Restaurant Finance Across America
Archived postings from October, 2010...
Landry's Wins Claim Jumper Auction
Posted: Fri, October 29, 2010 at 2:26pm (CDT)
Tilman Fertitta got his restaurant chain. Landry's Restaurants, the company Fertitta just took private, has won the bid for the bankrupt California chain Claim Jumper, a spokeswoman for Claim Jumper told the Monitor. Landry's winning bid was $76.6 million, according to a court filing, including $48.3 million in cash plus $28.3 million in assumed liabilities. That was considerably higher than the stalking horse bidder's offer, which totaled $56 million, including $27 million in cash. Landry's and the stalking horse, Private Capital Partners, had tried outbidding one another even before the auction began. Regardless, the $76.6 million is far from the $200 million that Leonard Green paid for the chain in 2005. The U.S. Bankruptcy Court in Delaware has scheduled a hearing for next Tuesday at 2 p.m. eastern time to approve the bid. ...continue reading.
Mexican Restaurants Decides To Delist
Posted: Fri, October 29, 2010 at 2:25pm (CDT)
One reason there are so few publicly traded restaurant chains is that small companies find it too costly and complicated to fulfill many of the requirements involved in selling equities. Mexican Restaurants apparently found that out. The 72-unit operator of various Mexican concepts today said it plans to delist its stock on the NASDAQ exchange and will suspend its reporting obligations. The company will instead list its shares under a service, such as "Pink Sheets," that doesn't require an SEC registration. The company blamed the high cost of the SEC requirements and the NASDAQ rules for its decision, and said it can delist because it has fewer than 300 shareholders. Still, at least one investor, Cross River Capital Management, which owns about 10 percent of Mexican stock, had expressed dismay with the prospect of a delisting, saying that it was "not on the surface a friendly shareholder move."
Mexican Restaurants, October 29, 2010
More Evidence On Restaurant Improvement
Posted: Fri, October 29, 2010 at 9:51am (CDT)
The condition of the restaurant industry is improving, according to the latest restaurant performance index from the National Restaurant Association. The index in September was at 100.3, up 0.8 from August and the highest level since April. The index was driven largely by improvement in restaurants' expectations for the coming months. Restaurants' current situation improved as well, though at 99.4 the current situation index remained below 100, signaling continued softness in the market. Still, according to NRA Senior Vice President Hudson Riehle, the industry reported record sales for the month, up 4.5 percent from a year earlier. Meanwhile, 38 percent of restaurant owners expect conditions to improve in the next 6 months, while only 16 percent expect conditions to worsen. One month hardly a trend makes, but the restaurant index, combined with numerous reports from restaurant chains, show that consumers in September decided to eat out more.
National Restaurant Association, October 29, 2010
Biglari And The Insurer
Posted: Wed, October 27, 2010 at 2:32pm (CDT)
In a recent SEC filing, Biglari Holdings said that it has nominated its namesake and chairman, Sardar Biglari, to the board of Fremont Michigan Insuracorp, the insurance carrier Biglari wants to add to his company's holdings. An insurance company would give Biglari a steady flow of cash with which to invest. Biglari recently made a revised offer to buy the insurance company, and now has a backer in the form of another investment company--Loeb Arbitrage Management, holder of 9 percent of Fremont stock. Loeb earlier this month urged Fremont in an SEC filing to consider Biglari's offer, saying it is "not in favor of further tactics that put off potential buyers of the company." We're guessing that Biglari's efforts to acquire Fremont will keep him from targeting another restaurant, for now, anyway.
SEC, October 27, 2010
Kona's Cost Conundrum
Posted: Wed, October 27, 2010 at 11:10am (CDT)
Kona Grill had a good third quarter as the upscale casual chain keeps pulling in more customers, even if they're not spending as much. Yet on its conference call the company also noted that it had significant food cost concerns in the quarter, which drove up its cost of sales by 100 basis points, mostly because of high beef, chicken and seafood prices. In Kona's case, the company plans to begin contracting those items in 2011, which the company believes could keep the inflation down--but the inflation will still be there. It will be the first time Kona has ever taken that step, mostly because in prior years it was just to small. Still, the issue illustrates something many restaurateurs are going to have to deal with in the coming quarters if they're not dealing with it already: Get ready for commodity price increases. ...continue reading.
Chili's Has A Bad Summer
Posted: Wed, October 27, 2010 at 10:05am (CDT)
The recession's lackluster recovery means that some restaurants will thrive while others won't, and the latest example of a "have not" is Chili's. While its main competitors, Applebee's and Ruby Tuesday, have stemmed the outflow of customers in recent months, Chili's keeps watching them leave. This morning, parent company Brinker reported that Chili's third-quarter comp sales fell 6 percent while traffic fell 5.5 percent. That said, there is some good news for the chain. Most of its problems came in July and August, when traffic fell 8.7 percent and 12.6 percent, respectively. Traffic fell "only" 2.1 percent in September. The company also reported higher profits, but it's clear that Chili's has fallen behind the casual dining pack.
Brinker International, October 27, 2010
What Consumers Say, And What They Do
Posted: Tue, October 26, 2010 at 9:19am (CDT)
Just about every survey shows consumers in a general state of fear. Various polls say consumers plan to cut spending. Consumer confidence remains at historically low levels, according to The Conference Board, even if it was up slightly this month. None of this jives with sales figures. Retail sales are up. And a host of restaurants have reported strong third quarter sales, including many casual dining chains that rely heavily on discretionary spending. That said, restaurants tend to look good now in part because of easier comparisons, said Sara Senatore, analyst at Bernstein Research. In addition, independents, may be getting the brunt of cutbacks. But we'd also add this: Consumers frequently say they'll cut back, but they don't once push comes to shove. Sales figures are the real test of consumer confidence. "I don't know who responds to those surveys," noted Sharon Zackfia, analyst at William Blair. "I tend to look more at what consumers do, rather than what they say."
The Conference Board, October 26, 2010
Casual Dining And Holiday Sales
Posted: Mon, October 25, 2010 at 3:59pm (CDT)
Casual dining chains have quietly had a good run, and that could mean good things for retailers this holiday season. The Knapp Track index of casual dining comp sales was up 1.2 percent in September. Several chains recently reported strong quarters, including previously struggling concepts like Applebee's and Ruby Tuesday. So how could this mean a good holiday season? According to William Blair Analyst Sharon Zackfia, casual dining sales can be a good, sales-based predictor of retail sales. She said that casual dining sales come from more discretionary purchases at dinner time. So if casual dining sales are up, people are spending more of their discretionary income, which often translates into higher retail sales (conversely, lower casual dining sales means lower retail sales). So, with casual dining sales up now, and an improved fourth quarter expected, this could be a good holiday retail season. By the way, other sectors aren't good indicators of retail sales. ...continue reading.
Burger King's New Management Team
Posted: Mon, October 25, 2010 at 1:51pm (CDT)
It's the prerogative of any new business owner to put in place his or her own executives, and 3G Capital, Burger King's new owners, are certainly taking that to heart. The company this morning announced what amounts to an overhaul of its management team, saying that six executives will either be new to the company or placed in new roles, while four executives will stay in their previous jobs. The new appointees include some with obvious connections to 3G, including a former InBev logistics officer and a former 3G partner. But Burger King also added a pair of former franchisees to the mix, which should be good for the chain, which has a troubled relationship with its operators. One new executive is Steve Wiborg, who will be the president of the North American operations. Wiborg had previously been with Heartland Food Corp., one of BK's largest franchisees. The other is Greg Ryan, who will head the Latin American operations and had previously been a McDonald's franchisee in Brazil.
Burger King, October 25, 2010
Jimmy John's And Its Union Problem
Posted: Fri, October 22, 2010 at 3:23pm (CDT)
The unionization effort by workers of a 10-unit Jimmy John's franchisee in Minneapolis has received a lot of attention, especially considering that it involves only 200 employees. A campaign by the workers fueled the effort, but the vote mostly garnered attention because it's just so rare. Unions do exist in the restaurant industry, but they're hard to find. Only 1.3% of restaurant workers were members of a union last year, roughly even with the level of the past decade. Most if not all of those are workers of full-service restaurants that employ more full-timers and professionals--we'd suspect the fast food union membership percentage to be close to zero. The workers are too young, and there's too much turnover. And unions overall are not exactly growing in favor--the percentage of private, non-farm workers has fallen from 24.6% in 973 to 7.2% today. Could the Jimmy John's vote lead to a surge in restaurant union membership? We doubt it. (Indeed, the vote ultimately failed Friday.) ...continue reading.
A New Restaurant Model?
Posted: Fri, October 22, 2010 at 2:49pm (CDT)
For all the experimentation that goes on in the restaurant industry, little of it has to do with the basic business. Customers go in. Order their food. Then they pay for it. If the restaurant has wait staff, they even eat it first. But a restaurant to open this year or next in Chicago, called Next Restaurant, could offer a radical departure from that model. Customers would buy tickets to meals, paying for them much in the same way you pay for a theater ticket. And those tickets would cost more during high-demand days and times. For instance, Friday evenings would cost more than a late Monday night. Customers have clearly shown a willingness to prepay for their meals, as shown in the massive popularity of sites like Groupon. It could also speed up service and help the restaurant adequately prepare. If the restaurant succeeds, we expect a few copycats.
Financial Times, October 22, 2010
Comp Sales And An Uneven Recovery
Posted: Fri, October 22, 2010 at 9:13am (CDT)
This morning, BJ's Restaurants said its comp sales last quarter were up a surprisingly high 6.7%. Yesterday evening, The Cheesecake Factory said its comps were up 2.8%. Chipotle as previously noted shot up 11.4%. And McDonald's domestic same store sales were up 5.4%. Taken together, these would suggest a broad restaurant recovery and, indeed, investors so far this morning seem to be taking it that way. But that's not necessarily the case -- remember that Sonic on Wednesday said its comps fell 6.4 percent. Rather, the recovery is uneven. Some demographic groups are doing better now than others, so restaurants that cater to a more low-income demographic will do worse than those who cater to the wealthy. In addition, with diners only slowly coming back to restaurants, they're opting for some chains and they're avoiding others. As long as the broad economic recovery remains uneven, the restaurant industry's recovery will be uneven, too. ...continue reading.
SBA Lending Up In 2010
Posted: Fri, October 22, 2010 at 8:46am (CDT)
According to the Coleman Report, a well respected newsletter and website that closely follows the SBA, 2010 was a good year for government-backed lending. The federal government backed 47,000 SBA 7(a) loans worth $12.5 billion in its 2010 fiscal year, which was up 34 percent from the previous year. The SBA backed 7,834 504 loans, worth $4.5 billion, which was up 15 percent. None of the figures are terribly surprising. Financing has been slowly easing throughout the year, and the government backed program is a popular avenue these days because of its 90-percent guarantee, which for now runs through the end of the year. Whether the market can continue its pace without that level of guarantee remains to be seen -- views seem to be mixed on that front -- but given the paltry level at which the SBA program was at 18 months ago, the increase is welcome news to the restaurant and franchise sectors.
Coleman Report, October 22, 2010
Chipotle Had A Pretty Good Quarter
Posted: Thu, October 21, 2010 at 3:50pm (CDT)
Every now and then, I wonder why Chipotle is trading at more than 17x EBITDA, and then I see quarterly financials like those the company released this afternoon. Comp sales in the third quarter grew 11.4 percent. Revenues were up 23 percent. Restaurant operating margin 27.7 percent. Net income grew 39.9 percent. Earnings per share were up 40.7 percent. Despite the company's continued growth, as well as growth in the number of competitors, Chipotle locations keep luring long lines of customers in the midst of a sluggish recovery that has hit young people -- its target market -- harder than anybody else. Probably about 90 percent of restaurant executives would give an appendage or two to get ahold of some of the fairy dust Chipotle is spreading around.
Chipotle, October 21, 2010
A Casual Diner Goes Public
Posted: Thu, October 21, 2010 at 8:55am (CDT)
Bravo Brio Restaurant Group sold 10 million shares of stock on the market yesterday. The price: $14 a share, which was at the lower end of its expected range, enabling the company to sell more shares and raise $140 million. Half of the stock being sold belonged to existing shareholders looking to cash out, the other half belonged to the company. When we first heard that the Ohio-based company, which operates a pair of Italian-style casual dining restaurants, we hadn't expected it to get this far -- we figured the filing was something of a broad sales pitch, as companies are far more likely to sell to private equity than they are to go public. Still, Bravo Brio is the first new restaurant company to go public since 2006. Bravo will trade on the Nasdaq exchange under the ticker BBRG. UPDATE: Proving that stock investors really want a growth restaurant to buy, shares at Bravo Brio rose 14 percent, closing at $15.90 a share.
SEC, October 21, 2010
The New Abnormal
Posted: Wed, October 20, 2010 at 3:23pm (CDT)
Burger King's "go-shop" period came and went without any bid surfacing to beat 3G Capital's $24.00 per share bid for the company. No surprise here. Apparently, the rest of the "smart money" crowd sat on their hands at this auction.
How many investors out there would pay more than nine times cash flow for a QSR chain with lousy sales, a fractious franchise community and a concept in need of a facelift? In this environment, it might only be another private equity fund with too much time and money on their hands.
I don't begrudge BK's shareholders and management team from cashing in at an opportune time, it being the right of every red-blooded American to take profits when and if they want to. But, you have to feel sorry for the franchisees, who are hopeful things will turn around when the new management team shows up, but know in the back of their minds the new owners are paying too much for the brand and it might come out of their hides.
I know I'm being negative again about this deal for the second straight month and the promoters will counter there is international franchise potential for the brand. Blah, blah, blah. Don't all these prospective international franchisees have to come to the U.S. eventually and see how things are running? They might get an earful from the U.S. franchisees if they ever come to town. My guess is the new owners will have a separate franchise convention just for the foreign guys, safely out of this country so there is no interaction with the U.S. guys over cocktails. That could get really ugly.
Nine times cash flow is a growth multiple, and a really generous one at that. Nine times is not a multiple for a stagnant No. 2 chain with issues. I can't get over what the "smart money" keeps paying for these tired restaurant chains, including in my opinion, a no-growth Burger King.
Even the current board of directors admits challenges for the chain. In the company's proxy filings justifying the transaction, the board admitted it had "limited influence over their restaurant operations and must rely on franchisees to implement major initiatives including the reimaging initiative and point-of-sale upgrade and marketing and advertising programs to drive future growth." Rely on franchisees?
If the franchisees were so important to Burger King as the board intimates in this filing, you'd think they would have ordered management to treat them a little better.
Imagine this: At nine times EBITDA, 3G Capital is settling for an 11% implied return (the inverse of nine times) unless they can grow the cash flow from an already juiced up $446 million from 2009. That won't be easy. They are borrowing almost a billion dollars of the deal at close to a 10 percent interest rate. Bad things happen to restaurant companies when they borrow a billion dollars. I'm betting they can't grow the cash flow, just like Leonard Green & Partners, another private equity speculator, couldn't grow cash flow at Claim Jumper because they paid too much.
Financial guys have a hard time growing cash flows. Marketing isn't in their DNA. They need to be able to buy companies at the right price, slash a few expenses here and there and then hopefully flip it to someone once they can tie the red ribbon on the package. It doesn't work when financial buyers pay too much, even if they are partnered up with good operators. Good operators can't overcome bad deals.
I'm living in a dream world, though. Another era. I liked it better back in the days when someone could actually buy a restaurant chain, get a good deal and really make some money on it without resorting to the financial hocus pocus. The late Alan McDowell, a former Allen & Company investment banker and successful restaurant investor, once told me that no group of restaurants was worth more than three times cash flow.
Why only 3x?
"Too many things can go wrong in restaurants, and you must have a margin for error," was what McDowell used to say. I believed him because he made a lot of money with that approach.
OK. I always thought three times cash flow was a little harsh. And, I'll admit I haven't seen many deals lately at three times. I'd probably get out of the newsletter business for good if I could buy some Panera Breads and Buffalo Wild Wing restaurants at 3x cash flow. I might even pay 4x if they were in a no-tax state like Florida, Texas or Tennessee.
But 9x? Leonard Green & Partners paid 12x for Claim Jumper and look what they got. Nothing but a big goose egg! Julia Stewart bought Applebee's at 10x and there is no way those shareholders will ever come out on that one, either, unless they find another private equity fund to buy the company for more. How do you buy stores at 10x and then you can't give them away to the franchisees?
In the Burger King deal, the board hired Goldman Sachs to bless the deal for the shareholders with a "fairness opinion." Inasmuch as Goldman is already a big investor in Burger King, that's like asking Lady Gaga to provide positive comments about one of her outlandish outfits.
When Goldman says the Burger King sales multiple of nine times EBITDA is fair, who is going to argue with them? Of course it's fair for Burger King's shareholders, what else is Goldman going to say? "Congratulations, you guys really screwed 3G at 9x, so lets get this deal closed before they realize what rubes they are and rescind it."
In comparing the Burger King multiple to larger restaurant deals made over the past 12 years, Goldman says the typical multiple of enterprise value to EBITDA was 8.2x. However, if you excluded the restaurant M&A deals made during the hyper deal environment of 2005 to 2007, you got a multiple of 7.4x. That sounds more like it. Why is Burger King getting so much again?
Those hyper deals, when apparently everyone lost their minds and paid 9x or more, included the IHOP/Applebee's party, Bain Capital's lardish acquisition of Outback Steakhouse, Darden's poorly-timed buyout of Rare Hospitality, Nelson Peltz and Triarc-Arby's non-synergistic buyout of Wendy's and JP Morgan's investment in Quizno's. Role models for the new normal.
I can see 7.4x for a growth restaurant company, but never 9x. However, 9x cash flow must be the new normal for private equity funds operating in the modern, Ben Bernanke-America where "cash is trash" and the government's policy of quantitative easing (a.k.a. printing money) is making the investment funds and bond promoters richer (for awhile) and the rest of us poorer. Zero interest rates are great for speculators like 3G and Goldman, but not so good for creating jobs.
What's becoming normal here is that 9x EBITDA for a mediocre restaurant chain is simply a function of speculation and low interest rates rather than whether or not these companies are actually worth it. It's all a mirage. Burger King is worth 9x EBITDA because that's the new abnormal. It almost sounds like 2006 and 2007 again. God forbid if rates start to go up.
Corporate cash levels have risen dramatically across the U.S. and M&A advisors are hoping for a rekindling of deal mania. I think they will get what they want. With interest rates so low, eventually Bernanke will entice everyone who has cash or some borrowing capacity to buy something, even if they know they are overpaying. A Bugatti? Why not, especially if I can get zero percent financing. A new company? What the hell. I can pay up for it because I'm playing with Bernanke dollars and if it doesn't work, someone will bail me out. How about a restaurant chain that's seen better days? Count me in as long as I don't have to run it. I'm a finance guy and you know how we run things.
Sonic Looking On The Bright Side
Posted: Wed, October 20, 2010 at 12:50pm (CDT)
Sonic's recent quarterly conference call (linked below, via Seeking Alpha) was odd, to say the least. Cliff Hudson, the company's chief executive, noted that the company's own stores had reached the same performance level as those owned by franchisees, an accomplishment the company has been striving toward for a couple of years. Then again, when you have little positive news to report about in a conference call, you have to grab onto something. Sonic's comp says systemwide fell 6.4 percent at a time when QSRs in general have been on the upswing. And that 6.4-percent decrease is lapping a 4.5-percent fall from the previous year. In short, Sonic is still having trouble getting customers to come back, and continues to fight a brutal sales slump. Until it gets out of that slump, it will have little to truly brag about.
Jonathan Maze, October 20, 2010
Cheese Prices Mar Pizza Performance
Posted: Wed, October 20, 2010 at 10:12am (CDT)
Pizza chains have made a remarkable comeback in the past year or so. After getting hammered by grocery stores' freezer aisles, companies like Domino's and Pizza Hut have somehow convinced the general public order their pizzas more often. Consider Domino's recent performance, an 11.7-percent comp sales increase in the third quarter. Yet its profit margin for the quarter was actually smaller despite those sales. And a big reason was cheese prices. The company's cost for a block of cheese rose 28.6 percent. And meat costs are going up, too. The company then noted that it expects continued problems with cheese prices in the fourth quarter. While cheese prices have leveled off recently, providing some hope that the worst is over, the increase in commodities has put a damper on a pretty good run at the nation's pizza chains. It could be a sign of things to come for the restaurant industry as a whole as it recovers from the recession but faces commodity pressures. ...continue reading.
The Dangers Of Promoting Your Franchise Experience
Posted: Tue, October 19, 2010 at 2:48pm (CDT)
Business experience always plays well in the political world. So Doug Ducey is using his experience as the former chairman and CEO of Cold Stone Creamery in his run for Arizona State Treasurer. Yet perhaps this wasn't such a good idea. Cold Stone may have been a "true Arizona success story" at one point, as Ducey says in his campaign literature, but few would call the franchise "successful" today. It has lost a net 200 units in two years, has a 31-percent failure rate on SBA loans and has been the subject of franchisee lawsuits from angry operators. Not surprisingly, some of those operators are participating in ads against Ducey, including a particularly ugly attack ad linked below.
Jonathan Maze, October 19, 2010
Reconciling Conflicting Numbers
Posted: Tue, October 19, 2010 at 10:23am (CDT)
It's getting difficult reconciling economic reports with sales results. Just about every survey out there shows a consumer insisting it plans to cut back on spending, a dangerous sign for restaurants. Yet those "cutbacks" are not showing up in restaurant sales figures, which are improving almost across the board. QSRs are up. Casual dining is up. Pizza is up. Upscale is up. So we asked for help from Larry Miller, managing director at RBC Capital Markets whose report yesterday noted broad improvement in the QSR sector. "Consumers are spending a little more than they're willing to say they are," he said. "The picture I came away with is prudent caution is the name of the game." The economy is in a precarious spot. We could see a recovery or a double dip. So while consumers are spending a bit more after two years of cutbacks, they're also acknowledging the economic uncertainty and are talking about more cutbacks. Will they follow through? Only if we don't get some clarity soon. ...continue reading.
Darden And Worldwide Expansion
Posted: Tue, October 19, 2010 at 9:15am (CDT)
Darden Restaurants today made an announcement that proved to be a dual first for the Florida-based casual dining company. Darden reached an area development deal with a company called Americana Group, which will develop Red Lobster, Olive Garden and Longhorn Steakhouse in the Middle East -- it's the company's first foray into the franchise world, and its first venture outside the U.S. Darden CEO Clarence Otis noted that the company is still committed to domestic expansion, but has been eager to expand internationally for some time. Indeed, doing so simply recognizes reality: A company like Darden may be able to find some places in the U.S. where it isn't, but the fact remains that the domestic market is limited. The real growth is outside our borders, where there are fewer restaurants and where dining out is still on the upswing.
Darden Restaurants, October 19, 2010
Nathan's Famous Loses A Round
Posted: Mon, October 18, 2010 at 7:24pm (CDT)
Nathan's Famous, which is more "famous" for its hot dog, uh "eating" contest than its hot dog restaurants, lost the latest round in its battle with a licensee for its hot dogs, SMG, a specialty meat producer. A judge in Illinois awarded SMG at least $2.9 million over claims about the way Nathan's has apparently profited from the sale of its seasonings to the company. But the bigger decision is yet to come. That issue, which was the subject of a recently concluded trial, is over whether Nathan's has the right to terminate its agreement with SMG. The two sides have been fighting one another over that for three years -- Nathan's has charged SMG with a breach of their license agreement. So far, at least, SMG believes it will keep the agreement. It still has Nathan's logo on the front page of its website.
Nathan's Famous, October 18, 2010
Declining Consumer Sentiment
Posted: Mon, October 18, 2010 at 3:04pm (CDT)
Restaurants seem to have stabilized their sales somewhat in recent months (indeed, casual dining comp sales were up 1.2 percent in September, according to Knapp Track). Still, a number of surveys are pointing to a decline in consumer sentiment, which would be bad news for the industry going forward. The latest such news comes from Technomic in its Viewpoints newsletter. The consulting firm started tracking consumer sentiment regularly since the outset of the recession. Its most recent survey shows broad apprehension among the public. Only 20 percent of its respondents said they were comfortable with their current economic well-being. And 87 percent said they have reduced expenditures. Meanwhile, 14 percent said they planned to "treat" themselves again, which is down from 20 percent in December, which Technomic Vice President Bob Goldin noted is "not exactly the direction we want to see."
Technomic, October 18, 2010
RFDC Preview: Restaurant Valuations
Posted: Mon, October 18, 2010 at 10:27am (CDT)
How much is an existing business worth? The answer is, usually, some multiplier of earnings. Yet using such a rule can be complicated and, as it turns out, your business may be undervalued as a result. At this year's Restaurant Finance & Development Conference, to be held November 8-10 at the Bellagio Hotel in Las Vegas, John Hall and Ed Moran will help you avoid that fate in their session, "Why a Rule of Thumb Might Undervalue Your Company ... and Nine Other Restaurant Valuation Facts You Must Know Before You Sell." Moran has been involved in small business and franchise valuation and accounting issues for 35 years. Hall is the CFO for 42-unit McDonald's franchisee McEssy Investments.
RFDC, October 18, 2010
Franchise Brands First Step: Fix Taco Del Mar Franchisees
Posted: Fri, October 15, 2010 at 4:32pm (CDT)
A spokesman for Franchise Brands LLC, the sister company of Subway that just bought the bankrupt Taco Del Mar system, told us today that his company plans to perform a "needs assessment" on its new purchase before making any decisions on changes, such as management. (Though it is doing away with Taco Del Mar's master developers.) The biggest challenge, however, will involve the company's franchisees. Taco Del Mar had 270 units by the fall of 2008, but restaurants have been shutting down faster than they could be opened--the chain said that 200 units closed between 2005 and 2009, with many operators winding up in bankruptcy. Today the Mexican chain has about 200 restaurants. Les Winograd, a spokesman for Franchise Brands, said that the company will take a look at the operators. "Ultimately, when it comes down to it, the profitability of franchisees is extremely important," he said. "The company can't grow if the franchisees aren't doing well." ...continue reading.
The Daily Deal Fad
Posted: Fri, October 15, 2010 at 1:51pm (CDT)
Every five minutes in this country, somebody starts a daily deal site on the Internet. OK, we made that figure up, but it sure seems like that. Big-name competitors restaurant.com and Open Table recently joined Groupon and LivingSocial to offer daily deals on the web. Yelp is also testing a site out. On top of that, numerous local media companies have their own such sites (we have several here in Minneapolis). Restaurants are a common client of such sites--roughly half of sector leader Groupon's deals are restaurants. Still, we would advise caution when considering such a campaign. They can bring in a massive influx of customers for which many companies may not be prepared, and profits are far from guaranteed, even over the long-term. Still, the competition is good news for restaurant owners because the sites may have to negotiate on their price. For now, such sites split revenues with the business owner. The deals would better for the restaurant if it got a bigger share.
Businessweek, October 15, 2010
WSJ: BofA To Add Lending Staff
Posted: Fri, October 15, 2010 at 12:43pm (CDT)
A Bank of America executive told the Wall Street Journal that the company plans to hire 1,000 small business bankers around the country, which should come as good news to anybody who watches the franchise lending market. According to the story, the bankers will focus on businesses with revenue between $250,000 and $3 million. It was, after all, a decrease in lending from large national banks that made the lending environment so difficult the past couple of years, especially for small businesses. These banks, at least those that are still lending, are under pressure to boost their lending to the small business market. This is obviously a step in the right direction.
WSJ, October 15, 2010
Gallup Survey Supports The Double Dip Theory
Posted: Thu, October 14, 2010 at 4:48pm (CDT)
It's good personal policy right now to take various economic predictions with a grain of salt, lest you get dizzy from all the different directions the economy is slated to go into. Still, this one caught our eye. According to the polling organization Gallup, lower and middle income discretionary spending was at its lowest level -- by far -- since the firm began tracking it in January 2008. Self-reported discretionary spending fell to $48 a day, down from $54 in August and $64 in July. And total discretionary spending fell to $59 a day, matching the lowest level of the current recession. According to Gallup Chief Economist Dennis Jacobe, this supports the prospect of a double-dip recession. Even if it doesn't, it's bad news for restaurants. Discretionary spending is the best way to predict restaurant performance, because while food itself is hardly optional, a night out at a restaurant is.
Gallup, October 14, 2010
Wendy's On The Upswing
Posted: Thu, October 14, 2010 at 12:30pm (CDT)
Wendy's/Arby's Group shares are up more than 8 percent today, entirely on rumors that the company is going to get bought out. UPDATE -- a source we consider reliable tells us it's just a rumor, at least at this point. Private equity groups have been willing to spend money on restaurants, and Nelson Peltz has acknowledged in the past that his company was approached regarding a potential buyout. We think a sale of Wendy's would be interesting, to say the least. Peltz for years pushed Wendy's to make changes, including unloading Tim Horton's and Baja Fresh, only to buy the company and merge it with another chain, Arby's. Suffice it to say, that combination hasn't worked, either. By the way, the Wendy's rumors are also helping competitors Yum! Brands and McDonald's, both of which hit all-time highs today.
Associated Press, October 14, 2010
Judge OKs Taco Del Mar Deal
Posted: Thu, October 14, 2010 at 8:53am (CDT)
A U.S. bankruptcy judge has approved Franchise Brands' purchase of the troubled Taco Del Mar chain, giving the company started five years ago by the founders of Subway a 200-unit chain to play with. Bidders weren't exactly beating down the doors to buy the chain -- while several companies, including Roark Capital, had expressed interest in Taco Del Mar, Subway had to beat only two other bids, and one of them came from master developers trying to save their jobs. Franchise Brands, meanwhile, has yet to distinguish itself as a franchisor, though perhaps the Taco Del Mar purchase is a sign that it plans on picking up the pace. The company owns three chains, one a dual-brand pizza concept called Mama DeLucas, along with a personal training company and the "ugly houses" franchise HomeVestors.
Franchise Brands, October 14, 2010
Commodities On The Upswing
Posted: Wed, October 13, 2010 at 2:06pm (CDT)
Just when restaurateurs were beginning to breathe a sigh of relief that the worst is over in terms of the economy comes news that commodities are on the upswing again. This time, a "surprise contraction" in the corn market will cause feed prices to spike. And when feed prices spike, the cost of caring for cows increases. And that translates into higher beef prices. Higher beef prices, of course, are bad for steakhouses and burger joints and anything else that relies heavily on meat that comes from the cow. One analyst told us this morning that concern over beef prices will make companies that franchise more units a better stock pick next year because they'll be more immune to the cost increases expected next year. In any event, it has to be tough for an operator coming off two years of bad sales that came after the brutal commodity market of 2007 and 2008. This business ain't easy.
Financial Times, October 13, 2010
Bigger Bids Lacking For Burger King
Posted: Wed, October 13, 2010 at 9:01am (CDT)
Burger King this morning said that the 40-day "go-shop" period called for in its buyout agreement with 3G Capital came and went this week. Not surprisingly, Burger King didn't receive any alternative acquisition proposals and is thus sticking with the 3G bid. Of course it didn't receive any alternative proposals because it's difficult to imagine anybody trying to beat 9x EBITDA (or more) for a chain that is in need of a re-energizing, is badly trailing its main rival McDonald's and whose stores require a $3 billion upgrade, according to the company's own estimates.
Burger King, October 13, 2010
Ruby Tuesday And Health Care Reform
Posted: Tue, October 12, 2010 at 4:31pm (CDT)
We're not exactly big fans of the Health Care Reform Act around here, especially considering the prospect that restaurants could end up paying a much higher health care bill. But Ruby Tuesday CEO Sandy Beall's contention (linked below) that health care reform played a role in his company's decision to license the Lime Fresh fast-casual Mexican chain is pure poppycock. According to the piece, Beall said that fast casual restaurants have fewer employees than a typical casual restaurant, thus keeping their theoretical health care costs down. Yet if Beall were truly concerned about those health care costs he would have just bought the Lime Fresh concept, rather than license it like a franchisee so his company could operate the restaurants itself. Nor would he be buying up Ruby Tuesday operators now to get out of the franchising business. Health care reform is more worrisome to an operator than it is to a franchisor.
Dow Jones Newswires, October 12, 2010
Look Who Is Hiring
Posted: Tue, October 12, 2010 at 10:01am (CDT)
For all of the concerns that the restaurant industry has now--the economy, the health care overhaul, etc.--perhaps the one figure we should look at most is this: employment. And based on that number, restaurateurs have been having a good few months. Or they expect better times around the corner. According to federal data, restaurants added 33,900 jobs in September, which would account for roughly half the total private company hiring nationally that month. Restaurants are not going to hire if they don't have better sales and they're not going to build if they don't expect a few customers. That said, the recent hiring binge--104,000 employees added so far this year--comes after two years in which restaurants cut staff.
U.S. Bureau of Labor Statistics, October 12, 2010
Biglari Makes Another Insurance Run
Posted: Tue, October 12, 2010 at 8:45am (CDT)
Sardar Biglari's ultimate goal of becoming this generation's version of Warren Buffett requires that his company, Biglari Holdings, acquires an insurance carrier. But so far, his efforts to take over Freemont Michigan Insuracorp have met with heavy resistance. Biglari, however, is not giving up. His company recently upped his offer for the company by $4.50 a share, to $29, which would be a 41-percent premium over the company's closing price yesterday. After Biglari made his previous offer, Freemont convinced the Michigan State Legislature to approve a rule requiring two-thirds of shareholders of a small state insurer to approve any proposed sale. In a letter to the company's board, he declared that "this stalemate should end." Biglari needs an insurance carrier to turn Steak & Shake into the next generation's Berkshire Hathaway because those companies provide a steady stream of cash that could be invested. Biglari wants that cash.
Biglari Holdings, October 12, 2010
Today's Doom Brought To You By Kurt Salmon
Posted: Mon, October 11, 2010 at 4:01pm (CDT)
Just in case you're getting a little cocky about sales as we head into the holiday season, here's one report to bring you back down to earth. According to Kurt Salmon Associates' latest report on consumer confidence, spending at restaurants failed to pick up this summer despite some "relative consumer optimism" this spring (there perhaps should be emphasis on "relative," because that "optimism" this spring looked an awful lot like "pessimism" to us.) The consulting firm said that the weakness could extend through the fall, and Kurt Salmon's Todd Hopper suggested a repeat of the 2008 holiday season when restaurant sales "defied a usual uptick in the final months of the year."
Kurt Salmon Associates, October 11, 2010
The Applebee's Selling Spree Continues
Posted: Mon, October 11, 2010 at 9:13am (CDT)
DineEquity this morning said that it has sold 56 Applebee's units to a pair of operators, generating gross proceeds of $41 million, or approximately $730,000 per store, which means the casual dining restaurants are getting more expensive (the company's previous sale of 63 units brought in about $500,000 per restaurant). The first sale, for $25 million, was for 36 restaurants in St. Louis and Illinois to Mid River Restaurants LLC. The second involved 20 restaurants in Virginia for $16 million. Under CEO Julia Stewart, DineEquity continues to find takers for its Applebee's units in the company's efforts to unload its to pay off debt and get out of restaurant operations, and the deals seem to be coming at a fast clip now. Raymond James analyst Bryan Elliott said in a note that DineEquity's recent debt refinancing has given franchisees confidence to buy up company restaurants. It probably doesn't hurt that Applebee's sales numbers are improving, either.
DineEquity, October 11, 2010
Unemployment And Income And Restaurants
Posted: Fri, October 08, 2010 at 1:48pm (CDT)
The unemployment outlook is ugly, but it is really ugly for some groups and not ugly at all for others, as noted in the post linked below from Roubini Global Economics. It shows that people with lower incomes are much more likely to be unemployed, underemployed or discouraged. And people with higher incomes are pretty much at full employment. This is, bar none, the best explanation for why some chains are struggling and why others are flourishing. Those chains whose demographic is largely low income, like KFC, are having a much tougher time than companies like Chipotle that generally target a higher-income demographic. Other chains that have avoided major problems despite their demographics have either successfully discounted (Steak & Shake, Subway) or they broadened their customer base (McDonald's). The problem is that not all chains can successfully do those things.
Roubini Global Economics, October 8, 2010
Government Problems Likely Just Beginning
Posted: Fri, October 08, 2010 at 9:17am (CDT)
The U.S. economy shed 95,000 jobs last month, and nearly all of them were due to cutbacks by government employers. Some of those cuts, 159,000 government job losses in all, came from U.S. Census workers whose temporary assignments ended. But many came from local governments shedding workers to right bad balance sheets. This is not expected to end anytime soon. Local and state government finances represent the next challenge that the economy will face--like it or not, the government is a big employer, and many governments balance sheets are in horrible shape thanks to falling tax receipts, frighteningly bad financial maneuvers and various political shenanigans. So while private employers added a few jobs last month, the unemployment picture isn't improving and probably won't anytime soon. For restaurants, it's a further sign that their work continues to be cut out for them.
U.S. Bureau of Labor Statistics, October 8, 2010
Auntie Anne's Is No 'Fixer-Upper'
Posted: Fri, October 08, 2010 at 9:09am (CDT)
Russ Umphenour, chief executive of Roark Capital-owned Focus Brands, told us this morning that his company's latest acquisition, Auntie Anne's, has had six straight years of improved same-store sales. This surprised us, because we heard there's been a recession for some of those years. In addition, Anne's is a snack concept, and snacks are fairly discretionary. And the chain is concentrated in malls, which seemingly have done pretty poorly in recent years. But malls aren't doing as poorly as many people think--some larger regional malls, in fact, are thriving. According to Umphenour, Anne's "has done a good job of increasing their capture rate" with new products and strong marketing. Franchisees, as a result, are profitable and happy. "It's impressive to see the job they've done," Umphenour said. He then added of Anne's, "It's not broken. It's not a fixer-upper. It's humming along well." ...continue reading.
Roark Bites Into A Pretzel
Posted: Fri, October 08, 2010 at 8:38am (CDT)
There's little truth to the rumor that Roark Capital buys out all mid-sized franchise restaurant chains. It only seems that way. Nevertheless, the private equity group bought out another concept. This time it's iconic mall-based pretzel maker Auntie Anne's, according to a company announcement this morning. The 1,100-unit Anne's, based in Pennsylvania, is Roark's 8th investment in a restaurant chain and its 19th in a franchise brand. Terms of the deal, expected to close this fall, were not disclosed. Auntie Anne's was acquired by Roark's multi-concept operator, Focus Brands, which operates many of the franchise concepts, including Carvel, Cinnabon, Schlotzsky's, Moe's Southwest Grill and Seattle's Best Coffee. ...continue reading.
Subway And The Master Developers
Posted: Thu, October 07, 2010 at 5:06pm (CDT)
A U.S. bankruptcy judge in Washington effectively cleared the way for Subway -- er, Franchise Brands LLC -- to buy the small and troubled Mexican QSR Taco Del Mar. In a letter ruling, Judge Karen Overstreet ruled in favor of Taco Del Mar, allowing for the dismissal of a group of master development agreements. As part of its winning, $3.25 million bid, Franchise Brands required the dismissal of those contracts, which would effectively put the developers out of business. The developers themselves had bid just over $3 million, which would have kept their contracts, and they argued that their bid should have been accepted even though it was lower. The judge disagreed, saying that Taco Del Mar used "sound business judgment" in accepting the higher bid. ...continue reading.
Bravo Brio's Shrinking Offering
Posted: Thu, October 07, 2010 at 9:53am (CDT)
Bravo Brio Restaurant Group said in a filing today that it estimates its upcoming IPO will generate at most $153.3 million. That is less than the $172.5 million estimated when the company first registered to sell equities back in July. Nearly half of the 9.6 million shares being sold is held by existing shareholders, meaning the company will raise an estimated $67 million with the offering. The funds will be used to pay down debt. When considering restaurant companies that could go public back in the spring, Bravo Brio wasn't near the top of that list. While Bravo turns an operating profit and has increased revenues each of the past two years, its comp sales numbers (down 7.1 percent last year) don't suggest it's pulling away from the casual dining pack right now. We imagine that potential investors may think the same thing.
SEC, October 7, 2010
DE-Franchising: Ruby Tuesday Going The Other Direction
Posted: Wed, October 06, 2010 at 4:29pm (CDT)
These days, franchise systems seem to be shying away from operating their own restaurants. Numerous systems, including Applebee's, Burger King, Jamba Juice, Jack in the Box and the previously mentioned KFC, are selling off corporate stores at a rapid rate. So we found interesting comments this afternoon from Sandy Beall, Ruby Tuesday's chief executive, on his company's quarterly conference call. Ruby Tuesday is going in the other direction--DEfranchising, if you will. The casual-dining chain just bought up two franchisees, on Long Island and in New England, and Beall said that "going forward, our goal is to get out of the franchise partner business." Later, Beall noted that his company is licensing additional restaurant brands to grow the company, rather than buying them. "We're not trying to manage multiple brands. That's where companies get into trouble. They do it well once and think they can do it again. We're licensing. We're operators." ...continue reading.
'No Quick Fix' For KFC
Posted: Wed, October 06, 2010 at 2:41pm (CDT)
Yum Brands released its third quarter results yesterday and, predictably, they emphasized the widening gulf between KFC's business in China and the U.S. In the U.S., same-store sales fell 8 percent for the quarter and CEO David Novak admitted today that there's "no quick fix" for the troubled domestic brand. In China, where it's the largest QSR chain, KFC is luring more customers, building more stores and successfully adding breakfast and delivery. To be fair, KFC can act differently in China than it can in the U.S.--for instance, it can freely add beef and seafood there successfully, but it is limited to chicken in the U.S. given domestic restaurant reality. But we also don't think it's coincidental that KFC is aggressively refranchising company units here, while it's adding units in China. Don't get us wrong, franchisees frequently run better stores. But refranchising efforts often feel like a company is abandoning its own brand. This seems especially true with KFC right now.
Seeking Alpha, October 6, 2010
So Much For The Lack Of Loan Demand
Posted: Wed, October 06, 2010 at 10:24am (CDT)
In May, the Small Business Administration ran out of money to fund an increased, 90-percent guarantee in the 7(a) loan program. The result was an immediate and precipitous drop in loans come June. Yet everybody we spoke with said demand was fine. People just expected Congress to fund yet another extension of the guarantee, creating a backlog of loans. Well, that backlog is no more. The government said yesterday that it cleared that backlog, all 1,939 loans worth a cool $970 million, in the week since President Obama signed the Small Business Jobs Act of 2010. Most of those loans had been conditionally approved and were waiting for passage of the act so the loan could come without a fee and at a higher guarantee.
SBA, October 6, 2010
A Merry Christmas?
Posted: Wed, October 06, 2010 at 9:45am (CDT)
Economic news this morning has been mostly bad. The ADP job report found that private sector businesses cut jobs in September. And the IMF lowered its expectations for U.S. economic growth this year and next. Being relentlessly positive people here at the Monitor, we'll instead point out the news this week that this could be the best Christmas in years, with both the National Retail Federation and the International Council of Shopping Centers expecting a boost in holiday sales. While the holiday season is hardly the make-or-break period for restaurants that it is for some retailers, an increase in holiday sales could provide a nice boost for restaurants located near big shopping areas (all that shopping takes energy, after all). True, the expectation is that discounts will bring people out to the stores, but anything that gets people out of the house and away from the kitchen is good news in these parts.
WSJ, October 6, 2010
Quiznos' Door Keeps Revolving
Posted: Tue, October 05, 2010 at 2:58pm (CDT)
If it seems like Quiznos gets a new CEO every year, you're absolutely right. And 2010 is no different. This morning, the Denver-based sandwich chain said that Greg MacDonald, the company's president, will take over from Rick Schaden, who will remain as company chairman. Quiznos has had a new CEO every year since 2007, when Greg Brenneman took over. Dave Deno took over in 2008, then Schaden in 2009. Now MacDonald will get what is arguably the toughest job in franchising--few chains have ever experienced the level of collapse that Quiznos is feeling right now. Freefalling sales have combined with bad unit economics to result in a nearly unprecedented string of restaurant closures, including several hundred this year alone. MacDonald's task? Fix the unit economics, repair franchisee relations and get customers to come back without a coupon.
Quiznos, October 5, 2010
These Times Aren't So Good
Posted: Tue, October 05, 2010 at 2:19pm (CDT)
There was a small, almost unnoticeable change in control at a burger chain today. Good Times Restaurants today said that it has agreed to sell control to a Bermuda-based investment firm called Small Island Investments. Small Island will buy 4 million shares of Good Times stock for $2 million, and among other things will get four seats on the 7-seat Good Times board. Good Times will use the funds to pay some bills and provide working capital. Good Times has struggled mightily the past two-plus years. Commodity inflation hit hard in 2008, and then plunging sales came next. It lost $1.65 million last year on only $23.7 million in revenues, nearly 7 percent, last year. It has been the subject of multiple delisting warnings, is in default on its loan covenants and had to stop development to focus on getting comp sales to a more reasonable level from the double-digit drops common since 2008. That said, there is some good news for the regional chain -- it reported slightly positive comp sales ...continue reading.
News Flash: Consumers Aren't Spending
Posted: Tue, October 05, 2010 at 10:31am (CDT)
We're not big fans of online polls. It's too easy to influence the results. (We'd much prefer subjects be interrupted with a phone call at dinner time; irritated subjects give quick, honest answers.) We also think that question wording is a key element in results. So take the Harris Interactive poll on consumer spending tendencies released yesterday with a big grain of salt. That said, its numbers were not positive. Two-thirds of consumers said they were likely to decrease spending on restaurants over the next six months. While we think that a large percentage of these are unlikely to follow through on their threat, that's still a substantial number, and it means that lots of people are still concerned about their finances enough to consider eating at home more often. The bottom line: The consumer economy still stinks.
Harris Interactive, October 5, 2010
Subway Gets A Cheap Taco
Posted: Mon, October 04, 2010 at 3:42pm (CDT)
Taco Del Mar is getting a new owner, and that owner is none other than Subway. Technically, the company that won the auction for the bankrupt taco chain is Franchise Brands LLC, but that company was ostensibly started to sell new concepts to Subway operators who want bigger businesses but can't open more Subways because of market saturation. Franchise Brands' winning bid was an astoundingly low $3.25 million. The company didn't have to beat out many potential suitors--while several companies had at least cursory interest, only three companies actually bid on the chain, according to bankruptcy court documents, the other two having been created to bid on Taco Del Mar. As for Franchise Brands, the company has yet to capture even a tiny amount of Subway's magic -- it operates a pizza concept called Mama DeLuca's, the Personal Training Institute and the "ugly houses" franchise HomeVestors.
Seattle Times, October 4, 2010
RFDC Preview: Alternative Financing Ideas
Posted: Mon, October 04, 2010 at 2:48pm (CDT)
If you're a franchised restaurant chain, or somebody trying to finance a restaurant, we probably don't need to tell you that the market for loans is tough these days. But that doesn't mean you can't finance your purchase -- you just have to get more creative. At the 2010 Restaurant Finance & Development Conference, to be held November 8-10 in Las Vegas, a panel of experts will discuss some of the alternative financing ideas growing restaurant companies can use to expand. Included on the panel: BeneTrends Sr. VP Jerrry Darnell, Directed Equity co-founder Mark Challis and Mercantile Commercial Capital CEO Chris Hurn. The conference site is linked below.
RFDC, October 4, 2010
Fertitta Gets His Chain
Posted: Mon, October 04, 2010 at 2:06pm (CDT)
Landry's Restaurants said today that its shareholders have officially approved a buyout by chairman and CEO Tilman Fertitta. The vote ends an oddly difficult negotiation between the two that has spanned more than two years and involved numerous price changes, shareholder lawsuits, charges that Fertitta was engineering a quiet takeover and just about everything else. The vote was probably a foregone conclusion after a big shareholder, Pershing Square, backed the latest buyout price of $24.50 a share, which was far higher than the $13 Fertitta was offering at one point. In any event, Landry's going private probably makes sense, because the company has been notoriously private about its operations, especially for a publicly-traded chain.
Landry's, October 4, 2010
Who's Leaving Casual Dining? It's Not Who You Think
Posted: Mon, October 04, 2010 at 10:36am (CDT)
As casual dining chain sales began struggling a couple of years ago, the popular theory was that younger people were leaving those chains and heading to places like Chipotle or Panera Bread. But according to Sandelman & Associates' latest study, casual chain's biggest problem is with its older customers. According to Sandelman, young diners, 18 to 34, actually reported that they're visiting casual dining more often now, compared to a year ago. But people 35 to 64--casual dining's bread and butter--were three times as likely to say they're visiting less often now. Thirty three percent said they're visiting casual dining less often, compared to 10 percent who are visiting more. Meanwhile, 37 percent of seniors said they're eating out less, compared with 4 percent who said they're eating at casual diners more. Where are all of these diners going? Nearly a third who cut back said they're going to fast-food places. ...continue reading.
Restaurants, Franchises, and Health Care Fears
Posted: Fri, October 01, 2010 at 9:28am (CDT)
News yesterday that McDonald's threatened to get rid of its modest "mini-med" benefit plan if it doesn't get a waiver on government requirements generated quite a stir--not just for McDonald's threat, but for whether the story was actually correct. Regardless, it's evident that restaurant chains and franchises in particular are worried about the potential impact the health care law will have on their business, and McDonald's apparent posturing is evidence of that. Restaurants are high-turnover businesses with a large number of part-time workers. If many of those workers get health benefits, that would drive up owners' costs--as much as four-fold, according to one estimate. And until the final regulations are written, restaurants really won't know what their costs will be. We talked to one restaurant CEO this week who said that every time they estimate their costs, "we get told that we're wrong," he said. One thing for sure, he added, "it'll be dramatic." ...continue reading.