Tag Archives: Inc.


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.

BBQ HOLDINGS(BBQ)-9/26/22-bought by MYTFF

BBQ HOLDINGS (BBQ) – purchased by MYTFF on 9/26/22, for $17.25 cash, by MTY Food Group, Inc. (MYTFF)














Leo Holdings, Inc. (LHC), soon to be CEC (or something similar), may well represent an attractive opportunity, but we can’t tell (yet). At 7.5x calendar ’19 EBITDA, with net long term debt at about 3x ’19 EBITDA, the valuation is not expensive. It is in what we term the middle ground for situations that are promising, but have material question marks. We realize that when more of the questions are answered, if in the affirmative, the valuation will be materially higher. However, this has not been a publicly held company for five years, and financials before 2018 have not been provided (to us at least), so we do not currently have a strong opinion. As we learn more about the last five years, and evaluate the current initiatives, we will keep readers posted.


What goes around comes around. CEC Entertainment, operator and franchisor of Chucky Cheese, is coming public again five years after Apollo Capital took it private, augmented by the acquisition of Peter Piper Pizza shortly after going private. CEC is being plugged into a Special Purpose Acquisition Corp (SPAC) called Leo Holdings Corp. (LHC), trading at just over the $10 IPO price, which raised $200M on 2/13/18. LHC has moved to $10.34 today from about $9.70 last month, as negotiations were finalized. . An important element of this equation is the highly qualified management team, led since 2014 by CEO, Tom Leverton, previously CEO at TopGolf.

We have listened to the recent conference call in which the deal was described and we urge interested readers to do the same, from the Investor Relations portion of CEC Entertainment’s website. We will summarize here the current state of the Company, as described in the press releases and conference call, then provide what we perceive as the pros and cons of the situation.

Chucky Cheese – As of 12/31/18 there were 515 company operated, 26 domestically and 65 internationally franchised. The locations average 12,700 sq.ft., do about $1.6M in annual sales, of which 43% is food and beverage, the balance entertainment related. Customers visit three times/year.

Peter Piper Pizza had 39 company operated, 61 domestically and 44 internationally franchised. The locations average 10,100 sq.ft, do about $1.8M annually, 73% is food and beverage, 20% is  takeout. Customers visit two times/month. There are about 82 international franchised stores signed for future openings.

It was disclosed that remodels have been increasingly successful. At Chucky, $550k spent in 2017 generated an incremental 12 points of improvements over a control group, and 2018 did even better with 17 points of incremental improvement. This increment in sales is generating over a 40% return on investment, and will be rolled out aggressively going forward. It was mentioned that buildout costs for new locations  have been lowered by 14% since 2014, but the base was not provided.

In the twelve months ending 12/31/18, company operated locations generated $896M of revenues, up from $887M. Royalty revenue were $20.7M vs. $17.9M, which may include some company stores that were franchised as well as openings. Without going line by line, store level EBITDA at company stores was an impressive 27.6% of sales, down a touch from 28.5%, but that was before 5.4% advertising expense. It is noteworthy that depreciation was 11.2% in ’18 (down from 12.4% in ’17), much higher than normal restaurant companies. Pretax Operating Income in ’18 was $50.8M after $6.9M of asset impairment. Adding back $101M of Depreciation (11.2% of Revenues), $6.9M of Asset Impairment, and other Adjustments, Adjusted EBITDA was $175M.

There are lots of operating initiatives, but the most dramatic change in trend came subsequent to July when Chucky Cheese introduced an “All you can Play” strategy. Comps went from 1.1% in Q2,  to 2.2% in Q3, to 3.3% in Q4 and 7.7% in Q1’19. I don’t know whether these quoted comps applied just to Chucky or to both concepts combined. In any event, the progress has been relatively dramatic.

Looking forward, the Company expects to generate a 4% comp in 2019 and 2020, included an unspecified price rise taken late in ’18. Corporate EBITDA is estimated at $187M, with $152M of discretionary cash flow in 2019, $172M in 2020. Total net long term debt, post merger, will be about $588M, or 3x ’19 EBITDA. The total current Enterprise Value of about $1.4M is about 7.5x ’19 EBITDA.

Summary of Positive Investment Features of LHC (Leo Holdings, Inc.) – CEC Entertainment

  • (1) The Chucky venue is uniquely appealing to families. (2) The price value relationship is attractive, recession resistant  important in a slowing economy. (3) There are lots of opportunities to further monetize the brands (4) There is a long runway for growth, domestically and abroad, especially if recent sales gains can be maintained (5) Remodeling results are encouraging, providing a lever for higher sales and better ROI. (6) The sales improvement, if sustained, can be broadly transformative (7) The international franchised deals will add to royalties (8) With only 3 family visits per year, opportunity exists to build frequency (9) Substantial discretionary cash flow provides opportunity for debt reduction, stock buybacks, dividends, or acquisition.

Summary of Question Marks

  • Though store level EBITDA margins, as a percent of sales, are impressive, very few new stores are being built, indicating that the ROI on 10-12k square foot new facilities is less than compelling. Therefore new locations, at least domestically, will not be a large part of this equation, though higher sales would be magical (2) While same store sales progress the last several quarters are impressive, it remains to be seen whether this is a base that can be built upon (3) There are lots of pertinent unknowns. What has been the history from 2015 until early 2018? (3) Depreciation is unusually high, at 11-12% of sales. What has been capitalized, rather than expensed, and why? (4) Why has Apollo Capital chosen this (less than commonplace) IPO approach. What has precluded the sale to other private equity firms, or discouraged a qualified underwriter. What portion of the history, or the opportunity, have they seen that we haven’t?

Conclusion: Provided at the beginning of this article

The following additional information was posted twenty four hours after the above article.


We appreciate that CEC Entertainment’s investor relations firm, ICR,  brought to our attention the fact that historical performance is publicly available from 2015 through 2018, when CEC was owned by Apollo Global Mgt. (We previously called it “Apollo Capital”). We made reference in our initial summary report that there were many unknowns in terms of the operating history from 2014 until 2017, and said we would comment further when more facts are known and as the situation develops from here.

With further operating facts available, our conclusion remains the same, but we understand more completely why CEC chose to go public in this manner.

Elaborating on our previously stated question as to why other private equity firms or an established underwriter has not stepped up, so that CEC chose to use a SPAC to become publicly held. The answer is: (1) Same store sales have been flat from 2014 through 2018 (including the pickup in late 2018) (2) Corporate Adjusted EBITDA has been flat at $170-175M annually (3) Adjusted Corporate EBITDA margin has gone down steadily from 23.9% in calendar 2015 to 19.5% in calendar 2018 (4) The number of company operated stores has been “flat” over the five years (5) The franchised units has been up from 172 to 196 over the four years, we suspect most of it international, since that is promising at the moment. It’s easier to understand now why potential financial sponsors of this situation, looking at five years of flat to down results, would hesitate to make a big bet based on six months of improving same store sales.

We were wrong in our suspicion that a number of company stores had been refranchised in 2018, accounting for the 16% growth in franchise fees and royalties. That was primarily the result in a change in accounting treatment, new revenue recognition  treatment shat included $3.5M of advertising contribution from franchisees in 2018, which apparently included a YTY  increase, resulting in the increase from $4.152M to $4.815M.

Our summary report emphasized the introduction of the All You Can Play approach, in July 2018, at Chucky, since the improvement of same store sales started at that point. In fairness,  we encourage readers to read the company’s full annual 10k report which details many other marketing and operating initiatives which management no doubt has high hopes will contribute to ongoing sales progress.

A couple of other material issues are described in the ’18K:

(1) Capex has been, and will be, substantial. using up most of the “free cash flow” from operations. There are three classifications: Growth capital spend (includes the Pay Pass initiative, remodels, expansions, major attraction and new venue development, relocations, franchise acquisitions; Maintenance Capital Spend (game enhancement, general venue capital expansion, corporate expenditures: It Capital spend. Growth capital spend has been $55M, 51M and 31M from calendar 2016 through calendar 2018.  Maintenance capital spend has been 34M, 36M and 45M from ’16 through ’18. IT capital spend has been $10M, 7M, and 4M from’16 to ’18. The totals were $99M in calendar 16,  $94M in’17, $80M in ’18, Estimated capital expenditures will total $95-105M in ’19, a new high. This high level of capex explains why depreciation is so high, at 11-12% of sales. CEC is basically reinvesting their depreciation in capex, which over the long term is the correct strategy. This situation demonstrates why we have said many times that depreciation is not “free cash flow”, and EBITDA as a measure of operating performance doesn’t tell the full story.

(2)  There was a class action lawsuit instituted subsequent to the going private transaction in 2014, against Goldman Sachs and CEC, criticizing the treatment of the public shareholders. This lawsuit was dismissed in the fall of ’18, but the plaintiffs have indicated they plan to appeal. We can’t argue the facts of this case, and it’s been dismissed, but the outcome of ongoing litigation can never be assured.

We will continue to provide relevant material analysis is we learn more. Again, neither ourselves or our affiliates are long or short this situation, though that can always change. We have no reason to be negative, just realistic and as accurate as possible. We try to provide summary information here, as a timely service to our readers.




Roger Lipton.




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”.

Yearly Report

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.