Archived postings from September, 2010...

Small Biz Loan Marketing Drops

Posted: Thu, September 30, 2010 at 5:00pm (CDT)

Despite various efforts by the government to stimulate small business lending, the market remains limited, even if it's improving at a snail's pace. Banks aren't even pushing their loan products anymore. According to Mintel Comperemedia, which provides direct marketing intelligence, only three percent of its small business panelists received a loan or credit offer in the mail in the last quarter, down from 12 percent two years ago when the lending market wasn't exactly surging. Instead, banks appear to be pushing more credit cards--60 percent of the panelists said they received a credit card offer last quarter, up from 33 percent a year ago.
Mintel, September 30, 2010

Claim Jumper's Growing Price

Posted: Thu, September 30, 2010 at 4:52pm (CDT)

The auction for the bankrupt Claim Jumper system is set for October 28 but, it seems, the bidding war has already begun. On Thursday, a U.S. Bankruptcy Court judge in Delaware approved a higher bid from a subsidiary of Black Canyon, an investor in the Claim Jumper chain and its largest creditor. The bid essentially equals a bid submitted last week by Landry's, meaning that even before the auction was set the cash price for Claim Jumper increased by 10 percent--Black Canyon's stalking horse bid is now as much as $55.3 million, including $27 million in cash, up from $24.5 million. The deal also includes a smaller reimbursement fee for Black Canyon should it not win the chain. Any company now bidding on Claim Jumper will now have to pay $56.15 million in cash plus assumed liabilities, but that's still a lot cheaper than the $200 million the chain cost a few years ago. ...continue reading.

Biglari Backs Off On His Pay

Posted: Thu, September 30, 2010 at 9:11am (CDT)

Sardar Biglari could seem to do little wrong since his engineered takeover of Steak & Shake and subsequent change to its corporate structure into an investment firm. Until April, that is, when Biglari Holdings proposed to pay its chairman like a hedge fund manager, entitling him to a bonus of 25 percent of any increase in the company's book value above 5 percent a year. The move generated a shareholder backlash and put a stop to Biglari's skyrocketing share price growth. And a proxy firm said the pay proposal could come at the expense of shareholders. The company has now backed off the proposal--but don't send Biglari to the poor house quite yet. Biglari Holdings said in an SEC filing late yesterday that it has changed the proposal, upping the bonus threshold to 6 percent and capping any bonus at $10 million. Under the new deal, Biglari would get $4.5 million if the company's book value grows 12 percent next year, according to the filing.
Jonathan Maze, September 30, 2010

RFDC Preview: Getting Past The Low Hanging Fruit

Posted: Wed, September 29, 2010 at 4:32pm (CDT)

We probably don't need to tell you--again--that restaurant sales have been a drag these past two years. And many restaurant operators have been working hard to cut costs and keep profits at a respectful level. At this year's Restaurant Finance & Development Conference, to be held Nov. 8-10 in Las Vegas, we're bringing together a panel of top-notch CFOs who can help you find ways to cut costs beyond the obvious. They include Gene Baldwin, currently interim CFO at Benihana and a partner at CRG Partners; Brian Armstrong, CFO at Rock Bottom, Todd Lindsey, CFO at Checkers, and Louis Psallidas, CFO at Uno Chicago Grill.
RFDC, September 29, 2010

Black Canyon Fights Back

Posted: Wed, September 29, 2010 at 4:20pm (CDT)

Last week, Landry's inserted itself into the bidding for the bankrupt Claim Jumper chain with a bid that was $2.5 million higher than that of supposed stalking horse bidder Black Canyon, which is also Claim Jumper's largest creditor. Yesterday, Black Canyon filed something of a response with the U.S. Bankruptcy Court, and it was little more than a series of documents. The documents? Landry's recent quarterly report, its annual report (both showing steep losses), reports of Tilman Fertitta's leveraged buyout and information on the "junk" status of the $110 million in bonds being used to buy Landry's out. The gist: Black Canyon attorneys are arguing that Landry's doesn't have the financial wherewithal to be able to buy another chain, even at a bargain price. ...continue reading.

The Queen Of Dairy And The Oracle Of Omaha

Posted: Wed, September 29, 2010 at 3:00pm (CDT)

In what is almost certain to be the largest gathering of personal wealth inside a Dairy Queen store, Warren Buffett and Bill Gates will get together with DQ CEO John Gainor today to open Dairy Queen's first unit in Beijing. The event is being held to note the chain's new focus on international expansion. Still, we've always wondered if DQ would ever use the respected Buffett, chairman of parent company Berkshire Hathaway, much like its fellow subsidiary, Geico, has started doing. A DQ spokesman told us that it's rare for Buffett to get involved at a Dairy Queen event, and in this case it was a bit of fortuitous timing -- Buffett and Gates just happened to be in China at the same time as Gainor.
Dairy Queen, September 29, 2010

DineEquity Unloads More Applebee's Units

Posted: Wed, September 29, 2010 at 9:07am (CDT)

DineEquity has apparently reached a deal to sell more of its Applebee's restaurants. In an SEC filing this morning, the franchisor that also owns IHOP said that it has three nonbinding letters of intent to sell 86 company-operated restaurants, 36 in St. Louis, 20 in Virginia and 30 in Washington, DC. Terms of the proposed sales, as well as the names of the buyers, were not disclosed, but we'll post them once we get them. That said, don't expect the price to be significant. The last time Applebee's sold a group of units they went for roughly $500,000 per restaurant.
SEC, September 29, 2010

Jack In The Box Shuttering 40 Stores

Posted: Wed, September 29, 2010 at 8:59am (CDT)

This morning, the burger chain Jack in the Box announced plans to close 40 underperforming stores, mostly in the Southeast and in Texas. The company said the stores weren't meeting key performance metrics. This is a pretty tough time for the San Diego-based Jack in the Box, which has had a brutal sales run and had to endure the ugly bankruptcy of one of its largest operators. In its most recent quarter, Jack reported a same-store sales decline of 9.8 percent. While the closures might help, we'd suspect those sales numbers would indicate a far broader problem than a handful of poorly performing units. Then again, at least Jack didn't refranchise those units, which is what many other franchisors seem to be doing these days.
Jack in the Box, September 29, 2010

More On The Continuing Saga Of Claim Jumper

Posted: Tue, September 28, 2010 at 4:18pm (CDT)

Landry's Restaurants isn't the only one who has objected of the sale of Claim Jumper to its largest creditor, Black Canyon Capital. One objection has come from none other than Craig Nickoloff, who founded the 45-unit chain in California 33 years ago, and remains a company shareholder. In a court filing late last week, Nickoloff revealed that he had bid on Claim Jumper twice, only to have Black Canyon's bid chosen both times--the second bid resulted in the agreement and Claim Jumper's subsequent bankruptcy filing. Before making its second bid, and on the day Nickoloff submitted his second bid, Black Canyon exercised its rights as the creditor to replace two board members of Claim Jumper's parent company with its own appointees, and attempted to do the same with Claim Jumper. The new board then chose Black Canyon's bid for the chain. "Based on available information," Nickoloff's filing states, "it appears that a board comprised of Black Canyon personnel approved a sale to Black Canyon." ...continue reading.

Sign Of The Times?

Posted: Tue, September 28, 2010 at 2:50pm (CDT)

Those of you eager for another publicly traded restaurant chain are in luck: Another company has filed its intent to sell shares and has set the price per share at $16.50 today. The problem? It's Chinese. The chain, Country Style Cooking Restaurant Chain, will be selling American Depository Shares, which enable U.S. investors to buy shares in foreign companies. According to its registration statement, CSC, as it's known, is a Chinese QSR that has exploded (much like the broader China economy) from 9 restaurants in 2008 to 101 as of June 30. Its revenues were $72.9 million last year. The company's registration statement also notes that the market for consumer food service in China has grown at an annual rate of 12.5 percent since 2004, and is expected to grow at an 8.8 percent rate through 2014. Given the state of the U.S. restaurant market, perhaps investors should look outside the States for a restaurant growth company to invest in.
SEC, September 28, 2010

Convenience Stores And Restaurants

Posted: Tue, September 28, 2010 at 1:09pm (CDT)

One industry that appears to be doing well right now is the convenience store. According to NPD Group, traffic at the nation's gas stations and corner markets increased 8 percent, while sales grew 11 percent. What does this have to do with restaurants? A lot, if you own a quick-service restaurant. C-stores have been increasingly competitive on the food and drink front, and that's not going to change anytime soon--many larger convenience store chains have been boosting their food selections, to the point that they're preparing food on-site now or giving consumers more options for building their burger, hot dog or sandwich. They're expected to target breakfast consumers more, as they already have bolstered their coffee business. For many restaurant chains, the trend will only increase the competition for the convenience diner.
NPD Group, September 28, 2010

Uh Oh: Consumer Confidence Plummets

Posted: Tue, September 28, 2010 at 9:22am (CDT)

Restaurants, as most of you know, depend heavily on a happy and confident consumer. A fearful one surely isn't going to spend on a luxury like eating out, which is why sales have been so brutal these past two years. But hope for a recovery took something of a beating this morning with the Conference Board's release of a monthly consumer confidence figure that was lower than at any point since February. And none of the numbers in the board's survey could be viewed as anything but negative. More consumers think business conditions are bad. More think the labor market is getting worse. And their incomes aren't improving. "Overall," said Lynn Franco, director of the Conference Board's Consumer Research Center, "consumers' confidence in the state of the economy remains quite grim." Indeed.
The Conference Board, September 28, 2010

Casual Dining's Big Fall

Posted: Tue, September 28, 2010 at 9:08am (CDT)

Piper Jaffray this morning released its fifth annual "Restaurant Cookbook Benchmark Analysis," but a better title might be "Restaurant Horror Show." Among other things, the analysis shows system sales at 75 restaurants over the past 14 years. If you were to track the sales of casual dining restaurants on a graph, it would look like a giant plateau ending in a steep cliff--most chains had really good years in the late 90s and for much of this decade before they plunged the last two years. Of the 37 casual diners, 25 lost money in 2009 systemwide, and 17 have lost money the last two years combined. Six of eight family dining restaurants, meanwhile, lost money the past two years. QSRs have fared a bit better--five of 30 lost money the past two years, but 11 lost money last year. This makes the strong performance of Buffalo Wild Wings, Olive Garden, IHOP and McDonald's over this time all the more impressive. ...continue reading.

Hollywood's Effect On Casual Dining

Posted: Mon, September 27, 2010 at 4:29pm (CDT)

If some casual dining restaurants have a bad third quarter, you can place at least part of the blame on Hollywood's failure to put out good movies. According to analyst Conrad Lyon, who recently initiated restaurant coverage for the investment bank B Riley, there is a correlation between box office ticket sales and traffic at chains with a heavy concentration of units near movie theaters--moviegoers can't survive off of greasy popcorn and Raisinettes, after all, and nor could they afford it. And those ticket sales were doing quite well for a while this year thanks to Avatar and then Alice in Wonderland, but lately the lack of many decent options has kept moviegoers home. Since March, ticket sales have been down 11 percent compared with last year, and August sales were down 42 percent. So restaurant owners should hope Hollywood gets its mojo back soon. ...continue reading.

A New Bidder Emerges For Claim Jumper

Posted: Mon, September 27, 2010 at 9:27am (CDT)

Tilman Fertitta has yet to complete his full takeover of Landry's Restaurants and already he's targeting another chain--Claim Jumper. On Friday, Landry's submitted its own bid for the bankrupt California-based chain, $27 million plus the assumption of certain obligations. That beats Black Canyon's $24.5 million bid. Landry's filed an objection with the U.S. Bankruptcy Court, asking that it be approved as the stalking horse bidder for Claim Jumper. In its objection, Landry's said that it would have submitted its bid this summer had it "been aware" that Claim Jumper was on the market at the time--which is funny, because we thought that everybody knew Claim Jumper was on the block. Incidentally, if you're interested, Moody's Investor Service gave Landry's Holdings Inc., which Fertitta is forming to acquire Landry's, a Caa1 rating on the $110 million it's borrowing to buy the company. That rating is often referred to as "junk." ...continue reading.

Moody's Gives BK Buyer A Good, But Not Great, Rating

Posted: Fri, September 24, 2010 at 4:29pm (CDT)

Moody's Investor Service today gave Blue Acquisition, the company formed to bid on Burger King, a B2 Corporate Family Rating and a Ba3 rating on the debt being used to pay the loan, including $150 million in senior secured revolving credit and a $1.75 billion senior secured term loan. It also has a stable outlook. Senior Analyst Bill Fahy said that the company has a "very weak debt protection metrics proforma for the acquisition" and that Burger King will see pressure on operating performance in the coming months. However, he said the brand has strong recognition, daypart diversity and meaningful scale to generate liquidity. Moody's expects debt protection to improve, but it could downgrade the debt if the company isn't able to get debt down below 6.5 times EBITDA within the next 18 months. ...continue reading.

Families And The Pizza Run

Posted: Fri, September 24, 2010 at 1:27pm (CDT)

Pizza chains have had a rough couple of years. They face immense competition from new competitors, grocery stores and wing chains (which tend to compete with pizza, rather than chicken). And then the recession hit and many families stopped ordering. Yet some chains have had some momentum recently. Dominos' comp sales grew 8.8 percent last quarter. Pizza Hut grew 8 percent. Little Caesars is making a comeback, and several companies are on the growth track. One reason why: Families are buying pizza again. Warren Solochek, vice president of client development at the NPD Group, said at a Morgan Stanley presentation this morning that family dining occasions, which had fallen last year, have steadied in 2010. And he gave much of that credit to pizza chains' ability to convince families that it's OK to order a large pepperoni now and then. Large pizza chains, he said, have been "effective at positioning their product as an inexpensive way to feed kids." ...continue reading.

NPD Says Next Year Will Be Better

Posted: Fri, September 24, 2010 at 11:00am (CDT)

Just wait until next year. After a brutal two-year period (or three, depending on who you ask), restaurants should see increased traffic next year, according to the NPD Group. Warren Solochek, vice president of client development for the market research firm, said at a presentation for Morgan Stanley this morning that traffic this year will be down 0.5 percent, but next year traffic should be up 1.3 percent, which will trigger a 3.1-percent growth in total sales. The bad news is that it'll be a long time before the industry will fully recover from the economic downturn. NPD is forecasting 60.1 billion visits in the coming year. The last time it was that low? 2005. "We lost 2 billion visits year-over-year due to the recession," Solochek said. That's billion with a "b." ...continue reading.

Here Comes The Lending Boom

Posted: Fri, September 24, 2010 at 9:21am (CDT)

When the SBA ran out of money to continue its 90-percent guarantee back in May, there was a subsequent plunge in the number of government-backed loans, leading to concern that the SBA market still depended on the higher guarantee. Despite this, we kept hearing from brokers and others that lending actually hadn't slowed over the summer. Instead, banks were waiting, convinced that Congress would again subsidize a higher guarantee on SBA loans and, despite a political fight over the measure, they proved prophetic (not that it took much in the way of prognostication skills). President Obama is almost certainly going to sign the bill that the House passed yesterday, and that could lead to a big boom in the number of SBA loans as brokers and banks begin clearing their backlogs now that they can get a higher guarantee.
Portfolio, September 24, 2010

Small Business Bill Gets Through House

Posted: Thu, September 23, 2010 at 2:19pm (CDT)

Earlier today, the U.S. House approved the Small Business Jobs and Credit Act. This was a foregone conclusion, and the move sends the bill onto President Obama, where he'll likely sign it. Amid all the politics involved, and there were plenty, the provision that should have the biggest impact on franchising is an expansion of the SBA loan cap from $2 million to $5 million. The larger limit should help existing operators who have reached their SBA cap but are too small for conventional loans or private equity interest. It may also enable operators building concepts with larger investments to qualify for an SBA-backed loan.
IFA, September 23, 2010

Commodity Reality Hits Starbucks

Posted: Thu, September 23, 2010 at 10:16am (CDT)

If you've noticed some of your coworkers panicking this morning and hoarding coffee, it's because Starbucks yesterday acknowledged that it may have to raise prices for its main product. This shouldn't come as a surprise to anybody who drinks coffee. Prices for green coffee have surged this year thanks to an ugly combination of bad weather, hoarding exporters and speculative investors. As it is, companies that sell coffee at grocery stores have been raising prices for a month, but thus far the big coffee chains have resisted the urge--until now, that is. Starbucks said it plans "targeted price adjustments on certain beverages in certain markets." Whether competitors Tim Horton's, Dunkin' Donuts or Caribou will plan similar "price adjustments" in response remains to be seen.
Starbucks, September 23, 2010

Burger King's Aging Stores

Posted: Thu, September 23, 2010 at 8:57am (CDT)

One of the reasons we're so skeptical about the price being paid for Burger King (and we're hardly the only skeptics) is this: Many of the King's restaurants are aging and could use a nice upgrade. And, indeed, Bloomberg today estimated that sprucing up the chain's stores would cost $3 billion--the company said that 85 percent of the stores could use an upgrade, estimated to cost about $500,000 apiece. The problem for 3G isn't so much the cost, because the vast majority of these stores are owned by franchisees. Yet franchisees in the Burger King concept aren't exactly a happy bunch. Given their current sales weakness, they may not be all that eager to spend much on their stores. While a new regime may have some political capital with operators, 3G will nevertheless have some work to do when it takes over.
Bloomberg, September 23, 2010

Applebees Outperforms IHOP

Posted: Wed, September 22, 2010 at 4:14pm (CDT)

Since IHOP bought Applebee's in 2008 to create DineEquity, IHOP the chain has always outperformed its new stepbrother, at least in terms of same-store sales. And often the gap was wide, as much as 5 percent some quarters. That is apparently changing this quarter. Late this afternoon, DineEquity released a "preview" of its quarterly sales, showing that in the first 11 weeks of the quarter, Applebee's domestic comp sales are up 2.7 percent, led by franchisee-owned units that are up 3.2 percent. IHOP, by comparison, is up 0.7 percent. Much of the increase is coming from pricing, according to the release, and guest counts continued to decline at company-operated units. Even if that's true systemwide, however, that still means that Applebee's is effectively weening itself from heavy discounting.
Marketwire, September 22, 2010

And Then There Were None

Posted: Wed, September 22, 2010 at 1:36pm (CDT)

So much for that proxy contest. Benihana yesterday said that it has reached an agreement with the family of its late founder, Rocky Aoki, to end their proxy battle against the venerable Japanese steakhouse. The family's company, Benihana of Tokyo, controls 38 percent of Benihana's shares and had been waging a contest to get a nominee named to the board. Benihana has now nominated the family's pick, Michael Kata, a vice president of Benihana Ono, and in exchange the family will vote its shares for Benihana's nominees and end the battle. Benihana and the Aokis had previously reached a deal, but that fell through when Rocky's wife, Keiko Aoki, gained control of the estate. While the new deal ends what drama was left at the company's meeting, to be held next week, it should make for interesting company board meetings, assuming the full slate wins. Benihana had previously agreed to nominate Adam Gray, managing director at Benihana's activist investor, Coliseum Capital Management.
Jonathan Maze, September 22, 2010

Darden And The Knapp Gap

Posted: Wed, September 22, 2010 at 10:59am (CDT)

Darden Restaurants had its quarterly conference call this morning and, not surprisingly, its news was generally good. The company is gaining market share. Its earnings improved. It's adding restaurants. Nevertheless, reports about the call have been mostly bad, largely because the company acknowledged that its so-called "gap to Knapp," industryspeak for its comparison with the casual dining sector, could decrease in coming quarters. The reason? Average check is increasing sectorwide, not because companies are discounting less--they're not--but because chains that have higher check averages are performing better. Yet Darden in a sense is stuck. It has typically avoided discounting, to good results, but it also strenuously avoids taking any dramatic price increase even if consumers are willing to pay it. Said CEO Clarence Otis: "It's important to take a consistent level of pricing, to maintain our integrity, but not to shock guests" by taking it all at once.
Darden Restaurants (webcast), September 22, 2010

KFC Is Burger Kinging Itself

Posted: Tue, September 21, 2010 at 4:07pm (CDT)

KFC's focus last year on its grilled chicken drew criticism for its subtle swipes at the company's main product, not to mention its failure to bring in more customers. The company has, seemingly, seen the error of its ways, which is what an 8-percent same-store-sales decline can do to a chain. But KFC now seems to be relying on gimmicks to attract the one group of people who could care less about calorie counts, young men. Take the double-down sandwich, and news today that KFC is looking to advertise it on the posteriors of college-aged women. We're all for broadening markets, but young men aren't exactly a thriving demographic right now and there is a ton of competition for their dollar as it is. Plus, as Burger King has experienced, the edgy marketing campaigns used to get these guys may be funny, but they do little to build a brand long-term and often alienate other groups--like those KFC tried to get with the grilled chicken in the first place.
BusinessWire, September 21, 2010

Look! Another Fast-Casual Mexican Concept

Posted: Tue, September 21, 2010 at 9:49am (CDT)

Lime Fresh Mexican Grill is about to hit the big-time. The 10-unit, fast-casual Mexican concept inked a 200-unit, master development deal with none other than the casual-dining chain Ruby Tuesday--which was so proud of its deal that it announced the agreement with a terse, two-sentence SEC filing one week after its signing. And no press release. Nevertheless, Ruby Tuesday has quietly expanded its brand offerings recently. In August, the chain said it planned to convert some low sales volume Ruby Tuesday units into a Jim N' Nick's Bar-B-Q or a Truffles Cafe, the latter of which is owned by CEO Sandy Beall's brother. And in 2007 it had acquired an Asian concept, Wok Hay. We are as yet uncertain whether Ruby Tuesday plans to use Lime Fresh as a conversion or a fresh concept, but we do think it's clear that Ruby Tuesday thinks little of its flagship concept's growth prospects.
Knoxville News-Sentinel, September 21, 2010

Don't Call It A Comeback

Posted: Tue, September 21, 2010 at 9:27am (CDT)

It's difficult to kill a restaurant brand and nearly impossible to kill an iconic one. To wit: Krispy Kreme. The North Carolina-based doughnut chain went from admiration to laughingstock almost overnight amid restated financials, an SEC investigation, a flirtation with bankruptcy and several bankrupt operators thanks to horrible unit economics. The chain lost $136 million in 2006, for instance. But the company expects to make a profit this year and next, and it has stopped shrinking. It only lost one unit this year. It has started to re-enter lost markets. And next year it'll do something almost unthinkable two years ago: grow in the U.S. Krispy Kreme is projecting to add 15 domestic units in 2011, bringing its total to 239, with many of those being smaller, cheaper units rather than the costly doughnut factories the company once built. It may not be a return to the long lines of early last decade, but at least the hot doughnuts are still around.
SEC, September 21, 2010

Discounts On The Downswing?

Posted: Mon, September 20, 2010 at 1:13pm (CDT)

According to the Bureau of Labor Statistics' latest release, menu prices went up 0.3 percent in August, a seemingly modest increase, but the largest in well over a year. It also ended several months in which menu prices either didn't increase or went up 0.1 percent. The August menu-price growth may be a one-time blip, but it may also mean that restaurateurs are finally willing to start taking some price increases after years in which discounts and price cuts were viewed as the only way to get customers in the door. So far, it doesn't appear to be keeping them away, at least judging from federal data and companies' own preliminary sales figures for the month.
U.S. Bureau of Labor Statistics, September 20, 2010

Rejoice! The Recession Is Over!

Posted: Mon, September 20, 2010 at 9:53am (CDT)

The National Bureau of Economic Research, which tells us when recessions start and when they end, said this morning that the recession officially "ended" in June 2009. It also noted that the recession we just endured was the longest since the end of World War II. Sure, we'll buy it that the recession is over. But we refuse to call our existing situation a "recovery." Stagnation might be a better word. Or a "bottom-lingering."
National Bureau of Economic Research, September 20, 2010

The Economics Of Breakfast

Posted: Mon, September 20, 2010 at 9:45am (CDT)

We'll admit we were surprised when we found out that Subway was going to start a breakfast service, but that was nothing compared to our shock when we saw this story linked below, that Domino's will be watching the performance of a 24-hour store in Ohio that will serve--you got it--breakfast pizzas. Then again, maybe we shouldn't have. Breakfast is big now. With lunch and dinner stagnating, several quick-service chains have been adding or improving breakfast. Franchisors that add breakfast increase sales, and thus royalties, and franchisees can leverage their fixed costs. Despite all this, we have questions about whether it is profitable--franchisees at some concepts have told us they lose money on the daypart, meaning that breakfast mandates may cause more tension between franchisors and operators. As for this Domino's, we don't think it'll become a big deal nationally. This franchisee-owned unit is on a college campus. Those kids will eat anything.
MSNBC (AP), September 20, 2010

About That $30 Billion Lending Fund ...

Posted: Fri, September 17, 2010 at 3:39pm (CDT)

The small business lending bill that the Senate sent to the House this week has some good provisions that should help small business lending--notably the expansion of the amount of loans the SBA will guarantee, to $5 million, from $2 million. But the biggest question surrounds the $30 billion small business lending fund that nearly killed the bill. Will the fund increase lending? Probably. As much as advocates say? Probably not. Small community banks that access the fund would pay a smaller dividend if they expand small business lending, and the nation's community bankers say that will work. But, back in May, the Congressional Oversight Panel called the fund's prospects "far from certain." Part of it is political, as many banks may not want to take the money for fear of being associated with a "mini-TARP." Mostly, however, the panel said that the failure of TARP's community purchase program to stimulate lending raises questions about whether any fund would do the job.
Jonathan Maze, September 17, 2010

Unemployment, Education, And The Impact On Restaurants

Posted: Fri, September 17, 2010 at 10:44am (CDT)

The unemployment rate among people with at least some college education has gone up the past two months, while the rate for those with only a high school diploma or less has declined. Yet the figures don't diminish one fact of the economy's lackluster recovery: People with more education and higher incomes have fared better since the Great Recession's so-called "end." As it is, the gap between those two groups has widened into a gulf. Before the recession hit, people without a high school diploma had a roughly 7-percent unemployment rate. A year ago that rate was 15.5 percent. Those with a college degree had a 2-percent unemployment rate before the recession and 4.7 percent a year ago. Not surprisingly, restaurant chains that cater to the working class and low-income people have fared far worse, while chains like Panera and Chipotle that target higher-income people have done well.
Jonathan Maze, September 17, 2010

In The Monitor: The Students And The Sushi Chef

Posted: Fri, September 17, 2010 at 9:11am (CDT)

Here's what we love about the restaurant industry: No matter how big it is, and no matter how many different concepts there are and how much food is served, there are always guys like Daniel Certner, Shaan Puri and Trevor Ragan who are
trying to make it better.
The three do not own their own restaurant, not yet. They're probably standing on a Denver street corner right now, counting the number of people who walk or drive by as they search for the perfect location. But they've already put in countless hours and money into the concept they want to start, a fast-casual sushi restaurant to be called Sabi Sushi.
And it has already generated attention. It's taken them to Wall Street and to China and to Atlanta. It's won them the support of a well-known sushi chef. And it enabled them to win the Duke Startup Challenge, an award typically reserved to grad students--rather than undergrads like themselves--who start health care or technology companies.
"We're entrepreneurs," Certner said. "That's what we are. We don't care how many obstacles get in our way. If we need to talk to someone, we're not afraid to cold call them. The judges saw that and thought, 'These three kids are just crazy enough for this to work.'"
Certner, Puri and Ragan were friends at Duke. Two years ago, they went out for sushi. Puri and Ragan hadn't tried it, but they fell in love with the dish that evening, and they kept eating it. "They made up for 20 years of not eating sushi in one month," Certner said.
But sushi is expensive, and the restaurants have long wait times. They did some research and came up with a plan for a fast-casual sushi restaurant. They brought it up to Lisa Keister, who taught a "Getting Rich" class at Duke they all took. She encouraged them to pursue the idea.
The three put their careers on hold--Certner was to go on Wall Street, Puri to medical school and Ragan was to be a teacher--and pursued Sabi Sushi.
They entered their idea into the startup challenge, run by Duke's Fuqua School of Business. The competition was started by Duke Students more than a decade ago to promote some of the university's ideas. This year the competition included 110 people. The three would-be restaurateurs had a lot going against them: They never wrote a business plan before--and they didn't know anything about sushi, either.
Then they saw Phillip Yi compete with Bobby Flay in a Sushi Throwdown on the Food Network. Yi is a sushi expert. He runs his own sushi restaurant in Los Angeles, Sushi Central, which he started more than four years ago after he helped run the California Sushi Academy, and where he considers himself as much of a sushi educator as a sushi chef.
The students called Yi. He agreed to look at the business plan, but he wasn't serious--at first. "The truth is, I blew it off," Yi said. But the guys kept calling, over and over again, for months. "They were persistent, and so respectful," Yi said.
He agreed to a one-hour conference call, and then he agreed to fly to North Carolina--the students scrounged up $300 to fly him out there for three days.
Yi agreed to be a partner in the concept and to teach the kids about sushi. So Certner, Puri and Ragan each flew out there and lived with Yi for two weeks, eating and making sushi.
And it's here where the three learned how tough the restaurant industry is. "You'd wake up in the morning, go to the fish market, check out the fish for the day," Certner said. "You live in the restaurant. Phillip said, 'you guys don't know about the restaurant industry. It's a lot harder than you think.' We were working 15-hour days, the life of owning a restaurant.
"It was eye-opening. As a college student, you don't know what goes into running a restaurant. It's not a question of rolling sushi. It's a question of getting the restaurant prepared so you can roll the sushi."
Said Yi: "At one point, with each one of them, I tried to take them to the point where I'd break them a little bit. None of them broke."
Yi's partnership helped the students win the Startup Challenge, making them the first undergraduates to win the competition, and the first ones with a restaurant. The victory came with $25,000 in prize money, which they've been using to fund research into their idea.
They've since packed up all their belongings into an Infinity and a Chevy Cavalier and moved to Colorado, where they're living in an aunt's basement. They picked Colorado over the Duke campus largely for its heavy presence of fast-casual restaurant concepts--Certner mentioned Noodles & Co., Qdoba, Chipotle and Quiznos, though he'd be advised to not look too hard at the latter's business plan. They also discovered why the area is so food friendly: "They have a lot of money, and they spend a lot more to eat out," Certner said. "Most of the country spends 6 percent of their income on eating out. In Colorado they spend 8 percent."
They've kept up their studies since then. They research locations—they want to move near a college campus. They attend conferences, and will be at the Restaurant Finance
& Development Conference in November. They met with Noodles executives. They were among 40 students to be invited by the global import-expert company alibaba.com to go on an all-expense paid business tour of China.
None of this guarantees success, even if sushi is hip and fast-casual concepts are popular and the people around them are enthused about their idea. But they've got the entrepreneurial spirit and the gumption to keep pushing. "We're not afraid to call someone up and say, 'I'm 22 years old, I don't know anything, and I want to learn,'" Certner said. ...continue reading.

Plenty Of Losers In The Claim Jumper Deal

Posted: Thu, September 16, 2010 at 11:48am (CDT)

When Claim Jumper filed for federal bankruptcy protection late last week it had nearly $186 million in debt. It's pretty safe to say that the holders of that debt won't get much of their money back. Based on bankruptcy filings, the 45-unit chain owes $74.1 million to Wells Fargo, GE Franchise Finance and Bank of the West. It also owes $111.8 million to Private Capital Partners, which is owned by Black Canyon Capital--which, not coincidentally, is the stalking horse bidder in the proposed sale of the company. Claim Jumper was sold to Leonard Green for more than $200 million, and then its sales fell into an abyss--revenues went from $293 million in 2007 to $233 million in 2009, a 20-percent decline. The chain has lost $11 million in two years. Not surprisingly, bids for the company, including some last year during a first, failed attempt at a sale, have never come close to equaling the chain's debt. Black Canyon is paying $24.5 million in cash and "obligations." ...continue reading.

Predicting A Seller's Market

Posted: Wed, September 15, 2010 at 1:45pm (CDT)

We've been looking for explanations about Burger King's purchase price all week, and so we were intrigued by a note, published back in May, by Bernstein Research Analyst Brad Hintz, who predicted a "rebound" in the private equity deal space. He said an improved leveraged finance market could support deals from $1 billion to $4 billion. And then he said this: "The challenge right now is that there is too much PE capital for the size of PE opportunities available today. Therefore, competition among the largest players is fierce and it's a seller's market." A 9x multiple for Burger King? We'd say it's a seller's market. ...continue reading.

Tracking The Franchise Sector

Posted: Wed, September 15, 2010 at 9:44am (CDT)

The U.S. Census Bureau released its franchising census yesterday and, truth be told, there was nothing particularly revelatory about it. The study more or less confirmed, with numbers, how big franchising is, and how common it is in industries that rely on convenience and size and have the unit economics to support independent owners (quick-service restaurants, car dealerships, gas stations). Still, here are a few numbers: Franchising is a $1.3 trillion sector; one out of every 10 employers is a franchise; franchisees, on average, own 77.3 percent of the units in a franchise system; car dealerships led in total sales, with $687.7 billion, and the industry where the business strategy is the most common is--wait for it--quick-service restaurants. As of this census, there were 124,898 franchised QSR restaurants in the U.S., by far the most among any industry.
U.S. Census Bureau, September 15, 2010

Good Bad News On The Restaurant Front

Posted: Tue, September 14, 2010 at 3:17pm (CDT)

A new study from the market research firm NPD Group shows more good bad news for the restaurant industry, or bad good news, depending on how you look at it. Visits to U.S. restaurants declined again this past spring. But the rate of decline, down 1 percent, was better than it was the previous spring. Full-service restaurants fared the worst, particularly mid-segment, where traffic fell 3 percent. But at least restaurants have been able to get people out of bed in the morning. Breakfast grew 1 percent in the quarter, including 2 percent at QSRs. Competition has intensified for breakfast among big quick-serves, as Subway and other chains have either added the daypart or expanded their offerings, and then marketed them heavily. Perhaps this marketing effort is getting people to put down their Froot Loops now and then.
NPD Group, September 14, 2010

Small Business Lending Bill Moves Forward

Posted: Tue, September 14, 2010 at 12:33pm (CDT)

The Senate this morning paved the way for final passage of a $30 billion small business lending bill, effectively ending all drama over the measure. The bill is backed by industry groups and should help ease the lending environment even further for franchised restaurants--it expands SBA loan limits, making larger loans eligible for government backing, and temporarily returns the agency's guarantee to 90 percent from the 75 percent it has guaranteed over the past few months. The return of that guarantee will likely clear the way for loans that had been on hold pending the bill's outcome.
Reuters, September 14, 2010

With BKC Bought, Who's Next?

Posted: Tue, September 14, 2010 at 10:48am (CDT)

Since Burger King announced its proposed sale to 3G Capital early this month, speculation has run rampant about who's next. Some private equity groups have money to spend, and the leveraged finance markets have recovered. Here are some likely candidates: California Pizza Kitchen and Benihana have already said they're looking to sell, and Wendy's has said the same thing--sort-of. Sara Senatore, analyst with Bernstein Research, mentioned a couple of others in a note this morning, including Brinker International and Bob Evans, based on their liquidity and debt capacity, which would also qualify Wendy's as a possible buyout candidate. We'll add Sonic, which we think is being targeted for takeover by Biglari Holdings. Senatore, by the way, said a buyer could get Brinker for $23.50 a share, and Wendy's at $5.60. ...continue reading.

Another Day, Another Chipotle All-Time High

Posted: Mon, September 13, 2010 at 4:07pm (CDT)

It's safe to say that Chipotle Mexican Grill's stock price has recovered from the recession. Today, the stock closed at $168.37, the latest in a string of all-time highs the stock has reached in recent days--the price had reached $150 in the months before the recession hit before falling down to earth along with everything else. Still, the current value is stunning. The burrito chain's stock is trading at 17x EBITDA. Compare that to other supposedly high-flying restaurant stocks like McDonald's and Buffalo Wild Wings, which are trading at just under 10x earnings, or Panera, which is trading at 11x EBITDA. It's clear to us that investors really want a growth restaurant stock. Either that or they love burritos.
Jonathan Maze, September 13, 2010

Here's A Tip: Don't Anger Your Customers

Posted: Mon, September 13, 2010 at 1:50pm (CDT)

Fazoli's CEO Carl Howard told us last week that the chain is bringing back its signature dining-room delivery of free breadsticks. This is a simple issue, but one that illustrates how chains can make big mistakes when they get desperate. Fazoli's grew quickly in the 1990s and in the early part of this decade but it has been struggling with years of falling sales. In the midst of those struggles, in 2007, Fazoli's stopped delivering those breadsticks. It may have saved costs, but it angered customers at a time when many were dining there less as it was. Not surprisingly, sales fell further as customers went elsewhere. It now has 233 units, down from a peak of 400. It has recently stopped the bleeding under Howard, who started in 2008 and seemed little impressed with the decision to go away from the breadstick delivery. "There was quite a bit of guest migration" after the delivery stopped, he said. "It was an iconic element." ...continue reading.

At Least The Temps Are Getting Jobs

Posted: Mon, September 13, 2010 at 9:10am (CDT)

Express Employment Professionals, a large temporary employment franchise, said late last week that it set sales records for each of the past two weeks, as clear a sign as any that companies are hiring temporary workers. This is good news--temporary hiring usually predicts gains in employment, and gains in employment are what's really necessary for any recovery in the restaurant industry. It's also not much of a surprise. Productivity has gone down, demonstrating that companies have stretched their workers as far as they can go. Yet many businesses remain leery of hiring permanent workers given the immense amount of economic uncertainty (and political gridlock, by the way, is not helping matters). Those companies won't start hiring permanent workers until they're confident that the economy is no longer in danger of falling off a cliff again.
PR Newswire (press release), September 13, 2010

Could Lunch Spending Come Back?

Posted: Sat, September 11, 2010 at 8:21am (CDT)

Not only have consumers cut their dinner spending, many are not eating out at lunch anymore, in part because more of them don't have jobs and coworkers to talk them into a restaurant meal. This helps explain why many QSRs, in particular, are overly focused on breakfast and why McDonald's is trying to become both Starbucks and Jamba Juice. But according to Packaged Facts, the lunch could make a comeback next year. The research firm this week said that lunch spending should rise to $114 billion next year. That's much lower than 2008, when it had risen to $119 billion, but it's still $2 billion over what's expected this year. No, this is not fuel for a full restaurant comeback, but at least it's something.
Packaged Facts (press release), September 11, 2010

More On The Soap Opera That Is Benihana

Posted: Fri, September 10, 2010 at 10:13am (CDT)

Last month, Benihana reached a deal with its activist investor, Coliseum Capital Management, agreeing to nominate its managing director, Adam Gray, to the company's board. But Benihana's other activists, the family of the company's founder, Rocky Aoki, have been quiet in their quest for board seats. Here's why: Rocky's widow, Keiko Aoki, with whom Rocky's children have been doing battle since his death, has gained control of his estate. According to an SEC filing, linked below, Benihana reached a deal with the Aoki kids to end their proxy battle shortly after the Coliseum deal was announced. But then a New York court gave Keiko control of the estate. Benihana negotiated with Keiko, who wanted to nominate someone else. But she apparently balked at some of the terms of the original deal and the negotiations fell apart. So the Aokis' proxy contest goes on.
Jonathan Maze, September 10, 2010

Claim Jumper Goes Bankrupt, And Has A Buyer

Posted: Fri, September 10, 2010 at 9:00am (CDT)

Leonard Green is one step closer to getting out of Claim Jumper. The 45-unit California chain this morning said it has a buyer, Private Capital Partners, an affiliate of Canyon Capital Advisors, an investor in the chain. Terms were not yet disclosed, but as part of the deal, Claim Jumper has agreed to file for federal bankruptcy protection. Regardless, the deal signals the beginning of the end of Green's ownership. His purchase of the chain in 2005, for an eye-popping estimate of $220 million, or 11 to 12 times EBITDA, remains one of the best examples of the over-heated deal-making that went on just before the recession hit. Claim Jumper's profits plunged soon after the purchase and the company this year was projected to lose $2.4 million.
Business Wire (press release), September 10, 2010

The Slowly Easing Financing Market

Posted: Thu, September 09, 2010 at 11:51am (CDT)

Financing is slowly easing, as many companies know, particularly those in the franchise space. Smaller and mid-sized franchise restaurants, however, may have an easier time in the coming years if they lease their space. That's because many banks are running up against federal limits on the amount of loans involving commercial real estate on their books. So they may be more willing to look at deals that don't involve property. As for those chains that buy their own property, one piece of advice comes from John Longstreet, CEO of Quaker Steak & Lube, who told us this morning that his operators are finding better luck in smaller markets. That's where banks have yet to run up against those limits, making them more likely to do a real estate loan. ...continue reading.

Burger King And The Railroad CEO

Posted: Thu, September 09, 2010 at 9:57am (CDT)

We'll admit that we know almost nothing about the Brazilian railroad business, but we imagine that it's different from running restaurants. Thus, we can't say we're overly impressed with the announcement this morning that Miami-based Burger King will be led by Bernardo Hees once the new owner, 3G Capital, takes over. Hees runs America Latina Logistica, a Brazilian railroad company, and by appearances he's doing so successfully. To be sure, plenty of CEOs with no restaurant experience have surprised us over the years with their performance at the top of chains, and so we're hardly giving up hope for the King. Yet more often than not, the person with greasy fingers is going to do the better job in the executive chair. In fact, we think that a chain is more likely to succeed if its executive ranks are filled not by MBAs but by people who rose up through the restaurant ranks.
PR Newswire (press release), September 9, 2010

Sales Versus Quality, Burgers Edition

Posted: Tue, September 07, 2010 at 3:38pm (CDT)

Consumer Reports today released results from its survey of burger chains, but all they prove is (again) that high consumer ratings don't necessarily beget success. While the two chains consumers love most, In N Out and Five Guys, are both successful, the No. 3 chain (Fuddruckers) just emerged from bankruptcy and No. 5 (Back Yard Burgers) is shrinking. Still, we admit to being perplexed by the performance of McDonald's, which was at the bottom of the 15 chains in the survey. Consumers gave it a 5.6 score out of 10, compared to 7.9 given to In N Out and Five Guys and below its QSR peers. This is the second time in weeks that arguably the best performing restaurant chain in the world received low consumer scores. Perhaps McDonald's image continues to suffer from obesity campaigns that seem overly focused on the Golden Arches. And perhaps many of its customers don't read Consumer Reports. Even so, these scores serve as one of the few storm clouds in McDonald's future.
Consumer Reports (press release), September 7, 2010

Could BK Deal Ignite A Selling Frenzy?

Posted: Tue, September 07, 2010 at 9:18am (CDT)

A Reuters article this week quoted a few analysts speculating that the Burger King sale to 3G Capital could ignite more deals in the restaurant space, and we're hardly going to argue. It's difficult to imagine boards, especially at some chains, not exploring the option when a company like BK can fetch a 9x multiple. And Reuters mentioned just about every publicly traded restaurant chain as possible takeover targets, including Ruby Tuesday, Brinker, Jamba, Morton's, Famous Dave's, Jack in the Box, Red Robin, Sonic and Wendy's. While we wouldn't expect to see a ton of buyouts in the coming months, only deals involving companies at their peak, such as a Chipotle or a McDonald's, would truly surprise us right now. As an aside, since Burger King's sale, both McDonald's and Yum! Brands hit new 52-week highs. Coincidence? Of course not.
Reuters, September 7, 2010

Burger King And The Private Equity Bubble

Posted: Thu, September 02, 2010 at 10:03am (CDT)

Any question that there is something of a private equity bubble was answered this morning when Burger King announced its rumored sale to the private equity group 3G Capital--which until now had been known most as the employer of the guy who married Chelsea Clinton (Marc Mezvinsky). But the price, $24 a share, or $4 billion, was a surprise--shares were trading at $16.45 a share on Tuesday, and you'd have to go back to April of 2009 to find a day when the company's share price even reached $24 a share at all. The price equates to about 9x EBITDA, far more than the 6.6x CKE got, as well as BK's 6.5x enterprise value as of Tuesday. Sure, the brand has some potential, and room to grow internationally, but it's not exactly flying high right now--sales are lagging and franchisees as a whole are angry. At these prices, why not sell?
Business Wire (press release), September 2, 2010

On Employment: Not Just About Numbers

Posted: Wed, September 01, 2010 at 9:38am (CDT)

Friday's closely watched report on unemployment isn't expected to be good news, as evidenced by the most recent ADP Employment Report. It found that private sector industries cut 10,000 jobs in August, further confirming that the recovery has stalled. But the news isn't even that good. According to ADP, goods producing companies cut 40,000 jobs, which was offset by a 30,000-job increase in service-sector workers. Why is this important? Pay. On average, goods-producing workers make $10,000 more than their service-sector counterparts every year. So many workers who do find jobs don't get the pay they once did. Less pay means less money to spend at restaurants.
ADP Employment Report, September 1, 2010

Now Burger King Is, Reportedly, On The Block

Posted: Wed, September 01, 2010 at 8:41am (CDT)

Burger King is apparently the latest restaurant company to look longingly at the greener grass of private life. According to the Wall Street Journal and the New York Times, the Miami-based QSR is in buyout talks with private equity groups, one of which is 3G Capital. Burger King has had a rocky ownership history, and it only went public four years ago. But the economy has been brutal on its core customers--young men--ending a string of strong sales since TPG, Bain Capital and Goldman Sachs bought the company from Diageo in 2002. It also has a large group of angry operators. In a note on the reports, Janney Capital analyst Mark Kalinowski called a possible sale "a chance for some investors to cut their losses." Indeed.
WSJ, New York Times, September 1, 2010