Archived postings from January, 2011...

Yes, Virginia, The Lending Market Is Easing

Posted: Mon, January 31, 2011 at 3:23pm (CST)

It's true: The lending market is easing--just like everybody says it is. That confirmation came this morning in the form of the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices. According to the fed, a "modest net fraction of banks" eased standards and terms for commercial and industrial loans in the fourth quarter. Lenders also said that there was a "moderate increase" in demand for commercial and industrial loans--a key finding, given that lower demand for loans has been as big a problem as tighter bank standards these past couple of years. Most of the banks said that the demand came from increased M&A activity. Large banks in particular eased standards on most terms, especially to large and middle market firms. Lenders said that a more favorable, or at least a less uncertain, economic outlook combined with increased competition to lead to the easing of standards.
Federal Reserve, January 31, 2011

Chick-Fil-A And Pointless Boycotts

Posted: Mon, January 31, 2011 at 11:24am (CST)

Atlanta-based chicken chain Chick-fil-A has had a strong run of sales and market share growth, even though it's closed every Sunday in adherence with founder Truett Cathy's deeply-held religious beliefs. These days, those beliefs may be costing the company some sales in another form, from a boycott from gay activists after a franchisee in Pennsylvania provided sandwiches to a group there that is against gay marriage. That's the problem with the First Amendment: it goes both ways. When you express your First Amendment right, someone else has a First Amendment right to complain about your use of the First Amendment. When a company decides to attach itself to a particular religion or political belief, it risks alienating potential customers. That said, boycotts such as this are usually ineffective at doing anything to a company's sales, because most customers are usually too hungry to let politics play into their lunch decision.
New York Times, January 31, 2011

Red Robin Acquiesces To Some Investor Demands

Posted: Mon, January 31, 2011 at 10:19am (CST)

Red Robin Gourmet Burgers may have eased relations with one of its activist investors by making a sale of the chain more likely. The burger concept this morning said that, after some discussions with one of the investors, The Clinton Group, it has agreed to ease some provisions of a poison pill approved last year to fend off a takeover threat, including an amendment that would not stop an acquisition that gets majority shareholder approval. The Red Robin board also agreed to put the poison pill up for a shareholder vote at its annual meeting, and it agreed to put a proposal in front of shareholders asking whether the board should declassify. According to an SEC filing from The Clinton Group, the company indicated that it "has no present plans" to start a sale process but will "analyze and consider merger and acquisition proposals." Here's one reason why Red Robin is giving into investor demands: The five largest shareholders own nearly 50 percent of the company.
Red Robin Gourmet Burgers, January 31, 2011

About That Skittish Consumer

Posted: Fri, January 28, 2011 at 1:56pm (CST)

We didn't get worked up about Mintel's survey yesterday indicating that 24 percent of diners plan to spend less eating out, while 10 percent plan to spend more. Surveys revealing expected spending patterns are iffy at best, because a lot of restaurant visits are impulsive and consumers often don't follow through on their own goals. So there is frequently a big difference between these survey results and actual spending. But the study did confirm that the consumer remains skittish and budget conscious. To wit: Rodger Head, CEO of the 37-unit bd's Mongolian Grill, told us this morning that his December sales were not as strong as he hoped, just like the broad casual dining category. His diners told him that they didn't eat out as much because they had spent more on Christmas gifts and had to make up for that increase somewhere. This pattern will likely to continue until that unemployment rate begins moving seriously in the right direction.
Jonathan Maze, January 28, 2011

Taco Bell Turning Beef Claim On Its Head

Posted: Fri, January 28, 2011 at 9:16am (CST)

Sometimes, the best solution when somebody makes claims about a business's product or service is to ignore it and avoid giving said claims the press their makers most likely crave. We don't think the federal "it's not beef" lawsuit filed against Taco Bell late last week is one of these instances--and neither, apparently, does Taco Bell. The Yum!-owned system is taking an aggressive stand in defending the quality of its beef, to the point where now it's working to turn it into an advertising coup. The class action lawsuit's claims that the seasoned beef in Taco Bell products is not actually beef, according to federal standards, goes to the heart of the chain's business. Questioning whether beef is really beef makes people awfully nervous, and as such the lawsuit has received considerable attention in various media outlets. Taco Bell, however, ran large advertisements in several national newspapers today actually thanking the filers of the suit by saying, "plain ground beef is boring."
Taco Bell, January 28, 2011

Executives Walk A Careful Tightrope On Pricing

Posted: Thu, January 27, 2011 at 2:14pm (CST)

Commodity prices are a hot topic on Wall Street right now, particularly as they concern restaurant chains, because of their potential impact on profits. One of the big questions is whether the executives will consider raising prices to offset these increases. A few, notably those at chains like Ruth's Chris that rely on business travelers who could care less about price, have pretty much said that they will. For the most part, however, executives at chains like McDonald's and Starbucks have been coy, lacing any talk of pricing with words like "selective" and "could" and "careful." Obviously, these restaurant executives know exactly the challenge that they face. They know that consumers can pull back awfully quick, as they've demonstrated time and again. They also know that while higher prices may help some stores, they can hurt others. Wendy's President David Karam this morning noted that pricing decisions should come with careful study and "vivid analysis." ...continue reading.

Peltz Invokes The Golden Arches

Posted: Thu, January 27, 2011 at 11:19am (CST)

Wendy's/Arby's Group executives barely mentioned Arby's during a five-hour presentation at the company's Investor Day this morning, and neither did Chairman Nelson Peltz, who spoke about Wendy's for five minutes. Nevertheless, Peltz made clear that unloading Arby's is key to the company's future, and he invoked McDonald's in so doing. He noted that McDonald's in 2003 was trading in the low teens. "It owned several brands, and had a lot of sloppy stores," he said. McDonald's then unloaded those brands, fixed those stores and improved the menu. Its stock is up five-fold since. Wendy's, he said, has a lot of "white space" in terms of new unit development both domestically and internationally, along with new products and new dayparts, and the company wants to focus on those opportunities. Arby's, it seems, would just get in the way. ...continue reading.

Wendy's Hopes Third Time Is The Charm

Posted: Thu, January 27, 2011 at 10:22am (CST)

Wendy's is the only major hamburger chain that has no semblance of a breakfast program, but not for lack of trying. The Atlanta-based chain has seemed like it's been trying to expand into that daypart forever. In truth, it's tried twice, but Wendy's President David Karam said at the company's investor day this morning that both efforts failed because of a "flawed menu design and ineffective testing." There is a good reason Wendy's is itchy to get into breakfast: Fewer people are eating at QSRs for dinner. Between 2002 and 2009, according to Wendy's, dinner traffic has fallen by 8 percent. By comparison, breakfast has grown 13 percent. Karam suggested that in three years, breakfast could be equal to dinner. As it is, 23 percent of QSR hamburger visits are during the morning hours, representing $13 billion in sales, despite Wendy's "negligible" breakfast efforts. Lack of breakfast is a big reason Wendy's continues to tread water these days. ...continue reading.

Commodities Already Giving Starbucks Fits

Posted: Wed, January 26, 2011 at 4:45pm (CST)

Starbucks had an awesome quarter. It recorded record sales, earnings and margins. It is adding new units worldwide and is luring more customers. Its consumer products business is flourishing and proving wise its decision to bring the business in-house. And yet, its stock in extended trading is down 2 percent. Why? Commodities. The company said that commodity costs, mostly record coffee prices but also cocoa prices, will have a 20 cents per share impact on earnings in the year, and not in a good way. Coffee prices are near record levels, said CFO Troy Alstead on the company's quarterly conference call this afternoon. Such spikes happen, he said, but not for very long, and the company doesn't expect the price to be sustainable. "This headwind may become a tailwind in the future," he said. Nevertheless, the early reaction to Starbucks' earnings revision confirms our belief that commodities will spook investors in the coming weeks, holding down restaurant stocks. ...continue reading.

Study: Oil Spill Is Hurting Seafood Consumption

Posted: Wed, January 26, 2011 at 9:39am (CST)

Oil isn't the only thing lingering four months after the oil leak in the Gulf of Mexico was plugged. Consumers apparently still fear seafood. According to a study released this morning by the research and consulting firm Technomic, 23 percent of consumers said they ate less seafood at restaurants following the spill, and 19 percent said they still eat less seafood even now. These results did not help the seafood category at all, which lost both sales and units last year amid an increase in competition from niche players, casual dining chains and fast food giants. Even though most seafood consumed in the U.S. is imported, said Mary Chapman, director at Technomic, "those indelible images from the gulf have led to some behavioral changes." Those changes are not permanent, she said in a release, but they've lasted longer than has the media coverage of the event.
Technomic, January 26, 2011

Bryan Elliott Takes A Hammer To Casual Dining

Posted: Wed, January 26, 2011 at 9:17am (CST)

The general view these days is that restaurant demand is on the increase as the economy slowly regains its footing. But some of the news has been negative lately, especially on the casual dining front. Some comp sales have come in weaker than expected. The Knapp Track same-store sales index fell in December. Bad weather is keeping customers at home. Grain prices are rising. So are gas prices. And restaurant stock growth has slowed to a crawl and is now underperforming the market. All of this caused Raymond James analyst Bryan Elliott to take a broad sword to his ratings on casual dining chains. This morning he downgraded Texas Roadhouse, PF Chang's, Morton's, Cheesecake and Ruby Tuesday. "Absent a reversal in macroeconomic trends," he said, "2011 still looks like a year of casual dining demand growth." He's simply coming down off his more bullish outlook of a few weeks ago and now believes that investors "should reduce their risk exposure to the small- and mid-cap restaurant space." ...continue reading.

Red Robin Fires Back

Posted: Tue, January 25, 2011 at 3:04pm (CST)

Red Robin Gourmet Burgers looks like it's going to take an aggressive route in dealing with its activist investors. This afternoon, the Colorado-based company released a letter from its chair, Pattye Moore, taking to task its latest activists, led by Oak Street Capital Management, for saying that the existing board does not have a "sense of urgency" in dealing with its problems. Oak Street made the "sense of urgency" comment largely because Red Robin wanted to wait an entire month, for its regularly scheduled board meeting, to address the group's concerns. She also noted that the company's "Project RED" plan to improve sales and profits was developed well before Oak Street filed its 13D. "We have set for ourselves an aggressive timetable for this strategic task, and while moving fast, have been working to incorporate the views of multiple, key constituencies." ...continue reading.

Steven Cohen Apparently Likes Domino's

Posted: Tue, January 25, 2011 at 1:15pm (CST)

Steven Cohen, the legendary investor who has averaged 30-percent returns for nearly two decades, is making a bet on pizza. Cohen's hedge fund, SAC Capital Advisors, disclosed this week that it has bought a 5.3-percent stake in Domino's Pizza, the Michigan-based chain that has regained footing recently thanks to a bunch of new products and a new pizza flavor backed by an ingenious ad campaign that disparaged the old recipe. It's a passive stake, according to an SEC filing, but SAC is now Domino's fifth largest shareholder. We've seen a lot of large investors buying up sizable stakes in the restaurant industry, both as passive and active investments, a further indication that investors expect more customers in the coming years. And pizza chains in particular have found ways to get diners in the door--particularly families that had pulled back significantly during the recession.
SEC, January 25, 2011

Chili's Losing Streak Continues

Posted: Tue, January 25, 2011 at 10:46am (CST)

Brinker International this morning reported that comp-store sales fell 4.9 percent at Chili's in its most recent quarter--a fall that was actually more like 5.4 percent given a change in quarter timing. The decline did come along with higher profits thanks to lower food costs and improved efficiency--Brinker wants to double its 2010 earnings by 2015. Yet Chili's is losing market share. That was its 10th straight quarterly comp sales decline and it came as the casual dining sector as a whole had turned positive. The company has some plans to reverse its sales slide, including menu and service improvements and store remodels, all of which are difficult to argue with. But the company has an uphill battle to bring customers back into its restaurants. The simple fact is bar & grill concepts are facing immense competition right now, especially from a fast casual sector that seems to produce another burger chain every week. ...continue reading.

What Is Stiller Doing With Krispy Kreme?

Posted: Mon, January 24, 2011 at 3:07pm (CST)

The SEC's form 13G is supposed to indicate a "passive investment" by a person or a group who say they don't intend to have any sort of influence with the company whose stock is being purchased. But that hasn't stopped people from wondering what Green Mountain Coffee founder Robert Stiller is doing with Krispy Kreme. The North Carolina doughnut retailer is trading up nearly 8 percent today, as of this writing, after Stiller revealed in a 13G that he has bought up more than 5 percent of Krispy Kreme stock. Of course, Stiller has so-called passive investments in other companies, including the pizza chain Noble Roman's, of which he owns more than 19 percent. But pizza and coffee don't sound as good together as do coffee and doughnuts--especially given that Krispy Kreme could use a good coffee program to go along with its fantastic hot glazed treats.
SEC, January 24, 2011

Hooters' Long, Complex Sale Is Finally Done

Posted: Mon, January 24, 2011 at 1:54pm (CST)

After nearly two years, the sale of Atlanta-based Hooters is finally done. The company today completed a deal to sell to a group of investors led by Chanticleer Holdings. At the same time, the investor group will buy Hooters' largest franchisee, the 41-unit Texas Wings. Backing Chanticleer is KarpReilly, a Connecticut-based private investment firm with investments in numerous restaurants and retailers. Coby Brooks, Hooters CEO and son of late owner Robert Brooks, said that his father built a "great company" but was often limited by a "lack of financial resources." "Since his passing, the requirements of his estate have limited us even further," Coby Brooks added. Those limitations might have played a role in the sale: Chanticleer was only able to buy the company after exercising its right to first refusal in early December. It got its right to buy the company by making a $5 million loan to the company in 2006.
Hooters of America, January 24, 2011

Restaurants Just Keep Closing

Posted: Mon, January 24, 2011 at 1:13pm (CST)

The NPD Group said this morning that its ReCount restaurant census shows that the number of eateries declined by 5,551 between the fall of 2009 and the fall of 2010. Add up last year's decline, and the two-year closure total is 7,203, which is below some estimates we've seen. Equally as unsurprising is that the decline is being felt most by independents, which accounted for just about all of the decline over the past year, though this hasn't exactly been a boom time for chains, either. And the decline has been felt in both the limited-service and full-service sectors. It remains an open question as to whether this decline will continue, as we've noted before. Regardless, restaurants trying to expand will have to take business from somebody else, and that somebody has been, and will continue to be, independent restaurateurs.
NPD ReCount, January 24, 2011

Sharks Going In For The Kill At Red Robin

Posted: Mon, January 24, 2011 at 8:56am (CST)

Earlier this month, a group of Red Robin Gourmet Burgers investors urged the casual dining chain to sell the company. Not to be outdone, another group led by Oak Street Capital Management, which owns 13.3 percent of the company, has delivered to the Red Robin board a laundry list of requests, including elimination of the poison pill requiring board approval of any buyout proposal. Oak Street met with management on January 7, according to letter to management, and also requested that the company declassify its board, buy back shares, appoint Oak Street representatives to the board and halt new unit growth until sales and profitability are restored. This looks like a pseudo-takeover from our vantage point. Oak Street's letter complains a lot about a board that was completely overhauled last fall, and faults management for wanting to wait a month to consider its requests instead of scheduling a special meeting. Oak Street should probably get in line.
Oak Street Capital Management, January 24, 2011

The Reality Of Brand Divestitures

Posted: Fri, January 21, 2011 at 11:06am (CST)

There is a simple reality behind the recent decisions by Yum! Brands and Wendy's/Arby's Group to rid themselves of lesser brands, and that is this: The QSR market in the U.S. stinks right now, and is showing no signs of improvement. QSRs' traditional customer base, men and people with lower incomes, are struggling to emerge from the recession and will do so only slowly. Domestic competition is heavy and, arguably, saturated. So QSRs are looking outside the U.S. to increase revenues and profits. Yum has already established itself as a global company that just happens to have U.S. locations, and Wendy's sees ts future in other countries, too, and neither company has exactly thrived in the U.S. lately (Yum's Taco Bell being the exception). Neither Long John Silvers, A&W, nor Arby's are viewed as having legitimate international growth options, so they're being offloaded so owners don't have to spend as much time focusing on the U.S. ...continue reading.

Resolution Nearing On The Hooters Deal

Posted: Thu, January 20, 2011 at 2:23pm (CST)

Chanticleer Holdings is looking like it's the winner in the ongoing battle to buy the Hooters chain. The Myrtle Beach Sun News this morning said that Wellspring Capital Management has indicated in court documents that the family of late Hooters owner Robert Brooks is preparing to sell the chain to "the holders of the rights to first refusal." That would be Chanticleer, which gained that right through a $5 million loan to Hooters nearly five years ago. A spokeswoman for Chanticleer wouldn't comment, but told The Monitor that the deal is "beginning to crystalize" right now. An announcement could come next week. Hooters has been for sale for nearly two years, and Wellspring had been working on a deal for months. That deal was reached in late November, but Chanticleer at the last minute exercised its right to first refusal. That issue has been in court ever since. According to the Sun News, Wellspring is seeking damages as a result of what it considers a breach of contract.
Myrtle Beach Sun News, January 20, 2011

Why Peltz Is Unloading Arby's

Posted: Thu, January 20, 2011 at 11:36am (CST)

One out of every seven Arby's restaurants was more than 60 days past due on royalties as of October. In each of the past two years, more Arby's restaurants have closed than have opened--the chain lost a net of 38 restaurants in 2009 and another 33 through October 2010. The company has an aging franchisee base and many operators believe it's better economically to close, according to people we've spoken with. In other words: Whomever buys Arby's will have some work to do to get the brand moving again. "We continue to believe that a turnaround would require significant investment (and even then is not guaranteed)," Bernstein Research analyst Sara Senatore said in a note this morning about the sale. She believes the impact of a sale will be "largely symbolic," as Arby's has been "barely profitable." Analysts naturally view the sale of Arby's as a positive for Wendy's, a move that will enable it to focus attention on its biggest brand and the one that has some growth potential. ...continue reading.

Peltz Finally Following His Own Advice

Posted: Thu, January 20, 2011 at 8:52am (CST)

For years, Nelson Peltz was a thorn in Wendy's side, convincing the company to spin off its various side concepts to focus on its core brand. And then when those efforts didn't succeed in reinvigorating Wendy's, he bought the company and combined it with his own chain, Arby's, saying that the two chains would benefit from economies of scale. Of course, we had our doubts. We felt the brands were too similar, and if Wendy's and Tim Horton's couldn't work well together, why would Wendy's and Arby's? Since then, the two chains haven't been able to get sales momentum at the same time. This morning, Peltz effectively threw in the towel on the combination, announcing that it is exploring "strategic alternatives" for the roast beef concept. In English, that means he's selling it. "Arby's is a good business," Peltz said in a news release, but "the reality is that the Wendy's brand, given its size and scope, is the key driver of shareholder return."
Wendy's/Arby's Group, January 19, 2011

Overbuilt Or Underbuilt? That Is The Question

Posted: Wed, January 19, 2011 at 4:13pm (CST)

At what point will restaurant contraction stop? The restaurant industry has gone through an unprecedented contraction in the past couple of years, but there seems to be some differing views as to whether that contraction should continue. Goldman Sachs analyst Michael Kelter recently indicated that supply is "constrained." He noted that 11,000 restaurant closures have put the per-capita supply all the way back to 1986 levels, and has a bullish view of the industry as a result. We would not give that same label to Jeffrey Bernstein. The Barclays Capital analyst said recently that supply must still come down, and he predicted in a recent note that the industry should lose as much as 1 percent of its units in the next year. We've held the view that the industry overbuilt, and that the recession provided a correction. But the shrinkage must stop sometime, and a more accurate view may be that the industry will continue shifting away from casual dining and toward limited-service concepts. ...continue reading.

About This Yogurt Craze

Posted: Wed, January 19, 2011 at 10:54am (CST)

Some of the fastest growing franchises right now serve frozen yogurt, led by the two most well-known brands, Pinkberry and Red Mango. And every time we turn around we hear about another. The problem we have with this is that the existing craze is too reminiscent of the last time frozen yogurt hit the public consciousness in the 1990s. You might recall that those days, frozen yogurt shops suddenly appeared everywhere. And then big, national brands like McDonald's got in on the action with their own frozen yogurt, and then the craze died and so did the franchises, with TCBY left standing. And now, earlier this week, one sizable national chain--Cold Stone Creamery--announced plans to get in on the frozen yogurt action with its own frozen yogurt bar. People love their low-calorie desserts, and we think there is a market long-term for frozen yogurt. We just don't know if it's big enough for all of these competitors. ...continue reading.

The M&A Environment Still Seems Healthy

Posted: Tue, January 18, 2011 at 1:23pm (CST)

It was widely speculated late last year that the market for mergers and acquisitions in the restaurant space was diminishing, or at least shifting focus from chains to multi-unit franchisees following last year's robust sales pace. And then Noodles got sold. And Hooters (though that's currently in legal limbo). And now, by our count, at least three other restaurant chains are on the block, following Yum's announcement this morning that it plans to sell Long John Silvers and A&W. Benihana is currently being auctioned off (one potential bidder we've heard is Tilman Fertitta, which should come as a surprise to absolutely nobody). And, let's not forget Wendy's/Arby's, where top shareholder Trian Fund Management is considering a sale. Nor should we ignore Red Robin Gourmet Burgers, where investors are pushing for a sale. So, if you're looking for a restaurant chain, there is plenty of supply on the market from which to choose. ...continue reading.

Yum! Brands Puts Its Minor Leaguers On The Block

Posted: Tue, January 18, 2011 at 10:18am (CST)

Yum! Brands is considered a three-concept franchisor: KFC, Pizza Hut and Taco Bell. Its other brands, Long John Silvers and A&W, have almost been after-thoughts--Yum rarely mentions them during presentations and discussions of its growth strategies. So it was no surprise this morning when the Kentucky-based Yum announced plans to unload the two concepts. According to a press release, Yum indicated that it doesn't have time to build the two brands. The company said it wants to focus on its growth in China, its international expansion, and on finding a way to get its U.S. business back on track. CEO David Novak said the two brands do not "fit into our long-term growth strategy." Even its press release barely mentioned the two concepts, which together have 1,630 franchisee-owned restaurants. Novak said in a release that the company will complete a sale "when the right buyer is found."
Yum! Brands, January 18, 2011

Quiznos Is Temporarily Cutting Its Royalties

Posted: Fri, January 14, 2011 at 11:31am (CST)

UPDATED: Quiznos is apparently taking some serious steps to keep some stores open. According to the Denver Post, the Colorado toasted sub chain has laid off 140 people around the country, half of them at Denver headquarters. The reason? The company is giving operators a break on royalties. Franchisees told us that Quiznos will give royalty credits of as much as 6 percent to operators in good standing, reducing royalties from 7 percent to 1 percent (though part of the rebates are capped, so some higher volume stores will pay more). "Maybe this will help us enough to keep our doors open," one operator said. The move is temporary, though the bulk of the rebates could last through the year, one operator told us. Royalty rebates are rare, especially among systems like Quiznos with few company stores. It's a clear indication that the company realizes the need to improve store profitability. One percent is better than zero, after all.
Denver Post, January 14, 2011

Fremont Is Pondering Its Options

Posted: Fri, January 14, 2011 at 10:15am (CST)

We officially believe that Sardar Biglari will get his coveted insurance company. The activist investor in Warren Buffett clothing has been itching for an insurance company for years and has aggressively targeted the small regional insurer Fremont Michigan InsuraCorp. Until recently, Fremont has largely resisted Biglari's overtures, even getting the State Legislature there to pass a special law that made an acquisition more difficult. Biglari, however, kept at it, making a renewed offer in October, then upping that offer more recently to $31 a share. On Thursday, Fremont indicated that it is taking a serious look at the idea. A special board committee has hired Philo Smith Capital Corporation as a financial adviser to review "strategic alternatives." And it hired Honigman Miller Schwartz and Cohn as its legal adviser. No timetable has been set, the company said, and "there can be no assurances" that any transaction will be completed.
SEC, January 14, 2011

Restaurants Are Spending On Ads Again

Posted: Fri, January 14, 2011 at 9:55am (CST)

Restaurant ad spending may be returning. In 2008, restaurants increased ad spending as rates fell, but that spending declined in 2009 and 2010 as sales declines hit ad budgets--spending fell 5% in the second quarter last year, according to a report by Bernstein Research Analyst Sara Senatore. But ad spending was nearly flat in the third quarter, suggesting that restaurants are picking up their advertising. Among chains, McDonald's is the only restaurant chain to consistently increase ad spending throughout the cycle, and it and Taco Bell were the only chains to increase advertising in the third quarter. Burger King, Wendy's, KFC and Pizza Hut saw slower declines in the quarter, and struggling Arby's saw its decline accelerate. McDonald's has a 35.6% share of the QSR advertising market in the quarter. Subway was second at 18%, Taco Bell third at 15.5%. Not surprisingly, those are the three best performing QSR chains. ...continue reading.

Sbarro Is Having Some Problems

Posted: Wed, January 12, 2011 at 11:57am (CST)

Sbarro, the chain of mall-based pizza restaurants, is having some problems with its debt. The company earlier this month told its lenders that it wouldn't meet a key financial covenant covering earnings. That covenant required Sbarro to have EBITDA of $43 million last year, a figure it won't reach--EBITDA through the first nine months was $23.7 million. Now, the Wall Street Journal says that the company has hired bankruptcy lawyers from the law firm of Kirkland & Ells to advise it on restructuring its balance sheet. The Journal said that the move doesn't necessarily mean a bankruptcy is forthcoming and that it may just be restructuring. Still, in the third quarter Sbarro said that it may not have enough cash to fund its debt service and provide enough working capital, which "raises substantial doubt regarding the company's ability to continue as a going concern."
WSJ, January 12, 2011

Eating Out More, But Spending Less

Posted: Wed, January 12, 2011 at 10:00am (CST)

One thought behind the recent stabilization of restaurant sales is that they should enable companies to get off the discounting bandwagon they'd been riding for two years. But one study says they can't. A survey released this morning by AlixPartners said that Americans expect to dine out more in 2011, but they'll spend less in the process. According to the survey, 57% of diners said they dined out at least once a week the past 12 months, up considerably from a similar survey taken in March. Yet diners expect to spend $12.90 per meal, down from $13.60 the past year. More than half of consumers said they need to save money when asked why they plan to spend less. We tend to take such surveys with a big grain of salt--people who say they plan to spend less frequently don't end up spending less. But it's an indication that consumers remain concerned about their finances and may be a bit skittish about their spending.
Alix Partners, January 12, 2011

Why KFC Can't Replicate Its China Success Here

Posted: Tue, January 11, 2011 at 9:41am (CST)

KFC is almost two different brands under one name. There's the one most of you are used to, the bone-in chicken-in-a-bucket QSR that is in the U.S. And there's the one that operates in countries like China, where KFC sells more than just chicken, and where it has a successful breakfast daypart and delivery service. Not surprisingly, KFC is doing a lot better in China than in the U.S. So why can't KFC do here what it did there? The answer: It would love to, it just can't right now. Steve Schmitt, director of investor relations for KFC parent Yum! Brands, said at the Cowen and Company Consumer Conference that the brand needs "to fix what we have here first." And Tim Jerzyk, vice president of investor relations, said that "operations are nowhere near as good in the U.S. as they are in China." They also alluded to challenges getting ideas past franchisees, which own the vast majority of U.S. units, and pointed to controversy surrounding its introduction of grilled chicken. ...continue reading.

How Restaurant Development Has Evolved

Posted: Mon, January 10, 2011 at 10:50am (CST)

We probably don't need to remind anybody that the recession has completely changed restaurant development, but we're going to, anyway. "There aren't the new retail projects to facilitate growth," Jerry Deitchle, CEO of BJ's Restaurants, said this morning at the Cowen and Company Consumer Conference. In the old days, he said, retail developers would lay down their project plan in front of companies like BJ's, and then BJ's could pick and choose the developments in which it wanted space. Not anymore. "We have to focus on available space." Deitchle said that it's important these days to have relationships with landlords compete for that existing space. Just another reason to be nice to your landlord. ...continue reading.

Paranoia Keeps Popeyes Going

Posted: Mon, January 10, 2011 at 10:40am (CST)

AFC Enterprises this morning said that same-store sales at its Popeyes chain grew 6 percent, performance which is notably positive given that its competitors in the bone-in chicken market have performed lousy of late. We can list a variety of reasons for Popeyes' outperformance. The company focuses on franchisee profitability. It worked on improving speed of service. It invested in marketing and innovation during the recession. Popeyes has promoted heavily its portable boneless chicken and seafood products that are increasingly popular among a bone-weary dining public. And its CEO is paranoid about competition. "We wake up scared to death every day," CEO Cheryl Bachelder said today at the Cowen & Company Consumer Conference. That might not be healthy for her health, but it's tough to argue with the results. ...continue reading.

As Red Robin Turns: An Investor Requests A Sale

Posted: Fri, January 07, 2011 at 4:27pm (CST)

We're going to go ahead and guess that some major change is about to take place at Red Robin Gourmet Burgers. Today, a group of investors that combined own nearly 9 percent of the company--led by The Clinton Group and Spotlight Advisors--released a letter it sent to the chain urging a sale. "... The time has come for the board to proactively engage likely buyers and strategic partners about a sale." While the investors said that they were pleased with the performance of new CEO Stephen Carley and have some faith in the company's restructuring efforts, "we are not convinced" that a restructuring is the right plan, the letter said. Investor opposition is building at Red Robin. Last year, the company swallowed a poison pill requiring that any proposed buyout be approved by the board first, an action that likely fended off the investor Sardar Biglari. More recently, a group led by one-time Denny's activist Oak Street Capital bought up 13.1% of the company.
SEC, January 7, 2011

Computers Are Killing The IPO

Posted: Thu, January 06, 2011 at 2:43pm (CST)

We've only been watching Facebook's apparent end-run around securities reporting requirements from a distance, but its clear decision to avoid a public offering is worth noting. The public markets are essentially broken, according to the accounting firm Grant Thornton and highlighted by the post referenced below by the Harvard Business Review. Under the current system, Wall Street must cater to large, high-frequency traders that use computer models to buy and sell stocks, at the expense of long-term investors eager to find diamonds in the rough. Smaller companies that might be those diamonds can't get the notice they could once find on Wall Street, and so they must choose other options for growth capital. So, in the restaurant world, small chains with some growth potential opt for private equity deals rather than the public markets. And small investors are unable to buy stock in a Noodles or a Wingstop.
Harvard Business Review, January 6, 2011

The Looming Impact Of Menu Labeling

Posted: Thu, January 06, 2011 at 1:55pm (CST)

At some point in the future--when, exactly, we do not yet know--the FDA will finalize the federal menu labeling law required by last year's health care reform act. And restaurants will have to comply with those regulations. But what kind of impact will that law have on restaurant sales once it does take effect? It's difficult to imagine that there won't be some change in diner habits. While we believe that most people don't want to eat healthy when they eat out, at least some people could be expected to get skittish when they see the calorie counts on menus. Studies thus far have shown modest changes in consumer behavior at best. And Darren Tristano, executive vice president of the consulting firm Technomic, expects there to be some changes when the calorie counts appear, but people will eventually get used to seeing the calories and will go back to old habits. For restaurateurs, the upshot is this: Post your calorie counts sooner, rather than later, to get ahead of those changes. ...continue reading.

The Recession Finally Sinks Larry Lundy

Posted: Wed, January 05, 2011 at 4:54pm (CST)

Larry Lundy's Pizza Hut franchise, which survived his cancer diagnosis, bankruptcy and Hurricane Katrina, apparently couldn't survive the recession. Lundy Enterprises abruptly closed its remaining 44 restaurants this week following the collapse of a deal to sell those restaurants back to Pizza Hut. Pizza Hut sued Lundy Enterprises this week, saying that the franchisee had fallen behind on royalty fees and other payments. The suit was filed a day after a deadline passed for Lundy to sell his stores back to the pizza franchisor without a final sale. The sale collapsed after a mid-December arbitration found that the value of the franchise was not enough to pay off the liens and other money owed on the business. Pizza Hut told Nola.com that it plans to spend $10 million to build new restaurants in Baton Rouge and New Orleans over the next 18 months. At one point, Lundy Enterprises was one of the largest Pizza Hut franchisees in the country.
Nola.com, January 5, 2011

Is The Employment Needle Finally Moving?

Posted: Wed, January 05, 2011 at 9:13am (CST)

A growing number of signs have pointed to an improving economy, or at least of a consumer that is willing to spend a bit more, but that annoying unemployment rate has barely budged--in fact, it increased last month. That might be changing, finally. Last week, initial unemployment claims fell to their lowest level in two years. Now there's this: The ADP Employment Report today said that private employers added 297,000 jobs last month. This is the third straight month in which the ADP report has shown accelerated hiring. Better yet, the improvement can be seen across the board, in all industries and among companies of all sizes. Manufacturing employment rose 23,000, and even the hard-hit construction industry stopped shedding employees. Whether the federal report reflects similar numbers among private workers remains to be seen--the ADP numbers can be unreliable--but the report is yet another sign that the economy is actually moving in the right direction.
ADP Employment Report, January 5, 2011

Sonic Wants To Catch Up To Its Franchisees

Posted: Tue, January 04, 2011 at 4:25pm (CST)

Sonic Drive-Ins has a simple strategy for adding $45 million a year in revenue: close the gap between company-owned restaurants and franchisee units. Average unit volume at Sonic franchisees is about $1 million a year, Sonic CEO Cliff Hudson said on a conference call this afternoon. By comparison, company-owned units make $900,000 a year. If Sonic can close that gap by bringing unit volume at those 452 company units to $1 million, that would add a total of $45 million to company revenue a year. Of course, to do that, Sonic has to reverse a same-store sales slide that coincided with the onset of the recession, and while comp sales have been improving, they still remain in negative territory (they were down 2.4% systemwide last quarter). Yet Hudson said on the call that closing the gap is "very achievable." ...continue reading.

Is Red Robin Playing Defense?

Posted: Tue, January 04, 2011 at 3:41pm (CST)

Red Robin Gourmet Burgers' Chairman, Pattye Moore, and its CEO, Stephen Carley, sent a letter today to shareholders providing an "update" of the Colorado chain's activities. The letter emphasizes the new blood in the company--Moore became board chair a year ago when the chain separated the chair and CEO titles; Carley took over in September, and four new directors joined the board in the summer. All this new blood is doing a bunch of new things, the letter states, including efforts to grow revenue and cut costs and open stores. Yet all this new blood doesn't appear to be stopping the chain's activist investors, led by Oak Street Capital Management, which previously tried, and failed, to gain seats on the Denny's board. The shareholder letter came less than a week after those investors said in an SEC filing that they had increased their Red Robin holdings to 12.1%. Those investors said they may start making noise at Red Robin, but they've been quiet--so far.
Red Robin Gourmet Burgers, January 4, 2011

Gee, I Wonder Where The Economic Growth Is At?

Posted: Tue, January 04, 2011 at 2:00pm (CST)

The restaurant industry depends heavily on the state of the economy. And that makes it a decent, if imperfect, economic indicator. So it should come as no surprise that, in an analysis of restaurant traffic and sales at 10 of the largest economies around the world, one country stands out--by far: China. Total restaurant spending there in the third quarter grew 17.7% from the same period a year earlier, buoyed by a huge, 16.2% growth in traffic. The next best country on the list was Australia, where restaurant spending grew 3.4% (thanks mostly to a higher check average). The worst was Japan, where restaurant sales fell 3%. And the U.S.? Restaurant sales grew 1.8% stateside, as traffic fell 0.7% but average check rose 2.6% as higher-end restaurants fared better and other chains reduced discounting.
NPD Group, January 4, 2011

The Problem In Picking Restaurant Stocks

Posted: Tue, January 04, 2011 at 1:16pm (CST)

We're speaking with restaurant analysts for an upcoming Monitor story on their 2011 predictions, and one analyst just confessed to us, in declining to participate, that he has no idea right now who to pick. To be sure, predicting the future isn't exactly easy, and our own prognostication skills are lacking. Yet it's his reason for declining that interest us: This is an "in-between" time in the restaurant industry right now. The best performing chains already seem to have their performance baked into their stock prices, and some even wonder whether stocks are overpriced (Chipotle, Panera, McDonald's, etc.). The rest of the publicly traded restaurant chains seem to be hampered by economic concerns as much as anything else. So analysts (and investors) must bet whether unemployment improves, which would provide a boost for most restaurants, or whether inflation will stay in check enough to keep consumers interested in spending. ...continue reading.

States' Next Revenue Target: Franchisors?

Posted: Mon, January 03, 2011 at 4:02pm (CST)

Late last week, the Iowa Supreme Court gave that state's Department of Revenue a belated Christmas gift by upholding previous decisions saying that KFC is liable for corporate income taxes there--even though franchisees own all Iowa KFCs. The court found that KFC did not need a physical presence in the state, and that the chain's brand and signage and other "intangibles" would likely be enough of a presence federal law. KFC could only appeal to the U.S. Supreme Court. Unless the high court accepts and then overturns the decision, KFC would have to pay Iowa $250,000. Adam Thimmesch, a tax attorney with Faegre & Benson, believes that Iowa could go after other franchisors if the ruling stands. And other states could jump on that bandwagon, too. Indeed, with many states facing significant financial difficulties, it would hardly surprise us to find states drooling over this ruling.
Faegre & Benson, January 3, 2011

November Was An Apparent Downer

Posted: Mon, January 03, 2011 at 1:31pm (CST)

Retailers may have had a good holiday season, but that was not likely the case with restaurants. According to the National Restaurant Association, restaurants reported a net decline in customer traffic levels in November--36% of restaurant owners said traffic increase from November of 2009 and 45% said it decreased, a reverse of the October figures. Hudson Riehle, the senior vice president of the NRA's Research and Knowledge Group, said that while consumers' disposable income increased 0.2% in October and November, their cash on hand remained tight and thus they held off on spending at restaurants. Still, operators are "decidedly optimistic," which has helped spur the creation of 157,000 restaurant jobs through the first 11 months of 2010. The association's performance index was at 99.9, down 0.8 from the previous month and below 100 for the first time in three months--100 on the index signals industry growth.
National Restaurant Association, January 3, 2011

The Closing Conundrum

Posted: Mon, January 03, 2011 at 11:05am (CST)

Franchised restaurants have a unique problem when encountering a franchisee with a struggling restaurant. On the one hand, letting a franchisee close an underperforming unit is frequently the best way to ensure that the business can keep going. Yet with new development still tough to come by, closing units can be terrible for a system--concepts showing unit declines can have an even tougher time getting financing or franchisees. What to do? At the moment, it appears, franchisors are taking a hard line on restaurant closings. John Berg, an attorney with Monroe Moxness & Berg, said that he's seen more conflicts between franchisors and franchisees over unit closings, some of which have landed in the courtroom. "Franchisors are getting tougher on store closures again," he said. "That's a reaction to closing units." Some systems are requiring buyouts of a franchise agreement, which can cost hundreds of thousands of dollars, to discourage a closure. ...continue reading.