Tag Archives: PLAY

UPDATED CORPORATE DESCRIPTIONS – DAVE & BUSTER’S (PLAY), RAVE RESTAURANT GROUP (RAVE), DARDEN (DRI), CRACKER BARREL (CBRL) – with relevant transcripts

UPDATED CORPORATE DESCRIPTIONS – DAVE & BUSTER’S (PLAY), RAVE RESTAURANT GROUP (RAVE), DARDEN (DRI), CRACKER BARREL (CBRL)

DAVE & BUSTER’S ENTERTAINMENT (DAVE)

https://www.liptonfinancialservices.com/2022/06/dave-busters-entertainment/

RAVE RESTAURANT GROUP (RAVE)

https://www.liptonfinancialservices.com/2022/09/rave-restaurant-group-inc-rave/

DARDEN RESTAURANTS (DRI)

https://www.liptonfinancialservices.com/2022/07/darden-restaurants/

CRACKER BARREL OLD COUNTRY STORE (CBRL)

https://www.liptonfinancialservices.com/2022/06/cracker-barrell-cbrl-write-up/

UPDATED CORPORATE DESCRIPTIONS: JACK IN THE BOX, ROCKY MOUNTAIN CHOCOLATE, FLANIGAN’S, CRACKER BARREL, DAVE & BUSTER’S – the average multiple of ENTERPRISE VALUE to TTM EBITDA is a SHOCKING 6.6X

UPDATED CORPORATE DESCRIPTIONS: JACK IN THE BOX, ROCKY MOUNTAIN CHOCOLATE, FLANIGAN’S, CRACKER BARREL, DAVE & BUSTER’S – the average multiple of Enterprise Value is a SHOCKING  6.6X TTM  EBITDA – check out the numbers (and transcripts) of these, and every publicly held restaurant company as well as four non-restaurant franchisors – click through from  CORPORATE DESCRIPTIONS on our HOME PAGE

JACK IN THE BOX (JACK)

https://www.liptonfinancialservices.com/2022/03/jack-in-the-box-updated-write-up/

FLANIGAN’S (BDL)

https://www.liptonfinancialservices.com/2022/04/flanigans-enterprises-bdl-in-process/

ROCKY MOUNTAIN CHOCOLATE FACTORY (RMCF)

https://www.liptonfinancialservices.com/2022/01/rocky-mountain-chocolate-rmcf-in-process/

CRACKER BARREL (CBRL)

https://www.liptonfinancialservices.com/2022/03/cracker-barrell-cbrl-write-up/

DAVE AND BUSTER’S (PLAY)

https://www.liptonfinancialservices.com/2022/04/dave-busters-entertainment/

 

THE WEEK THAT WAS, ENDING JUNE 10th: RATINGS UPDATES ON (PLAY) AND (CBRL) after EPS REPORTS (transcripts provided), lots of maintenance on others

THE WEEK THAT WAS, ENDING JUNE 10th: RATINGS UPDATES ON (PLAY) AND (CBRL) after EPS REPORTS ( see transcripts), lots of maintenance on others 

FROM PREVIOUS WEEKS’ REPORTS: JOHN IVANKOE catches up by DOWNGRADING DUTCH BROS (BROS). JEFF BERNSTEIN UPDATES ratings: LIKES DOMINO’S, BRINKER, WINGSTOP, WENDY’S, RESTAURANT BRANDS, McDONALD’S, FIRST WATCH, DINE BRANDS, DARDEN and BLOOMIN’ BRANDS. he is  NEUTRAL on YUM BRANDS, TX ROADHOUSE, SHAKE SHACK, JACK IN THE BOX, DUTCH BROS, CHIPOTLE, would UNDERWEIGHT CHEESECAKE FACTORY AND BLOOMIN’ BRANDS.

AFTER EPS JUST REPORTED:

DAVE & BUSTER’S still rated BUY by JACK BARTLETT, NEUTRAL BY NICOLE REGAN, and OUTPERFORM BY ANDREW STRELZIK.

https://seekingalpha.com/article/4516943-dave-and-busters-entertainment-inc-play-ceo-kevin-sheehan-on-q1-2022-results-earnings-call

CRACKER BARREL still rated: BUY by BRIAN MULLEN, NEUTRAL by BRETT LEVY and JOHN BARTLETT, a SELL by JON TOWER.

https://seekingalpha.com/article/4516946-cracker-barrel-old-country-store-inc-cbrl-ceo-sandy-cochran-on-q3-2022-results-earnings-call

THE WEEK TO COME:

WHILE OUR STOCKS MIGHT BE GOING CRAZY, WITH THE MARKET, THERE ARE NO SCHEDULED QUARTERLY REPORTS THE REST OF JUNE. RATINGS WILL NO DOUBT BE ADJUSTED, HOWEVER.

UPDATED CORPORATE DESCRIPTIONS: BBQ HOLDINGS, THE ONE GROUP HOSPITALITY, BLACK RIFLE COFFEE, DAVE & BUSTER’S, KURA SUSHI

UPDATED CORPORATE DESCRIPTIONS: BBQ HOLDINGS, THE ONE GROUP HOSPITALITY, BLACK RIFLE COFFEE, DAVE & BUSTER’S, KURA SUSHI

BBQ HOLDINGS (BBQ)

https://www.liptonfinancialservices.com/2021/11/bbq-holdings-bbq-in-process/

THE ONE GROUP HOSPITALITY (STKS)

https://www.liptonfinancialservices.com/2022/01/the-one-group-hospitality-stks-in-process/

BLACK RIFLE COFFEE COMPANY (BRCC)

https://www.liptonfinancialservices.com/2022/02/black-rifle-coffee-company-brcc/

DAVE & BUSTER’S (PLAY)

https://www.liptonfinancialservices.com/2022/01/dave-busters-entertainment/

KURA SUSHI (KRUS)

https://www.liptonfinancialservices.com/2022/01/kura-sushi-krus-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

 

 

DAVE & BUSTER’S (PLAY) – ACTIVISTS PLAY WITH (PLAY) – NEW WRITEUP

 

THE COMPANY

We have written quite a bit about PLAY over the last several years and we encourage interested readers to use the SEARCH function on our Home Page. For the record, we are neither long nor short PLAY stock.

Dave & Buster’s is familiar to most of our readers. In summary, the Company was founded in 1982 in Dallas, TX. There are now 139 locations in 40 states. As of the end of calendar 2020, the average size was 41,000 sq.ft., smaller than in years past because some smaller sized (20k-30k sq.ft.) locations have been opened. The average sales volume in the FY ending 1/31/20 was $10.5M, with 58% of revenues coming from Amusements and 42% from Food & Beverage. The store level EBITDA margin was an impressive 27.2% and the corporate EBITDA margin was also admirable at 20.7%. These above average EBITDA results are a result of the fact that the Amusement component is so high, having grown from 44% to 58% between 2006 and 2019. It is fair to say, therefore, that the Dave & Buster’s facility is more of an indoor kids’ amusement park than a restaurant. A big operating advantage is that the Cost of Goods is only 18%, rather than the more typical 30% (give or take) for most restaurant chains.

SOME FUNDAMENTAL LONG TERM QUESTIONS

The company emphasizes in their presentations the high ROI and “free” cash flow, especially for new units, but it also a fact that initial volumes are not sustained. It is worth noting that depreciation (of games, in particular) is a lot higher for PLAY at over 9% of sales than for restaurant chains that typically run 4-5%, and the Amusement facilities at PLAY are guaranteed to need that depreciation re-invested in the near term. Most restaurants, on the other hand can often defer that process in the short term and “classic” décor and good original kitchen equipment may not have to be replaced, even longer term, to the extent that the depreciation expense implies. The result is that EBITDA for PLAY is not nearly as indicative of free cash flow generation as it might be for restaurant chains.

Dave & Buster’s came public for a second time, in 2014, after spending several hundred million dollars to refresh, perhaps even “reinvent” the system, and produced impressive same store sales, profits and cash flow for a number of years. By 2018, however, for a combination of reasons, the same store sales after stagnating, turned down. Operating income flattened from calendar 2016 through 2019 though the system grew by over 50%, from 81 locations at 1/31/16 to 139 units at 1/31/20. In addition to opening 58 stores, at a cost approximately almost $300M, hundreds of millions of dollars were borrowed to buy back stock. With the shrunken share base EPS did better than operating income, but flattened and finally turned down slightly in the year ending 1/31/20.

We have discussed at length in the past the question as to whether the depreciation charge at over 9% is adequate to refresh the 58% of revenues that is generated from Amusements. It seems at least possible that this issue has been an important factor within the demonstrated performance cycle over the years. The Company originally came public in 1995, went private after “stagnation” in 2005, then spent ten years in private equity hands during which hundreds of millions were spent on capital improvements. PLAY came public again in 2014, performed well for several years and the question today is to what extent the operating history from 2016 through 2019 is a prelude to greater problems. The activists that have recently taken positions are doing their best, we are sure, to address this issue.

RECENT DEVELOPMENTS, AS DESCRIBED AT ICR CONFERENCE

Dave & Buster’s management gave a one hour video presentation, accessible on their website. There was little new incremental information and a lot of discussion about the economics of their stores and the changes that the company made to operations and food and beverage offerings as a result of Covid 19.  The presentation does a good job of explaining the bull case on the company. The two most important takeaways from the presentation can be seen in the following two tables. The main points are as follows:

  • Q4 revenue, about to end is projected to be around $100M, in line with Wall Street analyst projections. Last year sales were $347M. The lack of group events significantly impacted results.
  • Only 60-70% of the stores that are open today are EBITDA positive.
  • Q4 to date revenue is down -75% !
  • Management projects enterprise EBITDA positive at 50-55% of last year’s sales. Note this is EBITDA positive and the company still has $10M in quarterly interest and any cap ex to cover.
  • 61 of the 76 (80%) of comp stores that were open in October were EBITDA positive

LIQUIDITY AND CAPITAL ALLOCATION

Liquidity is adequate, but at a substantial cost and the cash burn continues. The number of stores that are open continues to fluctuate. In October, PLAY had 104 out of 139 stores open, but that dropped to 89 stores in December. The number of stores that are open now is around 100. With 27 high volume stores currently closed located in CA and NY, we do not expect the total number of store openings to improve for another month or two. Getting the stores in CA and NY open would help the company’s liquidity situation. Since Q1’21 (April ’20), Cash from Operations has declined from a positive $17M to a negative $32M at the end of Q3 (Oct.’20). This compares to a positive $217M through Q3 last year. The company has a $44M income tax receivable and should get $11M of that over the next few quarters. Due to store closures since the end of Q3, the cash burn rate has increased from $2.4M/wk to $3.4M, or $13M per month. While this is a considerable improvement from the initial $6.4M/wk PLAY was burning at the start of the pandemic, the company is still far from cash flow breakeven.

The company has been able to maintain liquidity, but at a very high cost to shareholders. There is currently $12M in cash on the balance sheet. This compares to Q1 cash of $156M, Q2 cash of $224M and Q3 cash of $8M. There is $277M available on the revolver vs. $314M end of Q3. PLAY therefore has almost two years worth of liquidity. However, the cost of that liquidity to shareholders has been substantial. In addition to the 17M shares the company issued earlier this year at around $10.70 per share, in October the company issued $550M worth of five year senior secured bonds with a coupon of 7.625%, upsized from $500M . The annual interest cost of $41M effectively doubles the $20M in interest expense the company incurred in 2019. While the company emphasizes the two year extension and modified debt covenants through 2022 on the maturity of its credit facility, the interest rate doubled from 2% to 4%. The company also has $17M in deferred vendor payments and $48M in deferred rent it will eventually have to pay.

In past reports we have discussed the relatively poor capital allocation of over $1B in capital expenditures since 2015. The timing of the company’s share repurchases have also turned out poorly. Prior to 2020, PLAY purchased approximately 13M shares for $598M or an average cost of around $46-$47 per share. Earlier this year the company was forced to issue 17M shares for $182M or an average of around $10.70 per share. The share buyback program has therefore destroyed over $400M of value for shareholders.

Putting it another way: There are 56% more shares outstanding due to the two secondary offerings. Compared to a year ago, the stock price is 25% lower ($33 vs. $44)  but the Enterprise Value ($3.5B vs. 3.2B, with the extra shares and debt) is 10% higher. The real world value of this company with 56% more shares outstanding and more debt is obviously not worth 10% more today than it was a year ago. With activists involved, as discussed below, and the stock seemingly fully priced at $33, it will take a very substantial “reach” to get shareholder back to the $44  of a year ago.

We can’t help but reflect upon the $70/share  high in 2017 before those hundreds of millions of dollars, largely financed with debt, were spent to buy back stock. It turns out that “returning cash to shareholders”, as most companies  like to describe it, by way of stock buybacks is not necessarily so well stated.

ACTIVISTS ARE INVOLVED

The current valuation is about twice the historical range, relative to earnings and cash flow and we have to believe that this is due to the presence of several well-known activists. When there are hundreds of billions, at least, that are searching for a yield, there are bound to be a couple of buyers that will bet on quick normalization of consumer activities after the pandemic. Over 35% of the shares outstanding are held by just four investment firms, two of them noteworthy activists. Since PLAY was taken private once before and the company might be able to generate cash flow of over $150M if same store sales can recover, the marketplace is apparently hoping for a transaction sometime soon. Perhaps the activists will be able to persuade management to slow growth until the base business improves, utilize the free cash flow to reduce the high coupon debt the company recently issued, at some point refinancing the debt at a lower rate.

Activist investors have bought over 5.4M shares in the last few months, in some cases lowering their $40+ per share initial cost basis with large purchases in the $16-18 per share range. KKR just reported that it has increased ownership to 10.7%, up from only 2.65% early in September. KKR had a member of their firm added to the Board of Directors last year and just recently, a representative of Hill Path (with 9.3%) joined the Board.  Both firms have described their intentions as “cooperative agreements”.

CONCLUSION

Management has done what was necessary to maintain liquidity, but the cost has been very dilutive to shareholders. As we pointed out earlier, comps had been negative for three years before Covid. In our view, the two new Board members representing KKR and Hill Path is a positive, but they are not magicians. It is possible that the post pandemic operating results, namely the AUVs, the store level and corporate operating margins will fall short of investor expectations. The pre-Covid issues of competitive intrusion and the need for Amusement as well as F&B innovation continue to be in place. The possibility exists, that both Amusements and F&B need to be, in essence, re-invented. In addition customers that have increased their at home gaming activity may not feel the need to visit D&B as often. Higher capex spending by PLAY on video game equipment is already a factor (up 17% YTD) and there could be a slow recovery in corporate events that have generated about 10% of revenues. While 27 high volume locations in CA and NY are still closed, the opening schedule and ongoing restrictions are still an uncertainty.  Lastly, while full service restaurant chains SSS weakened by 5-10 points in Q4 (QSR hardly at all) as in store dining was shuttered again around the country, PLAY’s “temporary” Q4 setback saw SSS in the open units fall twenty five points, from -34% to -59% from September to December. The PLAY system is therefore extremely sensitive to Covid related concerns so the timing and extent of a recovery becomes that much more questionable.

Overall, there seem to be many more questions than answers. In spite of the above described uncertainty, the stock marketplace, with PLAY acting well, is likely assuming a transaction at a premium to the current price. Almost anything is possible in this low interest rate environment and there is a fortune of capital looking for a home but, with the valuation band more than adequately stretched, we wouldn’t count on much of a premium. Private equity investors have a great deal more patience than public shareholders, and, if they take on this situation, we suggest they will need it.

Roger Lipton

DAVE & BUSTER’S (PLAY) – UPDATED WRITEUP – DOWN 75% FROM HIGH – A BUYING OPPORTUNITY?

DAVE & BUSTER’S (PLAY) – UPDATED WRITEUP – DOWN 75% FROM HIGH – A BUYING OPPORTUNITY?

We have written about Dave & Buster’s many times over the last few years, mostly concerned about the lack of productivity  of the hundreds of millions of capex dollars that were spent with minimal “marginal return on investment”. Readers can access those discussions by way of the SEARCH function on our HOME page. (plug in “PLAY”).  We believe this sort of analysis applies  to many restaurant and retail companies, that (before we ever heard of Covid-19) leveraged their balance sheet (with low interest rates) to buy back stock, while pretax operating earnings and/or EBITDA were not making much progress. PLAY,  by nature of the fashion driven nature of their Amusement  segment, as well as the declining portion of normally more stable food sales, just happens to be a good object lesson.

The table below summarizes the last six years since PLAY came public (again) in 2014.

Several financial trends are apparent. The first two years after coming public were very productive, as EBITDA grew from $165M to $262M.  Subsequent to that, however,  though hundreds of millions of dollars were spent on capex between 2015 and 2020, EBITDA, EBITDA grew only from $262M in the Y/E 1/17 to what was estimated (before the pandemic) to be about $335M in the current year.  Notice also that the shares outstanding were reduced from buybacks  from 42.2M at 1/17 to 30.6M at 1/20 while net debt went from $264M to $608M.

We compared each year end Enterprise Value with the Adjusted EBITDA in the following year and found that the multiplier was consistently in the 7-8x Expected EBITDA range, as shown in the far right hand column. That multiplier contracted most recently, at 1/20 to 5.8x, when the flat results in recent years discouraged investors from valuing PLAY quite so highly. So, in the “best of times”, PLAY was valued at 7-8x expected EBITDA. Followers of PLAY know well that overall comps flattened and finally turned down in the last year or so, as Amusement revenues stagnated and Food & Beverage never got traction.

Which brings us to the current broad based economic disaster. As almost all chains have done, PLAY has drawn down their lines of credit, cut back overhead, temporarily closed down the entire system.  Per last week’s conference call, they were burning $6.5M operationally plus $750k of debt interest per week through the complete closure.  They indicated that the 26 stores that had been opened for four weeks as of 5/26/20  contributed about $1.3M of cash to reduce that burn rate. The most recently opened stores are gaining volume more quickly than the first, which makes sense in that the public is presumably becoming more relaxed about the situation.  Overall, management seemed to state that stores should be breaking even, in terms of EBITDA, at about 50% of old volumes, the corporation at 60%, but it would be higher in the current ramp up year. Reference was made to “rent deferrals and abatements on 80% of the stores, payments to begin in Jan’21” but it is unclear what manner of adjustment is typical, and how that is built into the break even points referenced above.

Interested readers should access the full call and monitor the anticipated reopening program. Suffice to say, however, that it is a long way back and “re-invention” applies to all aspects of the operations. Openings are being put on hold, food offerings are being revamped, Amusements are being re-evaluated in view of new cleanliness and social distancing requirements. You don’t need us to tell you that the Dave & Buster’s concept is more challenged than most to cope with all the new operating requirements.

Which brings us to the current Enterprise Value. After the recent equity offerings and increase of debt, as the table above shows: the current Enterprise Value is north of $1.2B. The EV/EBITDA multiple in the best of times was 7-8x. We can only wonder how long it will be until PLAY generates an EBITDA north  of $150-200M to justify the current situation, let alone a higher valuation.

Roger Lipton

 

RESTAURANT INDUSTRY TURMOIL – NEW SKILLS REQUIRED, STARTING WITH BOARD

RESTAURANT INDUSTRY TURMOIL – NEW SKILLS ARE NECESSARY, STARTING WITH THE BOARD OF DIRECTORS, AND I’M AVAILABLE !!

The questions are numerous. The problems are obvious. The solutions are not so easily manufactured. We don’t know what sales will be, what labor will be required to service customers that have new requirements. Cost of goods is not the biggest problem, but distortions in the supply chain could create price volatility as well as product shortages. We will have lots of new “other” expenses, necessary to deal with health concerns of employees and customers. There has to be negotiation with landlords, convincing them that you are here to stay, but need their help. You must economize at the executive level, but the needs are broader and deeper than ever before. You have to maintain a strong balance sheet somehow, but financing is more difficult, and more expensive than ever with the fundamental uncertainty. With all of this, management is working for reduced pay and Board compensation has been reduced or eliminated.

It’s no wonder, then, that something like a dozen publicly held companies, have had changes at the Board level, sometimes suggested (or imposed) by activist investor groups. Roark has invested $200M in Cheesecake Factory (CAKE) and KKR now owns over 8% of  Dave & Buster’s (PLAY). Vintage Capital owns over 10% of Red Robin (RRGB) and is represented on the Board. Among smaller companies, Kanen Capital Management has taken major positions and is represented on the Boards of both BBQ Holdings (BBQ) and The One Group Hospitality (STKS). Shake Shack (SHAK), Bloomin’ Brands (BLMN), Cheesecake Factory, Dave & Buster’s and others have raised money publicly at what most would consider to be distress prices.  It’s clear, therefore, that management and the Board must be capable of evaluating strategic financial alternatives. We wonder, for example, how and why Bloomin’ Brands was able to raise capital at much better terms than Cheesecake  Factory.

Investment bankers are beating the bushes to “write tickets”, but their possibilities must be evaluated from a realistic standpoint. We heard of a highly regarded investment banking firm suggesting (this past weekend) to a privately held chain that they could still get a multiple of historical EBITDA close to what was considered reasonable before the pandemic. This chain, by the way, is a big box casual dining company. Their sales are currently down 50% YTY, and the chain is, predictably, cash flow negative. That particular Board won’t likely go down that fruitless road, because they have at least one  very smart Board member (my friend), but other companies might not know better and could be forced to do a very unattractive deal at the last minute with a gun at their head.

Now comes the commercial: I’M AVAILABLE ! Two of my most recent Board involvements have ended recently, one of them very successfully, the other a privately held company that required refinancing and the new lender didn’t know that he needed me:)

I was on the Board until just recently of publicly held Diversified Restaurant Holdings (SAUC), which we took private on 2/25/20 (how’s that for timing?) at a price over 100% higher than the stock had been trading. SAUC was operating 65 franchised Buffalo Wild Wings locations, clearly a troubled restaurant system even before the pandemic. They had about $100M of debt, which they were servicing as required, but the net cash flow after debt service was non-existent. I was on the Special Committee and, with the great help of Darren Gange of Duff & Phelps, we found the “needle in a haystack” private equity buyer.  Parenthetically, while we were negotiating with the ultimate buyer on virtually a daily basis, an activist investor (and shareholder) was screaming his desire to “help us out”, at what turned out to be about half the price we sold for. It was tedious but we closed the deal for an Enterprise Value of about 7.5x the “run rate” of Adjusted Cash Flow. Intense and lengthy as the negotiations were, it was stimulating and satisfying, especially since it was very successful.

The other recent Board position was a 17 unit big box privately held casual dining company that required new financing.  The chain was, and is, very successful in their home state, but geographically remote locations, opened before my arrival, proved to be their undoing. I’ve always been predisposed to keep operations  “close to home”, suggesting expansion outward from the base so there is always brand awareness and maximum ability to adjust when necessary. I learned from Norman Brinker forty years ago that “running a restaurant chain is like managing a military campaign”. You want your troops “massed”, for strength and speed and flexibility.  It was the old formula that Shoney’s used so successfully decades ago, finally running out of steam when the third or fourth generation of managers that followed founder Ray Danner allowed the operating standards to slip too far.

I’m well aware that compensation for Board members has been suspended in many cases, reduced at the least. I can, fortunately, afford to work for the “going rate” along with other Board members. My major requirement is that the chain has the corporate culture that provides the foundation for long term success. I would naturally like to work with colleagues that enjoy the hospitality industry as much as I and are committed to the task at hand.

Other than reminding all of you that I have a good education,  operated my own chain of fast casual restaurants  many years ago, and have had four decades of  investment banking experience relating to the restaurant/retail industry, more details are provided at the “About Roger” section of this website (from the Home Page)..

So much for the pitch. Publicly held or “Up & Coming” privately held companies can respond, and we’ll talk.  I can be reached at lfsi@aol.com or call 646  270 3127. Please leave a message if I don’t pick up, there is so much spam these days.

Along with you, I will be closely watching developments within the restaurant/retail industries over the critical coming months. There will be lots of closings, but some operators  will emerge stronger than ever. We will remain in touch with all of you, doing our best to contribute to your thought process.

Roger Lipton

 

 

 

 

 

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

A lifetime ago, on April 3rd, we wrote an article “MICRO meets MACRO”. Among other things we talked about the new “going concern” language in Dave & Buster’s (PLAY) most recent filing. It wasn’t a particular knock on PLAY, more a commentary that the whole world has taken on going concern considerations. Since then, on April 14th, PLAY raised $75M of equity and amended their bank covenants.  In the case of PLAY, with the current valuation, that amounted to about 20% equity dilution.

Shake Shack (SHAK) today announced a $75M equity offering. The good news is that this only amounts to about 6% equity dilution, since SHAK still has a valuation above $1.5 billion. This additional equity provides SHAK with total liquidity approaching $200M, which should tide them over for a while, considering that the weekly burn rate, as they described it this morning, is $1.3-$1.5M per week.  There is more to the release, which you can read elsewhere, describing the current situation relative to store closures and the decline in sales as the pandemic rolled through their system.

For our purposes this morning, we thought readers would find interesting the following language from their 8-K filing. We present this information not as a particular negative for SHAK, since this kind of filing is likely to become the norm rather than the exception. We want our readers to know what to expect as more companies come public with adjustments to their business plan.

Quoting this morning’s 8-K filing: (Bold Italics are ours.)

“As previously disclosed, on August 2, 2019, we entered into a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), providing for a $50.0 million senior secured revolving credit facility with the ability to increase available borrowings under the credit facility by up to an additional $100.0 million through incremental term and/or revolving credit commitments, subject to the satisfaction of certain conditions set forth in the facility. In March 2020, we drew down the full $50.0 million available to us under the credit facility…. as a result of the COVID-19 outbreak. We are required to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, in addition to other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of December 25, 2019, we were in compliance with all covenants. However, as a result of the COVID-19 outbreak, our total revenues have decreased significantly and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our domestic and licensed operations. While we expect to be in compliance with the financial covenants for the first quarter, due to the impacts of COVID-19, our financial performance in the first quarter was, and in future fiscal quarters will be, negatively impacted. As a result, it is likely that we will be unable to continue to comply with certain covenants contained in the credit facility, potentially as early as the second quarter compliance date. We are in discussions with Wells Fargo regarding potential modifications to our covenants, and/or temporary waivers, but there is no guarantee that we will be able to reach any such agreement. A failure to comply with the financial covenants under our credit facility would give rise to an event of default under the term of the credit facility, allowing the lenders to refuse to lend additional available amounts to us and giving them the right to terminate the facility and accelerate repayment of any outstanding debt under the credit facility. As a result, we may need to access other capital to address our liquidity needs rather than relying on our credit facility. As of April 16, 2020, we had approximately $112.0 million in cash and marketable securities on hand, excluding foreign currency and certain reconciling items such as deposits in transit. Our cash resources and liquidity would be substantially impaired by an acceleration of the debt under our credit facility.”

We expect that the banks will have been made comfortable by the $75M of new stock sold by SHAK, and, just as with Dave & Buster’s, covenants will be waived and adjusted. The commercial banks don’t want to run the stores. The good news for SHAK is that much less equity dilution is involved than was the case at PLAY. However, it’s a new world. All of this is becoming commonplace. Almost everyone, in and out of the restaurant industry, will be spending a great deal more time negotiating with bankers.

Roger Lipton