Tag Archives: RRGB




The following are transcripts from the conference calls following release of earnings:


















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









The long term investment appeal of well established franchising companies is accepted by the investment community. Most of the prominent franchisors’ equities sell at price to trailing twelve month EBITDA multiples in the mid to high teens (Denny’s (DENN), Dine Brands (DIN), Dunkin’ Brands (DNKN), Pollo Loco (LOCO), McDonald’s (MCD), Restaurant Brands (QSR), Wendy’s (WEN), even higher in a couple of instances Domino’s (DPZ), Shake Shack (SHAK), Wingstop (WING), lower in a number of “challenged” situations like Jack in the Box (JACK), Red Robin (RRGB), Brinker (EAT), Fiesta Rest. (FRGI).

The attraction of asset light franchisors revolves around the presumably free cash flow for franchisors, a steady stream of royalty income unburdened by capital expenditures to build stores. The operating leverage is at the store level.  Franchisees are responsible for building the stores, then controlling food costs, labor, rent and all the other operating line items. Franchisors receive the royalty stream and have the obligation of supporting the system with brand development, site selection advice, marketing support, and operating supervision. These supporting functions, it should be noted, are optional to a degree, and we have written extensively about system support sometimes being short changed by corporate priorities such as major stock buybacks.


We acknowledge that in every franchise system there will be some operators less satisfied than others. In the same way, customer reviews on Yelp or Facebook are more frequently written by critics. Bad news is more noteworthy and more customers are inclined to criticize than applaud, so we have to listen to the complaints but dig further for the reality. With that in mind, we hear the following from franchisees of various restaurant systems:

“I’ve been in this business for thirty years, and I’ve never seen it this bad. Everyone is making money but me; the landlords, the franchisor, the banks. My margins have been killed, and I’m up against my lending convenants”.

“All the franchisors want to do is build sales to build their royalties. The dollar deals are trading people down. My franchisor doesn’t care about my margins. I can’t maintain my margins, especially with the increasing cost of labor, let alone build it”.

“The franchisor is putting pressure on me to sell, even though I’ve always been considered a good operator, with high performance scores. I’m up to date on my development agreement, but they want somebody else to take me out, and the new buyer will agree to what I consider to be a ridiculously aggressive development contract”.

“The franchisor has replaced experienced long term field support with lower priced (and inexperienced) younger people. They’re cutting corporate overhead, but these kids, who never ran a store, are telling me to how to control costs.””

“I’m doing my best with the development objectives, but it is almost impossible to build stores with today’s economics. Rents are too high, labor costs are killing me, and I can’t raise prices in this promotional environment”.

“As if things aren’t tough enough, I’m being nickeled and dimed with demand for higher advertising contributions and fees on services (including software) that I thought would be provided”.

The valuations provided to the publicly held companies do not reflect the situation as described by the admittedly anonymous franchisees. The commentators quoted above don’t want to aggravate their franchisor, and we don’t want to be unfair or misleading to particular companies by relying on just a few conversations, though they do support one another. For the most part, franchisees are strongly discouraged from talking to the press or investment community. The companies will say that “competitive” issues require some secrecy, but there are few secrets in this industry.

The optimistic view, as represented by the valuations in the marketplace, is that the comments above are not typical or representative of the health of the subject franchise systems. Allow me to provide a short story which leads to a suggestion.


Twenty six years ago, in 1992, IHOP had just come public. I was a sell side analyst, thought the numbers were interesting and the stock was reasonably priced. The company, led by the now deceased CEO Kim Herzer, invited me to attend their franchisee convention, which I did. I obviously had the opportunity to interface with many franchisees and it was clear that, while all was not perfect, the franchisor was providing a great deal of support that was embraced by an enthusiastic franchise community. IHOP stock tripled over several years for me and my clients who owned millions of shares. I attended several more of their annual conventions and maintain some of those relationships to this day. Obviously, the conviction I gained from their open attitude was critical to the success of the investment. I should add, that many of those buyers in 1992 owned the stock for many years, not living and dying on quarterly reports.


As you are no doubt by now anticipating, my suggestion to publicly held franchising companies: open up your franchisee conventions to the investment community. The companies may quickly respond that lenders are already invited to franchise conventions, but franchisees are unlikely to express their system oriented concerns when they are making a pitch to a potential lender. Companies may also respond that their lawyers think it would be a bad idea, not consistent with full disclosure and analysts would be getting “inside information”. Let’s not allow the lawyers to provide “cover”. A good lawyer will provide a solution to the problem, not just provide the pitfalls. Analysts attending a franchise convention are not being told what sales or profits are going to be. Attending a franchise convention is  a “channel check”, no more than talking to a supplier or customer of a manufacturing company, which any decent analyst will do.

The anecdotal critical comments, as described above, have likely been heard by others, but may be atypical of most restaurant franchising companies. There are no secrets in this business. One of the investment appeals of this industry is its transparency. Notable news is going to leak out anyway. The objective of any publicly held company is to build stock ownership by well informed investors. Investment analysts pride themselves on their ability to “build a mosaic”, enhance the information provided in quarterly reports, SEC filings, and conference calls, with “channel checks”. What channel check would be more pertinent than meeting the franchisees of a company that is dependent on franchisee success? Putting it another way, and taking the highest valuation relative to EBITDA as an example: Wingstop (WING) is a company I have the highest regard for. However, you could call it irresponsible to pay almost fifty times trailing EBITDA for Wingstop stock (and I haven’t) if I couldn’t talk to franchisees of my own choosing?

There’s no particular need to invite this writer if I’m not considered influential enough. I have not spoken to these analysts on this subject, but qualified industry followers such as David Palmer, Nicole Reagan, Matt DiFrisco, David Tarantino, Jeff Bernstein, Andy Barish, Bob Derrington, Mark Kalinowski, Michal Halen, Gary Occhiogrosso, Howard Penney, Jonathan Maze, Nicholas Upton, John Hamburger and John Gordon provide the beginning of an invitation list.  I rest my case.

Roger Lipton




The stock has reacted so violently not so much because the results were disappointing but because management couldn’t provide comforting guidance going forward. Management refrained from describing the sequential progress (or lack thereof) in the year to date. While, during the conference call, management said “…still expect to deliver on our year end earnings targets”…analysts have obviously thought that an “adjustment” to expectations is more realistic. The upgrading of the Red Robin dining experience continues to be a work in progress, and money managers now consider RRGB to be a “show me” situation. At about 7x the current EBITDA run rate, RRGB could become a takeover candidate in an easy money environment (think Buffalo Wild Wings) but private equity firms also like predictability, and the stock could sell materially lower before the potential becomes adequately compelling. BWLD had the franchising (and re-franchising) component which is not nearly so prominent here. BWLD’s balance sheet was also far less leveraged than that of RRGB.

The best overview of the situation is likely provided by management, as described on the conference call:

  • The January administrative reset was described as “consistent with our pivot away from being a unit growth driven organization to one focused on value, affordability, and improved four wall economics”.
  • “The first quarter of 2018 demonstrated the continued evolution of RRGB’s business model that was largely dependent on sales to a business model that has multiple ways to deliver sustained earnings performance and return on investment… built on every day value, affordability, long term profitability and prudent investment of capital.

The Q1 report:

Before getting into the details of the report, this commentary is meant to not only describe the developments at Red Robin but provide our readers with feedback relative to operating trends (and challenges) that are broadly affecting the industry. This full service burger segment, most directly including Applebee’s and Chili’s, but also affecting chains above and below the price and service points, is one of the most competitive. Potential problems become vividly demonstrated. It’s like skiing a “double black” trail. Weaknesses in technique quickly become obvious. Management here is doing their collective best, but it’s hard to run up an escalator going the other way. So much for the metaphors.

The quarter was only mildly disappointing in terms of sales and traffic. Comp revenues were down 0.9% with comp guest counts up 0.1%, once again outperforming peer group trends. There was a 1.0% decrease in average check, comprised of a 2.0% decrease in menu mix, offset by a 1.0% increase in pricing. Importantly, off premise channels were up almost 40% YTY so dine-in traffic was down about 3%. “Adjusted” earnings per diluted share were $0.69 compared to $0.89, but GAAP EPS was $0.34 vs. $0.89. Income from operations was $7,019k vs $17,458k, after a charge of $6,287k in Q1’18 for “home office reset and establishment of a litigation reserve for employment-related claims”.

The operating details include restaurant EBITDA at 20.0%, down about 130 bp YTY. Cost of sales was up 90 bp to 23.8% (higher Tavern mix, higher cost of Steak Fries and ground beef, lower nonalcoholic beverage sales). Restaurant labor was better by 70 bp to 34.5%, due to hourly labor productivity, partially offset by higher manager salaries and bonus). Other operating expenses were up 70 bp to 13.3% as a result of increased technology expense, to-go and catering supplies and third party delivery costs, partially offset by lower repair and maintenance. Occupancy costs increased 40 bp to 8.4% due to higher property taxes and insurance costs. D&A was up 20 bp to 6.9%. G&A improved by 50bp to 6.8% due to the home offset reset. Importantly, the January reset was described as “consistent with out pivot away from being a unit growth driven organization to one focused on value, affordability, and improved four wall economics”.

Within the conference call dialogue were the following bullet points:

(1) Off premise dining, including curbside pickup, third party delivery, and catering, all of which have sales potential, have their own sets of operating challenges and margin implications. There may or may not be cannibalization of dine-in business, but if you don’t do it, your competitors will.

(2) There continues to be a huge battle to provide “value” to the guest in terms of quantity and quality of food (and of course the service). It is hard to improve operating margins when your most popular platform is at $6.99, including the challenge of attracting well qualified servers when tips are so modest at a low price point.

(3) It is desirable to control the off premise business yourself, for the purpose of gathering customer information as well protecting the brand and  profit margin, but third party delivery services are a necessary fact of life for the time being. 70% of RRGB locations have third party delivery.

Roger Lipton



We have written many times of our admiration for this company, founded by the legendary Danny Meyer, in terms of the employee culture, operating skills, and their successful management of an extremely aggressive expansion plan. The “cult” of Shake Shack goes far beyond their NYC roots, and openings literally worldwide have supported this notion.

In a nutshell: when a stock is “priced for perfection” ($37) at over 70x calendar 17 earnings and over 60x estimated ’18 earnings, all operating parameters have to be “in gear”, hopefully accelerating, certainly not decelerating. That means: same store sales and traffic, unit growth rate, store level margins, new unit “productivity” of sales and margins.

We don’t have time here to go into all the details of the current results, but in a nutshell: reality is setting in:

Management has continually pointed out that AUVs away from NYC will be closer to $3M annually than the incredible $7M/store within their hometown. It was pointed out that store level EBITDA would be closer to 20% rather than the previous 30% range, at the lower levels. Analysts, and investors heard this, but haven’t wanted to exactly believe this, as  new stores continued, until recently, to open materially above $3M, and average volumes held close to $5M. We will come back to this parameter shortly.

Yesterday, the third quarter report met estimates of earnings, same store sales were down, but a little less than expected, due to menu price increases, traffic was down more, but the expansion rate was increased for next year. Labor costs are up, as expected, especially since SHAK prides themselves on treating employees very well. Overall store level margins are expected to contract further, and G&A expense will not decline as a percent of sales due to the acclerated rate of company store expansion (35-40%) on the base. All of this could be “accepted” by analysts and investors, but here’s the rub:

Each quarter the Company tells us what the weekly AUVs were for domestic company operated stores. This is the way it has gone:

Q3’16    $103,000     Q3’15   $103,000               even

Q4’16     $90,000       Q4’15    $89,000               +1.1%

Q1’17      $86,000      Q1’16    $90,000               -4.5%

Q2’17       $92,000      Q2’16    $102,000            -9.8%

Q3’17       $91,000      Q3’16    $103,000            -11.7%

Clearly, new units are opening “lower”, by our calculation, at about $3.3M. Analysts explored this development on the conference call, and the company confirmed that this range applies, has been predicted all along. The supplemental slides showed that the cash on cash return for a store at $2.8M -$3.2M is 14% in the first year(after $400,000 of pre-opening expense) and 34% thereafter. While more than acceptable, this is a sobering reality compared to the 56% year one cash on cash return for a $5.0M unit, with 79% thereafter. Since the aggressive expansion plan is obviously focused on markets away from NYC, analysts have to assume that the margins will more rapidly approach the lower numbers than they had previously modeled. This is especially true since management was very clear that labor expenses will continue higher, commodities will provide no relief, and corporate G&A will be ratcheted upward to support growth and technology requirements.

In summary: Only the growth rate, of units, is “in gear”, accelerating in fact. Same store sales and traffic are challenged, which is an industry wide issue, store level margins at existing stores won’t improve and will be materially lower at new stores, and G&A won’t be leveraged in the short term. Worst of all, new stores are opening at the previously predicted lower volumes, which removes the possibility of earnings surprises on the upside. A case can also be made that a growth rate, for company stores, of this magnitude, has its own set of dangers, in addition to the more predictable unit level challenges. Investors and analysts have appropriately, in our view,  reacted cautiously to the latest news.


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