ANNUAL – per Yahoo/Finance
QUARTERLY – per Yahoo/Finance
ENTERPRISE VALUE/TTM ADJUSTED EBITDA per Lipton Financial Services
MOST RECENT CONFERENCE CALL TRANSCRIPT
ANNUAL – per Yahoo/Finance
QUARTERLY – per Yahoo/Finance
ENTERPRISE VALUE/TTM ADJUSTED EBITDA per Lipton Financial Services
MOST RECENT CONFERENCE CALL TRANSCRIPT
DRIVEN BRANDS (DRVN)
BRINKER, INT’L (EAT)
REGIS CORP (RGIS)
Don’t believe your eyes or your checking account. The surprisingly good US jobs report last Thursday, 250,000 higher than expected, was entirely due to over 500,000 new part time jobs, hardly any new full-time jobs. Though US inflation is ticking down, month by month, prices are rising materially faster abroad. Since we import more than we export, that alone will push US prices upward. In terms of deficits: Pre-Covid, in the FY ending 9/30/19, the stated annual operating deficit was $984B and the debt in the US increased by $1.2T (the difference: from the Social Security trust fund). Covid driven deficits spiked higher in ’20 and ’21, started coming down in ’22 as Covid abated. Presumably more normalized now, the deficit in the current year ending 9/20/23 is estimated to be about $1T. The debt, $31.5T as of 2/9, is therefore up about $700B in a little over four months, so will likely be well in excess of the (questionable) $1T deficit estimate. Summarizing, only relative to the bloated Covid numbers has the current administration “brought the deficit down”.
Strike Up the Band? – So far in ’23, the stock market has rebounded off the lows last year that were driven by sluggish economy and higher interest rates, with tax loss selling in December increasing the damage. Recalling that “when the music plays, Wall Street dances”, several potential restaurant IPOs are starting to surface. Panera’s (potentially including Caribou Coffee and Einstein Bros. Bagels) is supposedly in the wings. Panera’s was taken private, for $7.5B in 2017 by JAB Holding, and co-founder, Ron Shaich moved on. Recall that a potential “relationship” between Panera and Danny Meyer’s SPAC was terminated in mid-’22 so the Panera band is tuning up again.
Speaking of Ron Shaich, his $300M investment fund, Act III Holdings, has an important stake in “Cava”, which has apparently “filed confidentially” for an IPO. Founded in 2011, Cava attracted Shaich’s capital in or around 2017, as he stepped aside from active management at Panera. Yet to be disclosed is whether the public company will include Zoe’s Kitchen, which Cava Group purchased in 2018 for $300M. In April, 2021, Cava Group raised $190M, from a group led by T. Rowe Price, reportedly reflecting a valuation of $1.3B. It’s been reported that Cava Group has raised a total of $640M since 2015.
Another pending IPO is that of Fogo de Chao’, with a great deal of information already available since their first filing last summer. Market conditions late last year were clearly not conducive to completing the transaction, in spite of the strong Company fundamentals. It didn’t help that a number of other recent IPOs, priced in retrospect too high, had corrected materially in the meantime. We have mentioned Fogo in this column and written extensively on our website, and Fogo seems to be one of the best positioned casual dining chains to provide a differentiated dining experience. With stores generating about the highest cash on cash returns of any large chain, there is no shortage of “white space” for growth. This column is not intended to make buy and sell recommendations, but, depending on valuation, pay close attention to Fogo de’ Chao when it starts to trade.
Starbucks reported earnings last week for their December quarter. The subject here is “valuation” They missed EPS guidance for the quarter, for good reasons mostly China related, and maintained guidance for the year. Howard Shultz, the legendary founder, and still their best cheerleader, kicked off the conference call with a compelling description of all the opportunities ahead.
We all can agree that Starbucks has been, and hopefully will continue to be a growth stock. The faster the Growth, the higher can be the Price/Earnings multiple. A good guidepost is that a reasonable PEG (Price/Earnings divided by Growth Rate) is no more than 2:1. For example, If a company is growing at 10% per year, a P/E of 20x expected earnings is reasonable. 1:1 is better, of course, because there is lots of room for expansion of the P/E. Productive as Starbucks has been, they do not grow today as rapidly as 20 and 30 years ago In fact, over the last four years operating earnings have grown just over 4%, still under 5% in the seven years ending 9/30/22. If we add in years nine and ten, 2012 and 2013, which grow at about 24%, the ten year growth rate moves up to 7%. SBUX at 109, with consensus earnings for Y/E Sept’24 around $4.00/share and a 4-5% growth rate has a very rich PEG of about six over seven years and even considering the 7% growth rate over the last 10 years a PEG of four. Based on growth rate over the last ten years, this is a very expensive stock.
There is, however, the possibility that the growth rate in the future could accelerate to a rate that could justify a P/E multiple of 27x ’24 EPS. The stock today would be fairly valued if the future growth rate is at least 13.5%. Judge for yourselves this possibility.
UPDATED CORPORATE DESCRIPTIONS: BLOOMIN’ BRANDS, DENNY’S, STARBUCKS, YUM BRANDS, SHAKE SHACK, PORTILLO’S – with transcripts
BLOOMIN’ BRANDS (BLMN)
YUM BRANDS (YUM)
SHAKE SHACK (SHAK)
THE WEEK THAT WAS, ENDING 5/6, LOT’S OF EARNINGS REPORTS, SEVERAL RATINGS CHANGES, MANY MORE DATA POINTS IN THE WEEK TO COME – links to transcripts provided
Starbucks reports, only change is David Palmer upgrading. Nobody wants to be negative. NICOLE REAGAN, JOHN GLASS, CHRIS CARRIL and JON TOWER stay neutral. LAUREN SILBERMAN, JEFFREY BERNSTEIN, DAVID PALMER and ANDREW CHARLES continue to like it.
Denny’s reports, NICK SETYAN still likes it.
Restaurant Brands reports, only change is CHRIS O’CULL downgrading to HOLD. M.Stanley analyst maintains underweight. JON TOWER is neutral, while CHRIS CARRIL AND LAUREN SILBERMAN like it here.
Yum Brands reports. No changes. LAUREN SILBERMAN is NEUTRAL while JON TOWER says BUY.
Brinker reports (and disappoints). DAVID PALMER downgrades to IN-LINE. BRIAN MULLAN, NICK SETYAN, and M.STANLEY analyst are NEUTRAL. BRIAN VACCARO and ERIC GONZALES continue to be positive.
Wingstop reports (and disappoints). M. Stanley analyst, NICK SETYAN, JON TOWER and ANDREW CHARLES all stick with it.
SHAKE SHACK reports. Everybody maintains. LAUREN SILBERMAN and BRIAN MULLEN are neutral, while PETER SALEH & NICK SETYAN like it.
PAPA JOHN’s reports. LAUREN SILBERMAN and NICK SETYAN continue to like it while BRIAN MULLAN is neutral.
THE WEEK TO COME: MORE DATA POINTS
5-09 After Market Close RCI Hospitality Holdings RICK
5-10 Before Market Open First Watch Restaurant Gr FWRG
5-11 Before Market Open Wendy’s WEN
5-11 Before Market Open Krispy Kreme DNUT
5-11 After Market Close Dutch Bros BROS
5-12 Before Market Open Carrols Restaurant Group TAST
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.
FIVE UPDATED WRITEUPS, – KURA SUSHI (KRUS), ROCKY MOUNTAIN CHOCOLATE FACTORY (RMCF), McDONALD’S (MCD), STARBUCKS (SBUX) AND BRINKER ((EAT)
The links below take you to the updated corporate descriptions, which includes a link to the transcript of the most recent conference call.
Kura Sushi (KURA)
Rocky Mountain Chocolate Factory (RMCF)
STARBUCKS (SBUX) REPORTS DECEMBER QUARTER – A LOT YOU SHOULD KNOW!
Starbucks reported last evening results for their 1st (December) quarter, disappointing enough, especially in terms of guidance, that the stock sold off 5% in the aftermarket trading.
We’ve updated our concise Corporate Description, and that link is provided below. For those interested in all the details we have also provided a link to the transcript of their Conference Call last evening. Here and now we want our readers to be aware of their commentary regarding cost pressures, inflationary expectations, staff compensation requirements and pricing plans.
The single most dramatic statement, affecting every operator and investor in service industries is that Starbucks expects, by September of this year (their fourth quarter) to be providing AN AVERAGE STORE HOURLY WAGE OF SEVENTEEN DOLLARS. Competitors for retail crew will obviously have to compete with that, and Starbucks has long additionally provided excellent fringe benefits within an outstanding operational culture.
The Omicron variant resulted in higher than anticipated costs in the December quarter, both in terms of store staffing (hiring, training and retention) and supply chain distortions. While some of this has abated during January, the expectation is that these elements will continue to be a factor in the balance of ’22. These costs are expected to affect operating margins by about 200 basis points, part of which will be recouped by pricing actions and operating efficiencies. SBUX management commentary is no doubt typical of many product and service providers, who were hopeful that the obvious inflation would prove to be “transitory”, held back on price adjustments, but no longer. “Overall our inflationary pressures in FY2022 will remain elevated relative to FY2021”.
An interesting side note is that Starbucks, through a Partnership with Pepsico, is entering the energy category with Starbucks BAYA energy drink, no doubt looking over their shoulder at Dutch Bros (BROS).
Our readers can fill in the details from the public releases and the Conference Call transcript link provided below. There is no reason to write off this still great company, but 2022 will be a lost year in terms of earnings progress and that could prove to be typical of many other service companies.
CONFERENCE CALL TRANSCRIPT
UPDATED CORPORATE DESCRIPTIONS – Arcos Dorados, Flanigan’s, Noodles, Rocky Mountain Chocolate Factory, Red Robin Gourmet Burgers, Starbucks
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.
THE HOSPITALITY QUOTIENT – WE CAN CHANGE THE WORLD, AT NO COST!
“Culture” is an overworked term in the restaurant/hospitality business. Every operator strives to create an exemplary corporate culture. Hard as it is to define, Danny Meyer and Howard Schultz have demonstrated how far a great culture can take you. It is not the coffee, good as it is, that has allowed Starbucks to build 20,000 profitable stores worldwide. My daily visit to Starbucks is my morning social life. “Hi Roger, your usual venti soy latte’, no foam?”, or ”did you get a haircut?”, or “haven’t seen you in a little while, been away?”
My wife and daughter think I’m getting a little (or a lot) eccentric. Often, after a service person responds with a “no problem” after I thank them, I take a minute (if they seem friendly) to suggest that something like “my pleasure” is a lot more hospitable or what I might call charming. Of course it’s not a problem, because it’s their job, after all. I feel like I’m doing them a favor, mentoring them if you like, and it costs me nothing. I say it with a smile, tell them I am only taking the time because they seem like they care. Almost all the time they seem to appreciate it, and usually respond, on my next visit, with “my pleasure” and a smile. I tell my wife and daughter that they can call me a little crazy, if they like.
Which leads me to my visit this morning to Starbucks. The expeditor at the pickup counter, who Starbucks now has in place to sort out the digital/pickup orders from the in-store ordering, handed me my drink, and I thanked him. He said “my pleasure”. I complimented on that response, and he said that it was natural for him because he also works at Chick Fil A.
I’ve never met or spoken to the management of Chick Fil A but I have visited their stores and the experience is always a good one. Last I read they were doing $5M a copy in a six day week. That compares pretty well to McDonald’s, good as they are these days, doing 40% less than that over seven days. Maybe there really is something about a great corporate culture, taking the time to build something as simple as a warm salutation into the training process.
LET’S CHANGE THE WORLD TOGETHER ! There’s nothing obnoxious about “no problem”. However, we would be doing our employees, many of whom are just beginning their working lives, a great long term service if we suggest a variety of more personal, hospitable, even charming responses. “My Pleasure”, “Always Nice to See You”, “You’re Very Welcome”, “Any Time”, “Come See US Again”, or down south “Y’all Come See Us Again, Y’Hear?” are just a few suggestions.
There’s a reason that the customer experience at Chick Fil A and Starbucks is a cut above almost all of the competition, and the sales follow. The above does not happen by accident.