Archived postings from December, 2010...

Are Restaurant Stocks Overvalued?

Posted: Wed, December 29, 2010 at 11:55am (CST)

Barrons gave restaurant short-sellers a Christmas gift last week with a piece questioning whether some restaurant stocks are overvalued. We find it tough to argue with that premise--some investors have been just a bit too eager buying up restaurant stocks. While sales are improving, we still see largely mixed numbers and in many cases the stocks' valuation already takes improvement into account. Some investors may be starting to agree. Since the Barrons article came out, Chipotle's stock has fallen 3.6 percent. And two of the three other companies' stocks mentioned in the story (BJ's and Panera) have declined since, at a time when the S&P 500 has been up. Only Red Robin, which has increased slightly, has seen little impact. And it's also important to remember that in 2009 restaurant stocks rose in the expectation of an ending recession (the same reason they've risen in 2010) only to fall back to Earth when that end didn't come.
Barrons, December 29, 2010

Does Fremont Want More Out Of Biglari?

Posted: Wed, December 29, 2010 at 9:44am (CST)

Just in case anybody had forgotten, Sardar Biglari still wants Fremont Michigan InsuraCorp, the small Michigan-based insurance company that would provide a nice float for more Biglari Holdings acquisitions. Fremont has put up some heavy resistance to Biglari's overtures for several months, even getting the Michigan Legislature involved. Biglari renewed his efforts in October, offering to buy the 90.3 percent of Fremont shares he doesn't own for $29 a share. And now he appears willing to pay even more. In a letter to Fremont Chairman William Johnson, Biglari said he "is ready to confer in depth with Fremont's special committee concerning the terms of a transaction at a higher value." Biglari and his sidekick Phil Cooley met with the committee on December 1, and Fremont appears to be at least pondering an acquisition. Incidentally, Biglari said he'd keep Fremont's entire management team in place--except for the company's CEO, Richard Dunning.
SEC, December 29, 2010

More On Noodles: How Good Restaurants Lure Buyers

Posted: Tue, December 28, 2010 at 2:29pm (CST)

The merger & acquisition market these days is such that a strong, growing company doesn't have to put itself up for sale. The bidders just sort-of show up. That was the case with Noodles & Co. in its sale, announced today, to Catterton Partners. CEO Kevin Reddy told The Monitor this afternoon that his company didn't have to sell (or go public) and never held a formal auction. "We have very good investors," he said. "We have good banking relationships, and plenty of ability to go on without doing anything." Even so, the chain had a number of potential buyers make inquiries. Ultimately, Noodles "came across a partner that could make us better" in Catterton, which has an impressive roster of restaurants and retailers that it has invested in over the years. "You look at the success they've had in restaurants and retail, and few can match it," Reddy said. "They'll make us better." ...continue reading.

Noodles & Co. Isn't Going Public ... At Least Not Yet

Posted: Tue, December 28, 2010 at 9:25am (CST)

Noodles & Co. is the latest restaurant chain to get new owners. The Colorado-based fast-casual pasta concept said this morning that it has been bought by the private equity firm Catterton Partners--which has previously had its hand in a number of flourishing (and not-quite-flourishing) consumer companies, including PF Chang's, Outback Steakhouse, Baja Fresh, Cheddar's, Restoration Hardware and Build-A-Bear Workshop. Noodles Chairman, president and CEO Kevin Reddy will keep his job and his titles. Terms of the deal were not disclosed, but we're guessing that Catterton paid a premium. The 250-unit Noodles is one of the fastest-growing concepts in the country, having tripled in size the past five years. It has had positive comp growth during the recession and has strong margins. Indeed, it had been widely considered to be a prospect for an IPO. ...continue reading.

Granite City Gets Bought ... Sort Of

Posted: Tue, December 28, 2010 at 9:08am (CST)

UPDATED: Concept Development Partners, an affiliate of Dallas-based private equity firm CIC Partners, is trying to take over Granite City Food & Brewery, the struggling Minneapolis-based casual dining concept. Granite City this morning said that it has signed a letter-of-intent with CDP and its own top shareholder, DHW Leasing, in which CDP will become the chain's controlling shareholder. DHW owns two-thirds of Granite City stock. Under the proposed deal, which shareholders must approve, CDP will buy $9 million worth of preferred stock, and will arrange $10 million in financing, most of which will be used to pay $7 million for 3 million shares owned by DHW. As part of the deal, DHW affiliate Durham Capital Management has agreed to lower some of Granite City's rents, and Granite City has agreed to buy property in Troy Michigan from Durham for $2.5 million. CDP had previously tried buying the Max & Erma's chain, but was ultimately outbid by American Blue Ribbon Holdings. ...continue reading.

The Benefits Of Reality Television

Posted: Wed, December 22, 2010 at 11:53am (CST)

I'm not much for reality television, which is usually not very realistic to begin with. Yet it's becoming evident that CBS's Undercover Boss is providing some benefit to the companies, and bosses, that are featured. To wit: Johnny Rockets, where CEO John Fuller worked in restaurants in New York and Atlantic City. Fuller told The Monitor that he came up through the finance side of the business and hadn't spent a day working in a restaurant. He wanted to get grease on his fingers, so to speak, when he took the top job at the burger chain, so the show provided that chance. In addition to the exposure for the brand, Fuller said he met "really cool people" during his undercover work and learned a lot about the business he didn't know. One lesson, from a server, was to build a rapport with the diner. "Just find a way to smile and interact with them," Fuller said. "They're pretty forgiving, as long as you have that relationship." In other words, good service can mask a lot of wrongs. ...continue reading.

West Coast Capital Collecting Asian Concepts

Posted: Wed, December 22, 2010 at 9:24am (CST)

Asian food is undoubtedly popular in the U.S., but the sector is nevertheless a difficult one for restaurant entrepreneurs. Other than Panda Express and, to a lesser extent, Pei Wei, there are few chains of any size. But a Los Angeles financier appears to be making a go of it. Lorne Goldberg's West Coast Capital, which owns the Leeann Chin and Mandarin Express chains, has bought the 74-unit fast casual concept Pick Up Stix from Carlson Companies. Goldberg boasted of the chain's potential in reports and said he plans to cease franchising. The acquisition gives him more than 150 Asian restaurants in the Midwest and West. As for Carlson, it unloaded Pick Up Stix to concentrate its efforts on T.G.I. Friday's, the casual dining chain that has certainly seen better days.
Orange County Business Journal, December 22, 2010

Darden Restaurants And The Affluent Diner

Posted: Tue, December 21, 2010 at 10:41am (CST)

The economy is improving ever-so-slowly, and too slow from our vantage point, but it's not improving at the same speed for everybody. On its quarterly conference call this morning, Darden Restaurant executives noted that improvement in check average at casual dining restaurants may be due in part to a pullback in spending by less affluent customers, while more affluent customers are dining out more. That may be one reason (along with less aggressive discounting) that check average has been improving at many chains. And it's why chains that serve more affluent customers (and business travelers) are performing better. To wit: Darden's LongHorn Steakhouse had a great quarter, with comps up 6.8 percent. Red Lobster, on the other hand, saw comps fall 1.6 percent. "We're seeing a greater bounceback from the more affluent customer," said Darden CEO Clarence Otis. ...continue reading.

Buffett And Biglari: Joined At The Lip

Posted: Tue, December 21, 2010 at 10:14am (CST)

If I could pick one investor to emulate, I'd copy 80-year old Warren Buffett. The second richest man in the world, Buffett's investment record in Berkshire Hathaway is stellar. Over a period of the last 45 years, Buffett has compiled a 20.3% annualized investment return compared to the S&P 500's return of 9.3%. He has beaten the S&P in 38 out of 45 years, an amazing feat.

It's no wonder that Buffett is a legend. Thousands flock to Omaha for the annual shareholder meeting of Berkshire Hathaway, his holding company. Hundreds of thousands of investor types like me who don't go to the annual meeting read his shareholder letters each year to gain insight. Investors read him as if he were a prophet.

One huge devotee of Buffett is Sardar Biglari, 33, the hotshot investment manager and architect of the recent Steak N' Shake and Western Sizzlin' takeover. Biglari has combined both of these restaurant companies and his investment activities into Biglari Holdings (symbol BH).

In the June issue of the Monitor, financial reporter Jonathan Maze examined Biglari's quick rise to restaurant fame, his infatuation with Buffett and his controversial attempt to change his compensation package to hedge fund standards whereby he would receive 25% of any book value gains over a 6% guaranteed return. He won that vote, by the way.

Since Jonathan's article ran, Biglari has ramped up his Buffett worship. Biglari is said to follow Buffett's investing style, which is fine in our book. But in the December letter he wrote to his shareholders, Biglari crosses the line and not only mimics most of Buffett's central investment themes, but even writes his letter in Buffett's folksy style. He doesn't credit Buffett, nor provide reference notes or even a bibliography to credit Buffett for what is clearly much of Buffett's original work. Shame, shame!

When you read Biglari's letter, you wonder if the old boy himself isn't ghost writing for Biglari on the side. The similarities in style are too coincidental. The investment themes are mainly Buffett. The use of "we" to describe the company's collective action is "Buffett-esque."

Biglari even refers to his vice chairman, Phil Cooley, in the same friendly, home-spun manner as Buffett refers to his vice chairman, Charlie Munger.

This wholesale kleptomaniac capturing of Buffet's thoughts, without credit to Buffett, permeates Biglari's entire shareholder letter. Biglari's Buffett babble takes away from what was truly an exceptional year for the Steak N' Shake brand and what should have been the central theme of his letter. But no, Biglari wants his shareholders to believe that he is really Warren Buffett.

Robert Miles, an author of three books on the Oracle, told me that he often sees managers of hedge funds and other investment partnerships try to pattern themselves after Buffett. However, Miles takes issue with investors who act as if they are Warren Buffett.

"A lot of people attempt to be Warren Buffet and they are not," he says.

Biglari may not be the only Buffet wannabe out there, but running a public company and making plays for other public companies gets a lot of attention these days, especially when the CEO is spouting Buffett ideology.

Buffett works off of five central themes throughout his decades of investing and writing shareholder letters and Biglari has managed to capture all five themes in just one letter.

The first Buffett theme is that Berkshire Hathaway, even though it is a corporation, will treat its shareholders just like partners. In Buffett's 1983 shareholder letter, he made this clear. "Although our form is corporate, our attitude is partnership," said Buffett. In the 1999 Berkshire Hathaway's Owners Manual, Buffet also told shareholders "Charlie Munger and I think of our shareholders as owner-partners."

Not to be outdone, Biglari offers up both of Buffett's thoughts. "Phil Cooley, Vice Chairman of Biglari Holdings and I view you as true partners of the business," said Biglari in the beginning of his letter. Later, Biglari lets shareholders know that he, too, thinks of Biglari Holdings, a corporation, as a partnership. "Our attitude is fully akin to a partnership, though legally we operate as a corporation." Sound familiar? 

Buffett's second central theme is his search for companies to buy outright or invest in that generate cash and produce above-average returns. In the 1999 Berkshire Hathaway Owners manual, Buffett states "our preference would be to reach our goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital. Our second choice is to own parts of similar businesses, attained primarily through purchases of marketable common stock."

Biglari says exactly the same thing in his letter. Echoing Buffett, he writes, "we seek to grow and diversify the cash streams going to Biglari Holdings through a collection of wholly owned operating businesses as well as through an assemblage of positions in other publicly traded companies."

What constitutes an above-average return in Buffett and Biglari's mind? Would you believe the same thing? Buffett states in his 1983 shareholder letter he "will be disappointed if our rate does not exceed that of the average large corporation." Biglari likes Buffett's idea, because in his letter he says that he "must outdo the S&P 500 Index, the ultimate conglomerate." Both say the same thing. Guess who was first?

Buffett's third theme explores what types of businesses to acquire. Buffett has always preferred simple businesses and ones that generate cash. In his 1992 letter, Buffett said, "we try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character." In his 1980 letter, Buffett said his "preferences run toward businesses that generate cash, not those that consume it."

Biglari's letter only took one sentence to mimic Buffett's two-letter acquisition theme. "We are searching for businesses in simple, comprehensible, and predictable industries that are cash generating, not cash consuming," said Biglari. 

The fourth central theme of Buffett is how to analyze a business.  The general idea behind Buffett's commentary in most of his shareholder letters is there are two values to any business: the value the market places on the business and that of the true "intrinsic" value of the business. Buffett defines intrinsic value as "an economic concept, estimating future cash output discounted to present value."

In his 1983 shareholder letter, Buffett said his long-term goal was to "maximize Berkshire's average annual rate of gain in intrinsic business value on a per-share basis."

Not surprisingly, Biglari states exactly the same goal as Buffett in his letter. "Phil and I have set Biglari Holding's long-term economic objective as maximizing per-share intrinsic value," says Biglari. 

In his 2008 shareholder letter, Buffett says the key to investing is to identify situations where the intrinsic value of a business is greater than its market value, especially in a down market when businesses are being discounted. "When investing, pessimism is your friend, euphoria the enemy," said Buffett.

Biglari, no surprise is also a fan of Buffett's analysis. In his shareholder letter, Biglari states he will "seek mispricings between the value of a business and its price, the latter, a figure based on investor expectations."

Buffett thinks that in any market investors can find deals. Buffett said in his 2008 letter that if the circumstances are right, he is "always a buyer." Biglari, the same. "We apportion capital opportunistically, regardless of the economic or market cycle," said Biglari.

The fifth central investment theme of Warren Buffett is the job of allocating capital to high-return businesses. Buffett wants to take cash from his businesses and invest that cash flow, back into his high-return businesses and acquire other high-return, cash generating companies. In his 1984 shareholder letter, Buffett wrote, "allocation of capital is crucial to business and investment management."

Biglari, of course, has adopted the same philosophy as Buffett. "Although capital allocation is a crucial element at most businesses, it is our business at Biglari Holdings," he wrote.

Biglari borrows freely from Buffett's shareholder letters on investing philosophy, but also shares similar Buffett thoughts on shareholder communication, annual meetings and long-term investing.

On communicating with the shareholders, Biglari says it his "beholden duty to communicate clearly our approach, business objectives, philosophy, principles." In his 1983 shareholder letter, Buffett told his shareholders "it is appropriate to summarize the major business principles we follow that pertain to the manager-owner relationship."

Biglari told his shareholders that "we cheerfully will discuss our investment philosophy and operating catechism as we believe it necessary to clarify expectations for you, we will not telegraph our interests in specific publicly traded companies, our rationale, or our plans." Buffett said the exact same thing in 1999 but in reverse order. "Though we continue to be unwilling to talk about specific stocks, we freely discuss our business and investment philosophy," said Buffett.

On talking about investment ideas, Biglari said he would not discuss specific investment ideas in public. "Outside of regulatory requirements, we will not air our investment ideas, particularly in a world of investment competitors. We leave the yammering to others," said Biglari.

In 1983, Buffett said essentially the same thing. "Despite our policy of candor, we will discuss our activities in marketable securities only to the extent legally required.  Good investment ideas are rare, valuable and subject to competitive appropriation just as good product or business acquisition ideas are," he said.

Biglari's comments in his shareholder letter about his upcoming annual meeting is pure Buffett. "The bulk of the meeting, following prior years' practices, will center on answering your questions. Incidentally, last year's meeting with about 200 shareholders attending lasted almost five hours. Phil and I enjoy the annual meetings and are delighted to spend abundant time that day with shareholders," said Biglari. 


Here's Buffett: "Charlie and I always enjoy the  meeting and we hope you can make it. Attendance grew last year to about 1,000," said Buffett, in his 1989 letter. In his 1984 letter, Buffett talked about answering questions at the meeting. "Because the annual meeting is the time and place for questions, Charlie and I are happy to answer them all, no matter how long it takes," said Buffett.

On his long-term outlook for investing, Buffett said in his 1993 letter "we will try to avoid policies that attract buyers with a short-term focus on our stock price and try to follow policies that attract informed long-term investors focusing on business values.

Ditto for Biglari. "For us to invest for the long haul, we know it is imperative that our shareholders invest in Biglari Holdings for the long haul. We will continue to strive to avidly excite the attention of blue-chip shareholders who are unfazed by near-term fluctuations in our stock or by the vagaries of the stock market," said Biglari.

Here is what I know: Buffett's Berkshire Hathaway owns Burlington Northern and Geico outright, and holds major positions in American Express, Coca Cola, Kraft, Procter & Gamble and Wells Fargo. Biglari owns Steak 'N Shake and Western Sizzlin', two tired restaurant chains that will never be on the same plane as any of Buffett's holdings.

No one in their right mind would compare Biglari Holdings to Berkshire Hathaway, so why does Biglari insist on pretending to be Buffett? Biglari has had real success with Steak 'N Shake the past two years, overturning a long-term sales slide with impressive gains. So again, why not try to carve out your own business philosophy and quit ripping off the Oracle?

Although Biglari talks like Buffett in public, there are a number of key differences in their personal and investment styles in practice.

First, Buffett would never have changed the name of his company to his own name like Biglari did in early 2010. In fact, Buffett has kept the name of his company, Berkshire Hathaway, a former textile manufacturer, intact since he took it over in 1965. Biglari, on the other hand, had no qualms about elevating his own name, or selecting BH for his stock symbol. Does anyone out there think that BH should be Berkshire Hathaway's symbol, and not Biglari's? Berkshire's is BRKa.

A second difference between Biglari and Buffett is their real investing philosophy.  So far Biglari has been talking the talk and not walking the walk. Biglari says he looks for turnaround candidates. In his shareholder letter, he said his "prospecting frequently leads us to underperforming, under-managed, and undervalued companies because they afford better opportunities for outsized gain." Bargains.

Buffet would have none of that. He likes the concept of buying under-priced assets just like anyone, but prefers fairly-priced and successful operating businesses even more. In his 1981 shareholder letter, Buffett makes a distinction between what he calls "toad" companies and "prince" companies. "We have tried occasionally to buy toads at bargain prices with results that have been chronicled in past reports.  Clearly our kisses fell flat. We have done well with a couple of princes, but they were princes when purchased. And, finally, we have occasionally been quite successful in purchasing fractional interests in easily-identifiable princes at toad-like prices," said Buffett.

A third difference is management style. Buffett relies on the management team of the companies he purchases, whereas Biglari wants to be involved in management.

In his shareholder letter, Biglari says he puts himself "in a position allowing us to improve operations, or control and create other types of beneficial modifications. As control investors, we are searching for viable situations in which we would have an operating plan to unearth the underlying value."

Buffett doesn't want to get involved running the operations of his businesses day-to-day and often jokes it's best if he and Charlie Munger just "stay out of the way." Buffett says he likes to limit his and Munger's duties to allocating capital, controlling enterprise risk, choosing managers and setting their compensation.

And finally, Buffett has no interest in being a part of any hostile action to take over a company. He only wants companies that want to be part of Berkshire Hathaway. He tells potential candidates they can work full-time on building their business while he worries about the financial side.  "I'm the bank," Buffett tells the candidates.

Biglari, on the other hand, has had a history of hostile actions and should be described as an activist investor, not a Buffett clone. After taking an initial investment position in Steak N Shake, Biglari attacked the board and management in public. A "failed vision, failed strategy, failed execution and failed board," is how he phrased it. Can you imagine Buffett going after Goldman Sachs or Wells Fargo with that style?

In late 2009, Biglari accumulated shares in Fremont Michigan Insura, a small Michigan insurance company. Upon the news, Fremont enacted a poison pill. In October, Biglari offered $29 per share for all of the remaining shares that he didn't own and said he would fire Fremont's CEO if his bid was successful. The $29 price represented a 41% premium over the closing price the previous day. Does that sound like Buffet?

And while Biglari may talk of his company as a "Mini-Me" version of Berkshire Hathaway, building for the long-term, he's running it just like a hedge fund. In November, he convinced his shareholders to grant him a compensation plan that gives him 25% of any book value gains over a 6% base investor return. Shareholder concerns forced Biglari to cap the payout at $10 million in any one year. As a comparison, Buffett's salary last year was $100,000. All of Buffett's net worth is tied up in shares of Berkshire Hathaway.  No special comp deal for him.

They say that imitation is the sincerest form of flattery. Biglari talks to his shareholders like he's Buffett. Money talks and BS walks.

...continue reading.

PF Chang's Losing Its Co-CEO System By Attrition

Posted: Mon, December 20, 2010 at 3:36pm (CST)

We'll admit it: We don't understand the co-CEO model. We can see why some companies would do it, but there are a lot of potential problems that can occur when two people lead a company, rather than one. So we're not terribly surprised that P.F. Chang's China Bistro is abandoning its co-CEO model. The Arizona-based company, which operates P.F. Chang's and Pei Wei, said today that co-CEO Bert Vivian will retire at the end of next year. A company spokeswoman confirmed to the Monitor that Rick Federico will have the "co-" removed from his title. Vivian had been co-CEO since January 2009, and before that had been P.F. Chang's president.
P.F. Chang's, December 20, 2010

Franchisee Sales Keep Coming

Posted: Mon, December 20, 2010 at 3:16pm (CST)

Here's one prediction for 2011 for which we are confident: Expect a lot of consolidation among restaurant franchisees. For example, TAC Enterprises out of Jacksonville, Florida, recently sold 21 Papa John's units to Bajco Global Management, an Ohio company that already has more than 50 of the pizzerias. Advance Restaurant Sales orchestrated the deal and GE Capital provided the financing. More franchisees have been putting their businesses up for sale recently as their numbers have improved, financing has eased (somewhat) and buyers come out of the woodwork. Some franchisors, meanwhile, will likely increase their own refranchising efforts. While some private equity groups could swoop in and buy, a lot of the buyers will be existing operators looking to expand their holdings. ...continue reading.

The Restaurant Stimulus

Posted: Mon, December 20, 2010 at 10:46am (CST)

President Obama and Congress gave restaurants an early Christmas gift this month with the passage and signing of the bill extending the Bush-era tax cuts. That extension in and of itself will do little, if anything, as it simply keeps what we already have in place. Yet the inclusion of a one-year, 2-percent discount on Social Security taxes. For someone making $50,000 a year, that's $1,000 over the course of the year. That's more money in that person's pocket every paycheck, so unlike a one-time stimulus that frequently gets saved (especially now when consumers are shoring up their household balance sheets), those funds will likely get spent. Because eating out is often a spur-of-the-moment decision, the extra discretionary income will mean that more of those decisions will go in restaurants' favor in 2011. ...continue reading.

Restaurants Versus Retailers

Posted: Fri, December 17, 2010 at 10:24am (CST)

Traditionally, restaurants seem to have followed retail sales. If people are out shopping and spending, they tend to eat out. And thus it was thought that a good holiday shopping season would be good for the restaurant industry. That may no longer be the case. Malcolm Knapp, whose Knapp Track Index tracks casual dining comp sales, believes that the country has become a "reallocating society." Consumers live on fixed budgets, and have begun controlling their spending on credit. So if they spend more in one area, they cut spending in another. When consumers buy more goods, as they did on Black Friday weekend, they spend less at the restaurant. His Knapp Track numbers bear that out--comp sales at casual dining restaurants turned negative in the last half of November as retail sales went up. Speaking on a conference call this morning with Bank of America analyst Joe Buckley, Knapp said that comp sales could be more volatile in the coming weeks, even as consumers get more confident. ...continue reading.

Those Dang Gas Prices

Posted: Fri, December 17, 2010 at 10:01am (CST)

What is this, 2007? According to AAA, the average price for a gallon of regular unleaded gas is $2.984, which according to our math is 1.6 cents shy of $3. That's a pretty important two cents. That $3 amount is a psychological barrier for a lot of drivers, the point at which they begin to cut back on spending to make up for the price of their gas. And those spending cuts frequently hurt restaurants, which is what happened in 2007. Matthew DiFrisco, an analyst with Oppenheimer, estimates that higher gas prices this year could take $62.1 billion from consumers' discretionary spending budgets. The current price of gas is 15% higher than it was a year ago, and 3% higher than it was a month ago.
AAA, December 17, 2010

Finding The 'Fountain Of Youth'

Posted: Thu, December 16, 2010 at 5:00pm (CST)

All restaurant chains have life cycles--conception, birth, adolescence, maturity, aging, etc. Yet some chains seem to thrive in later life, while others flounder. Why? According to Goldman Sachs analyst Michael Kelter, there is a fork in the road as some chains age. Some chains find a "fountain of youth," while others get old and struggle. That helps explain why the Wendy's/Arby's Group is struggling, while chains like McDonald's and KFC are flourishing. McDonald's fountain of youth is in its new, domestic markets, such as beverages and snacks. KFC's fountain (heck, its entire drinking supply) is in China. Wendy's has yet to find those markets and is in a decline exacerbated by a decline in ad support, while Arby's seems to be in a freefall as the chain struggles and franchisees leave the system. ...continue reading.

Goldman Sachs Really Likes Restaurants

Posted: Wed, December 15, 2010 at 9:44pm (CST)

Goldman Sachs is back covering restaurants and apparently likes what it sees. In a note this evening, analyst Michael Kelter said that there is "the best restaurant supply/demand dynamics in 25 years." He said that the number of restaurants per capita is back to 1986 levels after the closure of 11,000 units. Construction of new restaurants is low, suggesting a "constrained supply" for two to three years. Economic growth in the coming three years should improve demand. "Survivors should benefit, with accelerated share gains," he said. Growth concepts that saw constrained sales because of the recession, like Chipotle, Tim Horton's and Starbucks, should benefit the most. Suffice it to say, we would label Goldman as "bullish." ...continue reading.

Should McDonald's Worry About This Happy Meal Suit?

Posted: Wed, December 15, 2010 at 4:47pm (CST)

In January 2003, stock in McDonald's fell below $12 a share. The stock has been on a steady, upward trajectory ever since -- a trajectory that has been impressive in its consistency. It went up during the recessionary years. And it went up in the second half of 2004, after Morgan Spurlock released Supersize Me, the documentary that blamed the burger behemoth on the nation's obesity epidemic. Sure, McDonald's stock dropped the day after the movie was released -- by 10 cents. But one month later the stock was up 5.5 percent, and it was up 15.3 percent six months later. We bring this up because the QSR giant is again fighting off food cops, this time in the form of a lawsuit filed against it over the marketing of Happy Meal toys (as if parents can't say "no"). McDonald's seven-year run will end some day. Perhaps it even has. But a lawsuit over Happy Meals will only end that run if McDonald's makes the dumb decision of giving in -- or parents somehow stop buying them. ...continue reading.

Charlie Browns To Get Sold Within Six Weeks

Posted: Wed, December 15, 2010 at 2:36pm (CST)

CB Holding Corp., the bankrupt operator of the Charlie Brown's, The Office and the Bugaboo Creek restaurant brands, has received $2.5 million in financing from GMAC Commercial Financing to keep the restaurants in operation. The court approved the financing this week. The financing agreement requires that the company be auctioned off by January 24, according to court filings. The deal also requires court approval of that sale by February 3. CB Holding has 39 restaurants left after shutting down 29 Charlie Browns and 18 Bugaboo Creeks before filing for debt protection. The company has blamed its problems on a combination of heavy competition in the restaurant industry and an unforgiving economy. ...continue reading.

Burger King's Operators Get A Gift From The New Owners

Posted: Wed, December 15, 2010 at 11:35am (CST)

Burger King and its operators have had a difficult relationship, to say the least, one that kept a lot of franchise lawyers in business. So when the system was sold to 3G Capital, one of the biggest questions was how the new owners will work with franchisees. So far, at least, it appears that the new regime will be more receptive. Burger King appointed some franchisees in its overhauled management team. And now the system is backing off its mandate that stores stay open into the wee hours of the morning on Fridays and Saturdays. Burger King has decided to move its closing time from 2 a.m. to midnight those days following discussions with franchisees on ways to improve profitability. Operators will have the flexibility to stay open later, or even 24 hours, where the market dictates. A group of franchisees in Florida had been in litigation with Burger King over the 2 a.m. mandate for years. Not surprisingly, those franchisees were pleased with the change.
Miami Herald, December 15, 2010

More Court Action On The Hooters Deal

Posted: Tue, December 14, 2010 at 10:49am (CST)

Not surprisingly, the issue over who will buy Hooters of America is going to court. The infamous casual dining chain known for its buxom wait staff filed a lawsuit in Delaware against a subsidiary of Chanticleer Holdings, the buyout firm that has blocked the sale of Hooters to Wellspring Capital Management. A judge in South Carolina had approved the sale of Hooters to Wellspring earlier this month as the family of late owner Robert Brooks seeks to unload the chain. Yet Chanticleer, which claims it has the right to first refusal to buy the chain, exercised that right and matched Wellspring's offer, putting the deal in doubt. The amount of the apparent purchase price has not been released, though the New York Post said in February that the chain could be worth as much as $250 million.
BusinessWeek, December 14, 2010

Steak & Shake And The Limits Of Same Store Sales

Posted: Mon, December 13, 2010 at 4:20pm (CST)

In his annual letter to shareholders, Sardar Biglari, chairman of the modestly-named Biglari Holdings (which operates Steak & Shake and Western Sizzlin), noted that same-store sales should not be the sole metric to use when judging a restaurant, even if the metric has validity. Over-reliance on comp sales, he said, can lead to "ruinous behavior, as evidenced by the multitude of retail and restaurant executives who spend considerable shareholder money simply to grow same-store sales without achieving a proper return." We can hardly disagree. Of course, it's easy for Biglari to rail on comp sales reliance. Steak & Shake just reported 6.8% fourth quarter comp growth on top of 10.1% comp growth the same period a year ago. Still, in an indication of how bad Steak & Shake was performing when Biglari engineered his 2008 coup, the company still hasn't recovered the sales the chain has lost since 2004.
Biglari Holdings, December 13, 2010

O'Charley's To Close Some Restaurants

Posted: Mon, December 13, 2010 at 10:30am (CST)

O'Charley's this morning announced plans to close 16 restaurants, including 11 of its namesake brand and five of its Ninety Nine restaurants. The closures are a reminder that, while the environment for the casual dining sector is improving, it's far from being back. O'Charley's in fact had been improving, though recent growth in customer counts have come at the expense of revenue, as the chain has used some aggressive discounts to bring customers in. During its most recent quarterly report, the company said that some research into the brand showed that customers "no longer perceive O'Charley's to have better food and service than competitors." So the chain reintroduced a promotion offering two meals for $14.99, with a dessert for another $2.99. Ninety Nine, meanwhile, has something of a value menu offering nine meals for $9.99. Perhaps not surprisingly, O'Charley's revenue fell in the quarter, and it lost $7.4 million.
O'Charley's, December 13, 2010

Red Robin May Get An Investor Fight

Posted: Fri, December 10, 2010 at 4:17pm (CST)

Oak Street Capital Management, a Chicago hedge fund, made a name for itself not long ago when it tried, and failed, to gain board seats at Denny's. Now the fund may be targeting another chain: Red Robin. In a regulatory filing today, Oak Street, which controls 8.64% of Red Robin stock, said it has determined that it may seek "a more active role in influencing" Red Robin's affairs. That includes the strategies typically listed in such filings, including the ever popular "discussions with management" and "may seek representation on the board of directors." Oak Street tried to join forces with another Red Robin investor out of Chicago, the Kovitz Investment Group, but no agreement came of those talks, according to the filing. Red Robin has been struggling for some time amid a casual dining slowdown and mounting competition from fast casual burger restaurants. Its new CEO, Stephen Carley, is reviewing the company's strategy top to bottom. ...continue reading.

Yet One More Reason For McDonald's Success

Posted: Fri, December 10, 2010 at 2:11pm (CST)

As we noted a couple of posts ago, regional differences can play a big role in a restaurant chain's performance, so quick-serves like Carl's Jr. and Jack in the Box can blame at least part of their problem on their heavy concentration of California units. But McDonald's has managed to avoid those problems, and that's a big reason why the chain has succeeded in recent years where others have failed. The company told Rachael Rothman, analyst with Susquehanna International Group that it has maintained comp sales growth in all of its markets. The Golden Arches has emphasized value or premium products strategically, depending on the market. That has enabled the company to gain market share in places like California where its competitors are seeing sales declines. Of course, it helps that McDonald's has broadened its customer base and it hasn't focused purely on young men, who have suffered disproportionately in the recession. ...continue reading.

Duke And King Finally Succumbs To Its Finances

Posted: Fri, December 10, 2010 at 11:26am (CST)

Duke and King Acquisition, one of the nation's largest Burger King operators, has filed for bankruptcy protection. The 93-unit, Minnesota-based operation blamed a combination of massive capital expenses, falling profits and ... Burger King. Duke and King has long had a troublesome relationship with its franchisor. The company emerged in 2006 with the purchase of troubled Burger Kings in Missouri, Minnesota and Florida that required significant capital expenditures. The company said it wanted to buy 66 units in Nebraska and Iowa to offset the struggling restaurants, but the deal was not approved by Burger King. Declining sales, meanwhile, meant that margins have not been sufficient enough for the operator to meet its capital expenses. Duke and King was to sell most of its restaurants by the end of the year as a result of a lawsuit settlement with Burger King, but the financial problems were too great for it to avoid bankruptcy before a buyer could be found. ...continue reading.

Benihana And The Aokis Are At It Again

Posted: Thu, December 09, 2010 at 3:22pm (CST)

Just when you think that the battle between Benihana and the family of its late founder, Rocky Aoki, had been ended, along comes another legal dispute to toss that idea out the window. This time, the issue is over the Benihana trademark outside the U.S. When Aoki spun off Benihana in 1995, putting the family's ownership of the chain into a separate company called Benihana of Tokyo, the deal gave BOT the right to the trademarks outside the U.S. But, in April, Benihana's subsidiary, Noodle Time Inc., submitted an application with the World Intellectual Property Organization to register the Benihana name in several countries. Under Noodle Time's name on the filing was Benihana of Tokyo--though the lawsuit claims BOT knew nothing of the filing. The address under BOT's name in the filing was Benihana's U.S. address. BOT and Benihana have been at odds many times over the years, but had seemed to settle their differences this summer when Michael Kata was voted on the chain's board.
South Florida Business Journal

Dairy Queen's International Opportunity

Posted: Wed, December 08, 2010 at 4:25pm (CST)

One of the more interesting benefits of international development is that it gives restaurant chains the opportunity to start fresh and shed some of the reputation that can sometimes shackle a company domestically. KFC is one such example. The chain is completely different in China and Europe--able to add products that it couldn't consider in the U.S., for instance. Another example: Dairy Queen, a great brand saddled with various issues domestically, notably consistency from one location to the next. It doesn't have those problems outside the U.S. "We have the ability with international to do it right," said Brad Houser, executive vice president of international for the Minneapolis-based Dairy Queen, speaking at a lunch earlier today. He said Dairy Queen in some countries has become a place where young people can hang out. "We're like the ice cream Starbucks brand," he said. ...continue reading.

Wells Fargo Says Business Owners Are Optimistic

Posted: Wed, December 08, 2010 at 10:33am (CST)

Small business owners, and many restaurants would qualify, are much more optimistic than they were just a few months ago, according to a survey of small business owners by Wells Fargo. The survey's overall index score, which combines scores for their present situation and their expectations, was -4, up from a brutal -28 the previous quarter. Most of the reason for the uptick was a surging belief that things will get better. The expectations index, which reflects their expectations for the coming year, rose from -2 to 15. Their present situation rose, too, but remains negative, at -19. In other words, small business owners may not be doing that well, but they're increasingly optimistic it'll get better.
Wells Fargo, December 8, 2010

Regional Differences And Fast Food

Posted: Wed, December 08, 2010 at 10:19am (CST)

They may have different names, but Hardee's and Carl's Jr. are just about the same restaurant. They have the same logo, same ads, same colors, many of the same products, and they target the same audience (young men). So how do you explain their parent company's release yesterday, showing that Hardee's had a remarkable quarter (8.3% same-store sales growth), while Carl's continues to occupy the quick-serve basement (a 5% comp decline atop of a 6.2% comp decline)? Simple: regional differences. Carl's has a heavy concentration of restaurants out west, particularly California, which remains in brutal economic shape, thanks to the housing crisis and its 12% unemployment rate. Hardee's is concentrated in the Southeast, which isn't exactly flourishing, but is certainly in better shape from an employment standpoint. In other words, Carl's is a victim of its circumstances.
CKE Restaurants, December 8, 2010

Tax Breaks And Restaurants

Posted: Tue, December 07, 2010 at 1:00pm (CST)

Restaurant investors have had a good morning. As many as a dozen publicly traded restaurant chains hit their 52-week highs in morning trading, including Brinker, BJ's, Starbucks, McDonald's, PF Chang's, Darden, DineEquity and Ruby Tuesday, among others. The stocks' performance continues another strong winning streak for the industry amid improving sales and a brighter outlook. The biggest reason for today's stock surge? Politics. President Obama and Congressional Republicans said they had a deal to extend Bush-era tax cuts and extend unemployment benefits. The deal includes a one-year reduction in the payroll tax that could, according to reports, mean $800 a year to a typical family. The tax break is designed to stimulate spending by putting more money in workers' pockets each paycheck. Some of that spending will undoubtedly be at local restaurants. Indeed, restaurant sales tend to increase when economic stimulus measures provide income boosts. ...continue reading.

Even Wingstop Needs A Push

Posted: Tue, December 07, 2010 at 10:30am (CST)

Yesterday, Wingstop announced an incentive plan in which it will offer new operators reduced franchise fees and royalties. The program is temporary, lasting only through April 1. Still, the plan came as a surprise to us. Wingstop is a fast-growing concept with a lengthy string of strong comp sales. What would it need an incentive for? Yet Dave Vernon, vice president of franchise sales, told us that the incentive is common when Roark Capital buys a system. Previous Roark acquisitions, including Moe's, have had similar incentives. In Wingstop's case, the incentive is designed to accelerate growth among larger operators and in markets where the 470-unit chain doesn't have a presence. Even without the reduced royalties, Wingstop expects to finish the year with 50 new units, and Vernon said the company will easily beat that next year. But, with 29 straight quarters of comp sales growth, Wingstop could probably afford to be more aggressive in adding new units. ...continue reading.

And So It Begins: BK Cuts Its Workforce

Posted: Tue, December 07, 2010 at 9:30am (CST)

When 3G Capital paid a surprisingly high price for Miami-based Burger King, the speculation was that the buyers would have to take some drastic steps to recoup their investment. Those steps have begun. The No. 2 burger chain announced yesterday that it's cutting 413 jobs, mostly at company headquarters. This is typical in a private equity scenario: buy a company, then cut expenses drastically so they can sell a more profitable company later on. While numerous companies could certainly use some paring, some more than others, the danger in such cuts is that they run too deep, damaging the underlying infrastructure and making it a weaker operation.
Miami Herald, December 7, 2010

Restaurateurs' Merry Holiday

Posted: Tue, December 07, 2010 at 9:23am (CST)

Restaurants can expect to have a good holiday season, according to the consulting firm Kurt Salmon Associates, which said that the strong Black Friday sales weekend, coupled with data on consumers' intent to spend, indicates that sales growth should continue at least until January. The sales growth should continue even though Christmas this year falls on a Saturday, which takes out a traditionally busy restaurant day. Restaurant sales have been on a growth track since the summer, a track that has continued despite unemployment that remains painfully high. Perhaps the big question, then, is whether the industry will be able to keep its momentum going beyond the holiday season. ...continue reading.

And The Next Restaurant IPO Is ...

Posted: Mon, December 06, 2010 at 4:17pm (CST)

We have no idea. Not yet, anyway. But Bob Snape, managing director at BDO Capital Advisors, did provide us with some candidates of who could go in 2011. One, Colorado-based Noodles & Company, has long been linked with a prospective IPO because it has all the characteristics you'd want in a company going public: fast growth and profitability. Dunkin' Brands is another unsurprising prospect, and it just paid its private equity owners a dividend. The third is a surprise: Papa Murphy's, which was only purchased earlier this year by Lee Equity Partners for a solid multiple. But Snape said it could happen in 2011, albeit late in the year. In any event, he said, the market is receptive now to a restaurant IPO. "The equity markets are obviously saved for the best performers," Snape said. "Ones with unit growth, positive same-store sales growth, good margins, terrific management teams. There are opportunities in the sector. The window is open for public equity." ...continue reading.

Coffee Fight Gets A Bit Ugly

Posted: Mon, December 06, 2010 at 9:56am (CST)

This morning, Kraft Foods said it is seeking a preliminary injunction in federal court to stop Starbucks from ending the companies' $500 million coffee distribution deal, throwing another legal wrinkle into the increasingly bitter public feud between the two companies. Kraft says that the deal between the two has no end and can only be invalided through a "valid termination," and it obviously does not consider Starbucks' termination valid. In response, Starbucks called the action a "delaying tactic" and reiterated that it plans to take over the distribution business as of March 1, 2011. Both sides, incidentally, have claimed that the other has been confusing customers with their respective statements, as if the average coffee customer truly cares about which company handles the distribution deal.
Kraft, December 6, 2010

DineEquity Sells 30 Applebee's

Posted: Mon, December 06, 2010 at 9:25am (CST)

DineEquity continued unloading company-owned Applebee's units this morning with the announcement that it has sold 30 units in the Washington D.C. area to the Potomac Family Dining Group, run by Timothy George, an investment banker who advised IHOP on its 2007 purchase of Applebee's. The deal will net DineEquity $27 million, or slightly more than $1 million per unit. Such refranchising efforts are expected to pick up steam in the coming months as financing continues to ease and operators look to expand. And some observers believe that private equity groups could target franchisees more aggressively in the coming months, particularly large operations with market dominance. Numerous chains, including Yum! Brands' Pizza Hut and KFC along with Burger King and others are going through major refranchising efforts.
DineEquity, December 6, 2010

Black Friday Good For Some Restaurants, But Not All

Posted: Fri, December 03, 2010 at 3:50pm (CST)

The Christmas shopping season isn't as vital to a restaurant's business as it is for retailers, but it does provide a nice boost, and this year has been no exception. A relatively strong Black Friday shopping period translated into higher sales for restaurants, according to Capital Access Network, which tracks credit card sales for small businesses. Yet not all restaurants benefited from the surge in shoppers. Restaurants with check averages of $25 or less saw a 4-percent bump in sales, while those with a higher than $25 check average saw a 1-percent bump. Any number of theories can be used to explain why: the consumer's continued emphasis on thrift; diners' love of fast casual restaurants or their lack of time with all that shopping to do. And perhaps they simply didn't feel as wealthy after making all those holiday purchases. ...continue reading.

So Much for All That Holiday Cheer

Posted: Fri, December 03, 2010 at 9:09am (CST)

Well, that optimism went away fast. For weeks now, a growing body of evidence has indicated that the economy's recovery was picking up a little steam. Sales were up all over the place. Consumers were feeling better about themselves. The ADP Employment Report showed that the private sector was adding jobs. This morning, the federal government splashed some cold water over all of those happy, optimistic feelings, reporting a slowdown in hiring and an increase in the unemployment rate to 9.8%. The number of jobs was up a paltry 39,000, far below the 150,000 analysts expected (which alone is not enough to move the unemployment needle). The lack of private sector hiring is disappointing, to say the least, given that the economy will no longer be able to rely on the government to provide jobs -- state and local governments will almost certainly cut spending next year and the result will be continued decline in public sector workers.
U.S. Bureau of Labor Statistics, December 3, 2010

The Hooters Deal Gets Complicated

Posted: Thu, December 02, 2010 at 1:04pm (CST)

Legal issues threaten to stall the sale of Hooters to a group led by Chanticleer Investments. The Atlanta-based casual dining chain, which has been on the block for two years, was to be sold to Wellspring Capital Management, which had reached a deal with the family of Hooters' late owner, Robert Brooks, the Myrtle Beach Sun News reported this morning. However, Chanticleer, operated by Mike Pruitt, a friend of Brooks, had the right to first refusal to buy the chain, and exercised that right late Wednesday by matching the Wellspring deal, a source told the Monitor. A judge was set to approve that sale today--to whom remains uncertain. Regardless, it appears that the sale will be entangled in a legal mess that threatens to delay the transaction, which the family wanted completed by the end of the year following a nearly two-year sale process. Chanticleer is heading a group that includes investment firms HIG Capital and KarpReilly.
Jonathan Maze, December 2, 2010

Hooters Close to a Sale?

Posted: Thu, December 02, 2010 at 10:35am (CST)

The on-again, off-again sale of Hooters of America is on again, and this time the deal seems like it will stick. The iconic, Atlanta-based chain known for its buxom wait staff may be sold to Wellspring Capital Management--which recently finalized the sale of the Dave & Buster's chain, meaning that Wellspring apparently wants to get back into the male-oriented casual dining business. Hooters has been caught up in a difficult estate case following the death of owner Robert Brooks four years ago as his wife and son battled over Brooks' assets--the largest of which is Hooters. The chain has been for sale for well over a year. It had faced an April deadline for a sale, which came and went, and since then has been linked in rumors to at least one other private equity firm. According to the Myrtle Beach Sun News, the Brooks family has approved a sale to Wellspring. A probate judge in Myrtle Beach, South Carolina must give her blessing on the deal.
Myrtle Beach Sun News, December 2, 2010

More Evidence On Commodity Costs

Posted: Wed, December 01, 2010 at 4:21pm (CST)

Restaurants are having a good year, at least when compared with the previous two. Most restaurateurs told the National Restaurant Association that comp sales were up in October. Nevertheless, commodity costs stand as a big, dark cloud hanging over 2011. To wit: Krispy Kreme. On its quarterly conference call today, the North Carolina-based doughnut chain reported its eighth straight quarter with a comp sales increase as it continues to recover from one of the biggest restaurant chain collapses in history. Yet commodity costs are hitting the company hard. Sugar--which the company, not surprisingly, uses a lot of--is at a 30-year high. Krispy Kreme executives said that commodities are its biggest hurdle heading into next year, and the company will have to consider price increases to offset its higher food costs. Then again, as BDO Capital Advisors Managing Director Bob Snape told us recently, "I'd much rather have a commodity spike over a three-month period than a 24-month recession." ...continue reading.

Is the Going Private Boom Over?

Posted: Wed, December 01, 2010 at 11:33am (CST)

At the rate publicly traded restaurants were going private by selling to private equity (CKE, Burger King) or to an executive (Landry's), one wondered whether there would be any public restaurants left, besides Chipotle and McDonald's. But, it seems, that going-private boom may be over. This isn't to say that some chains, notably Benihana, won't go private--indeed, Benihana is for sale now. There are plenty of private equity groups in particular looking to make deals. But, increases in stock prices--the restaurant industry has outperformed broader indexes this year--may be pricing many publicly traded chains out of the market. And expectations from sellers may be high, thanks in part to high multiples paid to companies like Papa Murphy's and Burger King. All this is bad news for chains like California Pizza Kitchen and the Wendy's/Arby's Group that had been exploring the possibility, or companies like Famous Dave's that would seem to be potential buyout candidates. ...continue reading.