handle today’s volumes, and the evolving environment that every successful retailer must adjust to. Starbucks is one of the most successful retailers ever created, and we don’t doubt that they will continue to succeed in a major way. We caution however, that the rate of progress demonstrated in the past, already slowing, will be increasingly difficult to replicate. The business model has evolved. Starbucks was a retail “disrupter” but their previous approach may not be quite as successful. Accordingly, valuation parameters that have applied to SBUX equity in the past may not apply in the future. The stock chart that has languished over the last couple of years may well be reflecting the most likely future business model; still good, just not quite as great.
THE WEEK THAT WAS, ENDING 3-25 – ANALYSTS ALREADY LIKED WINGSTOP, WENDY’S, FIRST WATCH, DARDEN, ONE COMPANY UPGRADED, WHICH WE WROTE UP A MONTH AGO
FIRST WATCH (FWRG) AND DARDEN (DRI) PROVIDE GOOD REPORTS, HARD NOT TO LIKE THEM. ARCO DORADOS (ARCO) GETS UPGRADED
RE: First Watch (FWRG), ANDY BARISH, JEFFREY BERNSTEIN, GOLDMAN SACHS, continue to like it. ANDREW CHARLES wants to see more (I guess).
RE: Darden (DRI), BRIAN VACCARO, LAUREN SILBERMAN, JAMES RUTHERFORD, JEFFREY BERNSTEIN, analysts at Morgan Stanley all continue to like it. NICK SETYAN wants to see more (I guess).
RE: Wingstop (WING), NICK SETYAN likes it, in spite of Charlie Morrison leaving.
RE: Wendy’s (WEN), IVAN FEINSETH likes it.
RE: Arcos Dorados (ARCO), ROBERT FORD upgrades to BUY.
RELEVANT TRANSCRIPTS FROM MOST RECENT CONFERENCE CALLS.
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
THE WEEK THAT WAS – KRISPY KREME AND FIRST WATCH PICK UP SPONSORSHIP AT ICR CONFERENCE
Brett Levy Upgrades Texas Roadhouse to Buy, Brian Bittner Uprades Chipotle to Outperform. Christopher Carril joins Bittner in downgrading Starbucks. Sara Senatore Initiated Krispy Kreme with a Buy. Brian Vaccaro Initiated First Watch with an Outperform.
None of the companies above had earnings reports lately but we have provided below a link for First Watch’s update this week and Krispy Kreme’s slide presentation
EARNINGS REPORTS TO COME
A quiet time. No reports scheduled until the last week of January. We will keep you posted.
ICR CONFERENCE APPEARANCES STIMULATE PUBLIC UPDATES, AND INTRA-DAY VOLATILITY IN A SKITTISH STOCK MARKET
Publicly held restaurant, franchising and retailing companies appear today, again tomorrow and Wednesday morning at ICR’s “must attend” conference, usually in Orlando but held virtually again this year.
Announcements have often preceded the public appearances and the news has sometimes been unsettling, stock prices reacted accordingly. We provide below links to the news releases that have triggered the largest price changes.
BURGERFI (BFI – consolidating after acquiring Anthony’s Coal Fired Pizza – up 0.35%)
DUTCH BROS INC. (BROS – got hit early, closed up 2.88%)
CARROL’S RESTAURANT GROUP ((TAST – already at a multi-year low – up 0.34%)
NOODLES (NDLS – announces major multi-unit franchise agreement – up 6.33%)
FIRST WATCH RESTAURANTS, Inc. (FWRG – finding its footing after IPO – up 2.33%)
RCI Hospitality (RICK – presentation fine, just profit taking after recent run – down 3.58%)
REFLECTION ON ’21, WEBSITE IMPROVEMENTS SET THE STAGE FOR ’22, CAN’T WAIT FOR TOMORROW BECAUSE WE GET BETTER LOOKING EVER DAY!
Happy New Year!
Our objective is to provide some food for thought (no pun intended). We try to write about topics and provide editorial commentary that you won’t find elsewhere. Looking back over our more than 100 topical articles in the last twelve months, we enjoyed studying and discussing quite a few of the most newsworthy developments. Use the SEARCH function on our Home Page if you would like to review our (unfiltered) commentary regarding:
THEMES such as :
SPACs, the appeal (as suggested by the “players”), and the dangers (hardly ever discussed) of this type of financing.
The economics of third party delivery.
Individual analytical reports on the newest public restaurant companies, namely BurgerFi, Krispy Kreme, Dutch Bros., Sweetgreen, Portillo’s First Watch and Fogo de Chao (pending).
Tilman Fertitta’s attempt to come public through the FAST Acquisition (FST) SPAC
Inflation, past, current and future.
We don’t get paid for this, except in our own account, but our readers seem to value our opinion so we sometimes provide it. We hope to help our readers avoid predictable mistakes. We continue to be negatively inclined toward the SPAC space and BItcoin. Among the newly public restaurant companies, we might have helped you sidestep BurgerFi (BFI) as well as the Krispy Kreme (DNUT) and First Watch (FWRG) IPOs. Sweetgreen (SG) and Portillo’s (PTLO) were (and are) too rich for our blood, though we are admirers of Dutch Bros (BROS), closer to the IPO price than here in the 50s. As an update, and in full disclosure, we personally took a small position recently in Krispy Kreme, far more interesting in the mid-teens (with JAB buying it back) than it was at the $17 IPO (reduced from the originally contemplated $21-23).
Fundamentals, in a world of FOMO (Fear of Missing Out) and TINA (There is no Alternative), still matter. In terms of documenting that the equity market has not altogether given up on common sense, we look back at our published analysis of the restaurant stock universe on 11/11/20, after the pandemic psychology had killed the stocks. We’ve provided the link just below to that report, where we pinpointed Papa John’s as an especially undervalued stock, considering the stock and the fundamentals at the bottom of the pandemic. Papa John’s (PZZA) was $77/share on 11/12/19 and today it is at $133 (up 73%). Every situation did not play out as expected, but we also pinpointed Wingstop (WING) at $129 and today it is at $172 (up 33%). The two stocks we suggested as most overvalued at that point (BJ’s and Shake Shack) have gone down, 15% and 10%, respectively, during the same time frame. “Paired trades” are difficult, especially over the short term, so it is gratifying that all four favorite positions (long and short) were profitable.
THE SITUATION TODAY
We are looking at a far different calendar ’22 than we anticipated a year ago, even six months ago. We expected ’21 to be the transition year, with a return to normalcy in calendar ’22, but now “not quite”. The staffing challenge in restaurants is worse than ever, even with a higher wage scale, and the timing of relief continues to be uncertain. Normal volatility in cost of goods has been exacerbated with supply chain distortions, with some products (just as with labor) sometimes unavailable at any cost. However, while a great deal of uncertainty still exists, there is far more clarity than 12-21 months ago. The country is more open for business, vaccines and treatments are now available and generally effective in avoiding the worst possible health consequences. Restaurant operators have learned to manage labor more efficiently, have simplified menus, and have enhanced their off-premise revenue base (with to-go, delivery, curbside pickup and/or ghost brands). While operational challenges accompany the new potential, because labor must be allocated among these new business segments and managed to avoid hampering the dine-in activities, in the best of circumstances operational margins could exceed pre-pandemic levels.
Publicly held equities have cooled off from the inflated values of early 2021, a number of well established companies trading in the lower half of their historical valuation ranges. Among the restaurant IPOs of 2021, Krispy Kreme (DNUT)($18.58), after declining from the $17 IPO price to under $13, has recovered, not in small part due to parent, JAB, buying back millions of shares of stock. Sweetgreen (SG)($31.48) is just above its $28 IPO price, after peaking the first day above $50. First Watch (FWRG)($17.43) came public at $18, traded just briefly to about $22, then bottomed below $16. Portillo’s (PTLO)($40.27) spiked to over $50, collapsed to the low 30s before recovering to the current level. Dutch Bros (BROS)($53.24) ran from its IPO price of $23 to about $75, fell back into the 40s before stabilizing here. The cooling process is also in evidence by the fact that there is no restaurant related SPAC that is trading at a material premium to its IPO price. Especially symbolic is the lack of premium for Danny Meyer’s USHG Acquisition Corp. (HUGS)($10.36), which has announced they will become a “cornerstone partner” with JAB controlled Panera. The uncertainty here is apparently the not yet disclosed relationship between HUGS’ capital and Panera’s valuation but the “smart money” is obviously not willing to bet that HUGS common stock will be compelling after the fact.
Our analysis going forward
For our investment purposes and yours we have updated our website. The “Corporate Descriptions” section now provides, at a glance, for every publicly held restaurant company, the most important parameters relative to current valuation. For example:
From that starting point, our investment process consists of evaluating the current operating fundamentals, whether or not the “on the ground” developments will materially change the financial picture. As part of that summary, we provide a link to the most recent conference call transcript. We are in essence looking for operational inflection points that are not yet reflected in the stock market valuation.
These Corporate Descriptions will be kept current on a quarterly basis.
Further “bookkeeping” improvements
This website will also keep all of us posted, on a weekly basis, which companies are about to report earnings. In conjunction with this weekly update, we will also publish changes in analyst ratings, and a link to the most recent publicly disclosed “data point”, the relevant conference call transcript.
We thank all of you for your past support and are looking forward to sharing with you a great 2022!
UPDATED CORPORATE DESCRIPTIONS – YUM CHINA (YUMC), KURA SUSHI (KRUS), WINGSTOP (WING), SWEETGREEN (SG), FIRST WATCH (FWRG), POTBELLY (PBPB)
UPDATED CORPORATE DESCRIPTIONS – SHORTLY WILL INCLUDE VIRTUALLY EVERY PUBLICLY HELD RESTAURANT COMPANY – to be updated each quarter
The summaries we show, while not complete in detail and involve a number of approximations, provide a good starting point for our own investment banking activities and will hopefully do the same for our readers.