MOST RECENT CONFERENCE CALL TRANSCRIPT
MOST RECENT CONFERENCE CALL TRANSCRIPT
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)
UPDATED CORPORATE DESCRIPTIONS: FOR JACK IN THE BOX, PAPA JOHN’S, RUTH’S CHRIS AND DOMINO’S – with conference call transcripts
JACK IN THE BOX (JACK)
PAPA JOHN’S (PZZA)
RUTH’S CHRIS (RUTH)
UPDATED CORPORATE DESCRIPTIONS – PAPA JOHN’S, RESTAURANT BRANDS, RUTH’S CHRIS, TEXAS ROADHOUSE, WENDY’S, YUM BRANDS
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.
SHAKE SHACK (SHAK) – NEWS AGAIN, PRODUCTIVE FOR INDUSTRY, DECISION FOR SOME !
THE NEWS, THE OUTCRY, AND THE RESPONSE
Shake Shack is returning the $10M they had been granted by the PPP program. Turned out their their potential sale of $75M of equity was expanded to raise $136M (before underwriting expenses on Friday. The public outcry, which these days is almost instantaneous, arose over the weekend, with observers complaining that the PPP was not intended to help companies such as SHAK, who can raise capital in other ways. Legendary founder Danny Meyer and CEO, Randy Garutti, published a letter outlining their desire to support employees every way they can. They therefore applied immediately when the program was established because SHAK qualified according to the guidelines. They are returning the $10M now because they have otherwise accessed the capital market, with less than 10% equity dilution it turns out, and they want the $10M to be given to more needy restaurant operators. Shake Shack has always been very good at public relations and the brand remains a cult in some quarters. Meyer and Garutti emphasized their dedication to their employees, and Garutti (on CNBC this morning) indicated that employees are going to get a raise in pay and bonuses in this current quarter, regardless of store sales.
THE BROADER POSITIVE, FOR THE INDUSTRY
Meyer and Garutti, with this very public situation, have indicated, appropriately, that the hastily prepared PPP has some problems. One of the most serious problems, which we described here last week, is that the funds have to be spent within eight weeks if the loan is to be forgiven. The restaurants aren’t fully opened, if at all, and business will not return to previous levels for months, at least. Operators will therefore be torn between their desire to “keep their (government) powder dry” and the requirement to spend 75% of the money on payroll, rent and utilities within eight weeks. Meyer and Garutti suggested a simple fix, which we hope will be adopted. The period in which the funds must be applied should be extended from eight weeks to six months. Meyer and Garutti have a high enough profile that maybe Kudlow, Mnuchin, et.al. will take this to heart.
A REMAINING ISSUE: WHO IS “DESERVING” ?? PICKING WINNERS AND LOSERS
The guidelines for PPP, and all government “entitlement” programs always leave room for questioning as to who is needy enough to deserve the money. Shake Shack (SHAK) “qualifies” but is not “needy” enough. Ruth’s Chris (RUTH) received $20M, Fogo De Chao (Privately held) received $20M and J.Alexanders (JAX) received $15.4M. All are profitable companies and have access to various forms of capital (at a price). Should they also return the government money? Everybody can use more capital. Some are more needy than others. Should a Jimmy John’s franchisee or a franchisee of McDonald’s, Burger King, Wendy’s or Dunkin’ get help. All are operating within successful systems that can presumably keep them going. At another level, perhaps a McDonald’s franchisee in Utah doesn’t need help as much as a McDonald’s on Long Island, NY.
There will always be questions, potential inconsistencies and outcomes that can be considered unfair. You can count on the fact that when trillions of dollars are distributed quickly there will be unintended consequences. We are all in a situation that is uncomfortable at many levels, in some cases desperately uncomfortable. Our advice, relative to this discussion is that we would take the capital we have qualified for, publicize it as little as possible while doing our best for various stakeholders. We would then hope for the best in terms of public reaction, if any, and react reasonably, knowing that you can’t please every observer. Shake Shack has reacted appropriately and productively under the circumstances, as we would expect from this highly respected company.
RESTAURANT Q4’19 – SALES, TRAFFIC, MARGINS @ TXRH, CAKE, RUTH, BJRI, BLMN – A LOT TO LEARN !!
In the last few days, five prominent restaurant companies, with company operated locations, have reported fourth quarter results. These data points give us a reasonably accurate view into current trends, and allows us a best guess as to what 2020 might look like. While franchising companies such as Wingstop and Domino’s have also reported, with excellent results it so happens, precise store level margins are not reported and we are not commenting here on those results. We have also not included Chipotle, which has become very much of a “special situation”, still recovering from the problems of several years ago, at the same time establishing themselves as a leader with off-premise sales, and it’s the four wall economics that primarily concerns us here.
The table just below shows the five companies listed above, with their Q4 results at the store level. We will fill in the other blanks later, with full updated writeups on these companies, but a quick look at four wall economics can tell us a lot quickly.
We’ve been saying for some time that a couple of points of comp sales is not enough to overcome higher store level expenses, wage inflation most notably but also higher occupancy and other store expenses. That conclusion is pretty clearly demonstrated by these results.
Only Texas Roadhouse (TXRH) improved same store sales materially (+4.4%), and that was accompanied by the best traffic trend among the five companies (+1.5%). That allowed TXRH to leverage the sales trend into a 117 bps increase in their store level margin. The other four companies , even with slightly better comp sales, suffered material deterioration of store level EBITDA margin. Labor Expense was higher by varying degrees, most notably at BJ’s, with Texas Roadhouse, again, being the only company to hold the line in this regard. Cost of Goods was not much changed across the board, except at RUTH with their heavy dependence on beef costs.
We have indicated also, at the bottom of the table, the indication as far as Q1’20 sales to date, or guidance for 2020. Once again, Texas Roadhouse leads the pack with a 6.4% comp sales increase in Q1 to date. BJ’s gave us a 1.7% number for Q1 to date. The others provided guidance for 2020 as a whole, very much in line with the modest recent increases. It is worth noting that the weather this winter so far has been fairly good on a comparative basis, and each of us can make our own judgements as to what effect this is having on Q1 results to date and management’s guidance for 2020.
In summary, there is no tangible reason to expect a material change in operating trends at company operated restaurant chains. Outliers can exist at special situations, but the overriding factors that have challenged the industry are still in place.
ICR CONFERENCE – report from last week’s widely attended three day restaurants/retail event in Orlando
There is lots more detail to follow in the next week or so, but it is safe to say that it is still tough out there in restaurant/retail land. Labor costs continue to be a huge issue, food delivery is a major subject and already in a shakeout phase, traffic is flat to down (mostly down) at almost all restaurant chains, especially “dine-in”. Since costs are rising and pricing power is limited, there is no margin relief to come at restaurant chains, unless they are recovering from depressed results, which is in fact the case in a few situations. We will be doing updates on many of the publicly held chains that will provide more details.
On the plus side, it is always interesting to hear from the chains that present on “privately held day”. While many of the publicly held chains are “mature” and coping with the inevitable pressures of maintaining their original “cultures”, it is always exciting to hear about the success at younger companies, still run by their energetic founders. That’s not to say that all the public companies have lost that youthful enthusiasm, but the job has inevitably become more complex and multi-dimensional.
As far as our coverage is concerned:
Among publicly held companies, we expect to do NEW writeups on Noodles, One Hospitality, and Denny’s.
We will do UPDATED writeups on Kura Sushi, Ruth’s Chris, Chuy’s, Del Taco, Red Robin, Pollo Loco, Dave & Buster’s, and Shake Shack.
The section on our website devoted to “Up & Comers” is largely an outgrowth of exposure at ICR and those articles get more readership because we all hear from the public participants every ninety days.
Our previous writeups on &Pizza, Barcelona Wine Bar (which is part of Barteca, now owned by Del Frisco’s), Fitlife Foods, and Fogo de Chao (which was public a couple of years ago) can now be updated.
Private companies we learned more about, in alphabetical order, include: Benihana (used to be public), Black Bear Diner, Bolay, Fogo de Chao (used to be public), Just Salad, Punch Bowl Social (now owned by Cracker Barrel), TGI Friday’s, and we hope to provide writeups on these companies in the near future.