Restaurant
Finance
Monitor
Volume 26, Number 11 • Restaurant Finance Monitor, 2808 Anthony Lane South, Minneapolis, MN 55418 • ISSN #1061-382X
November 17, 2015
OUTLOOK
Fed Policy and Restaurant Finance
Low interest rates are great for the economy, says the Federal
Reserve, confident its zero-rate stance pushed cheap credit into
productive activities that pump up American jobs.
Critics have long argued the Fed's suppression of interest rates
elevated asset prices and distorted capital allocation. They point
to valuations of modern art, Manhattan apartments and the
unprofitable tech "unicorns" valued at a billion plus, as evidence.
Or, they cite companies that favor share buybacks with newly
issued debt or asset sales, at the expense of expansion.
Valuations are in flux and investors are taking notice, perhaps
more so when the Fed raises interest rates in December. Already,
the public equity markets for restaurants have come back to earth,
signaling a change in sentiment. Every public restaurant company
we track is trading well below their 52-week high, and 47 of the
65 public companies on our stock list are negative for the year.
As I reported last year, there are certain areas of the restaurant
finance world still on the "frothier" side of the aisle, and overdue
for a correction. (See our exhibit on page 6 for insight into the
Monitor's restaurant financing pendulum.)
Just back from our recent Restaurant Finance & Development
Conference in Las Vegas, I still see an over heated market in
emerging brands, restaurant real estate, refranchising schemes,
and now, even franchise bank lending. Here's the Chicken Little
speech in a nutshell: All four are at risk of the music stopping and
one of their chairs getting pulled.
Emerging brands
"We're in an extraordinary period of capital availability for earlystage concepts," said Baird investment banker, Chris Sciortino,
to our general session audience.
He was speaking specifically of the interest in emerging restaurant
concepts from PE firms, family offices and mutual fund managers,
determined to unearth the next Chipotle. "Great ideas, very unique
concepts, inspirational founders and consumer trends," Sciortino
said of some of the reasons for the intense interest.
2016 EBITDA), the young food masters aren't shy asking for a
valuation based on a multiple of sales, or as some of the craftier
ones insist, forward store-level EBITDA, sans G&A. God bless
them for their boldness.
Emerging brand mania, millennial style, is reminiscent of the
‘80s when the initial public offerings of the baby boomer concepts
were all-systems go. Concepts like Chi-Chi's and Rusty Pelican
and Po Folks were to the Reagan era what the organic salad and
800-degree pizza oven concepts are to the Obama age. Try to
find one of those dinosaurs now.
This time the smart money is long fast casual and short casual
dining. The demographics are changed and the money private, yet
the fast casual restaurant business is no different than the casual
dining business of yore. It's still the tough, unrelenting restaurant
business it's always been. Every expansion cycle I've witnessed in
35 years of watching this industry was funded by cheap money
and ended with casualties.
Restaurant real estate
Restaurant real estate is another sector high on the Monitor
frothmeter. For the owner of real estate, prices have never been
higher and cap rates lower. That's a good thing—for them. For
the prospective restaurant tenant, rents have never been higher.
That's not a good thing.
On the development side, the sale-leaseback remains a wonderful
new-unit development tool because of the low rates. A Taco Bell
operator I spoke with at the conference told me he was getting
build-to-suit financing on new stores at a 6% cap rate. I remember
when they were 12.5%. Beautiful now.
Unfortunately, too many of the real estate deals I see are multiproperty sale-leasebacks used for leveraging an acquisition, or a
financial engineering exercise, generally a recap event. The math is
simple: Low cap rates translate into higher selling prices, especially
when rents are jiggered high relative to sales. The problem is there's
a lot of jiggering going on.
Today's millennial restaurant operators are smarter dealmakers
than the restaurant operators of yesterday. Not only is this crew
well-versed in technology, sustainability and employee enrichment,
they also know to the exact penny, the high bid for any five to
20-unit fast casual deal made in the last six months.
Excessive sale-leaseback rent commitments are like stealth debt on
the balance sheet. The payments may look like rent, feel like rent,
and the checks coded to rent, but they're really a debt payment,
and one that goes up every year by one to two percent. As Gene
Baldwin, a turnaround consultant, pointed out in a previous
Monitor, a poorly designed sale-leaseback puts enormous pressure
on the P&L after just a few years.
Inspired by Shake Shack's stunning go-public multiple (87x
Continued on page 6
© 2015 Restaurant
Monitor
Page Finance
1
FINANCE SOURCES
Citizens Funds Smokey Bones
Citizens Bank announced that it has provided a $30 million
credit facility to Smokey Bones Bar & Fire Grill, a 67-unit
Florida-based casual dining chain specializing in “good food,
good drinks, and good times.” The company is an affiliated
portfolio company of Sun Capital Partners, Inc.
The credit facility refinanced all of the company’s existing
debt, and also includes a sizable development line which will
be used to build multiple new restaurants and fund major
remodels of select, existing locations. Smokey Bones recently
opened its third new restaurant this year and has started plans
for some major remodels.
“Smokey Bones is a terrific concept poised for growth,” said
Thomas Hung, senior vice president and head of chain
restaurants within Citizens’ Restaurant Finance group. “We
are very excited about this new partnership.”
Citizens Bank’s Restaurant Finance group is a national lender
focused on meeting the capital needs of multi-unit restaurant
owners nationwide including franchisors, franchisees,
chain restaurants, and sponsor-owned restaurant operating
companies. For more information, contact Armando Pedroza,
senior vice president and national director, at (949) 726-7307,
or by email at armando.pedroza@citizensbank.com.
Taco Bell/Buffalo Wild Wings Franchisee Gets
Equity Investor
Private equity firm/pension fund manager Partners Group,
with headquarters in Switzerland, recently acquired a majority
stake in the combined entity of Pacific Bells, Inc and World
Wide Wings LLC, a franchisee of Taco Bell and Buffalo Wild
Wings, respectively. The franchisee company, led by CEO
Tom Cook, has 140 restaurants between the two concepts. A
consortium of banks provided additional funding, speculated
at more than $200 million, in the deal.
“Partners Group has a longer-term outlook than most PE
firms,” said Kevin Burke, managing director with Trinity
Capital, the investment banking firm that brought Partners
Group to the table and advised Cook and his team on the
recapitalization. “They are keen on the company’s two brands,
and they’ll bring capital to the table, as well as strategic guidance
in the financial markets.”
He also mentioned that Partners Group liked the company’s
development, acquisition and remodeling ambitions, and how
they operate “tight P&Ls. Partners Group saw that Tom and
his team had good street cred with both of the brands.”
According to Cook, expanding the company’s locations “will
be job one. Our goal is to expand through multiple ways,”
he said, “which will include accretive acquisitions as well as
new store development and opportunities in other brands….
There would have been no reason to go hunt for a partner if we
wanted to build five or 10 restaurants. Our desire is to become
a top-tier company in the U.S. in terms of restaurants, revenue
and profitability. There’s only a handful that have broken the
billion dollar mark, and we want to be one of them.”
Trinity also served as exclusive financial advisor to QSR
International LDC, a 120-unit, multi-brand master franchise
in its divestiture of 32 KFC restaurants in Costa Rica. The
company sold the restaurants to Intelectiva Costa Rica SRL.
QSR International is a quick-service restaurant developer
currently doing business in 16 countries throughout Latin
America and the Caribbean. For more information on Trinity
Capital, contact Kevin Burke at (310) 231-3100, or by email
at kburke@tcib.com.
CIT Equipment Finance Bridges Lending Void at
Finance Company
“At CIT Equipment Finance, we are looking to work with
our partner groups,” said Nick Small, managing director.
“We want to create a one-stop shop solution” for restaurants.
CIT purchased last year small business lender Direct Capital,
an online automated finance solution that offers franchisees
financing starting at $10,000. CIT also has a corporate finance
group that offers senior secured financing typically over $10
million to corporate restaurant clients.
“Since purchasing Direct Capital, CIT was looking at bridging
the gap between our equipment-only offering and the larger
secured financing deals,” explained Small. That’s where the
equipment finance group comes in, which offers senior secured
financing from $1 million to $10 million or more. They started
to focus on the franchise market about a year ago.
The name includes “equipment finance,” although it is a
bit of a misnomer: The group finances equipment, yes, but
also refinancings, partner buyouts, acquisitions, new builds,
recapitalizations and remodels.
“We really have a strong list of embedded customers with
the Direct Capital acquisition,” said Small. “It enabled us to
expand the offering to our existing customers and others who
fit in our target market.” They first work to build relationships
with franchisors to better understand their business model and
strategy, and then in turn, finance their franchisees.
They are focused on franchisees of top-tier concepts in the
quick serve, fast casual and casual sectors. “Our point of
differentiation is that no one really covers the dollar range we
do,” he said. “It enables a franchisee to grow with one partner.”
CIT Group also recently announced CIT Retail & Restaurant
Finance served as Sole Lead Arranger in a senior secured
credit facility to Bertucci’s, operator of Italian casual dining
restaurants with locations from New England to Virginia.
Bertucci’s is a portfolio company of Levine Leichtman Capital
Partners, a Los Angeles-based investment firm. Financing was
provided by CIT Bank. The financing, said Levine Leichtman
CEO Lauren Leichtman, will provide capital for Bertucci’s
to continue their kitchen reimaging program, which features
theater-style cooking.
For more information on CIT Equipment Finance, contact
Doug McKenzie, specialty finance leader, at (416) 507-5019, or
by email at douglas.mckenzie@cit.com. For more information
on CIT Group, contact Burt Feinberg, managing director,
(212) 771-1744, or at burt.feinberg@cit.com. To learn more
about Direct Capital, contact Douglas Solomon, vice president
of strategic relationships, at (603) 433-9413, or by email at
dsolomon@directcapital.com.
Page 2
finance sources
Element Finds Success Expanding Upon Program
Financing
“The history of Element Financial in the franchise sector was
originally centered around program financing for specific QSR
brands," reported Bernie Lajeunesse, senior vice president
and general manager—specifically those that had financing
needs related to new kitchen equipment, menu changes, POS
or signage changes. Initially much of that program lending
was focused on smaller-ticket loans, $20,000 or $100,000 back
in 2009, to larger portions for a few select franchise systems.
“That was the entry point for us into the franchise sector and
it was successful.”
When Lajeunesse was tapped to run the U.S. franchise business
for Element about 18 months ago, the company was seeking
to broaden all of its U.S. business lending verticals. For the
franchise group, the goal included expanding upon Element’s
prior success with program lending and increasing both the
number of brand relationships, as well building deeper direct
lending relationships with franchisees in those brands.
Today, with regional account executives in place and 25
franchise brands under their umbrella, Element still offers
brand program financing, but has expanded it to assist
franchisees of those brands directly. The company provides
loans for refinancing existing debt, remodels, acquisitions,
recapitalizations and new store development. Element also has
expanded their target deal size and now provides financing
for these types of transactions ranging from $350,000 to $15
million, Lajeunesse said.
For example, if a 15-unit operator has to still remodel 10
locations and four of those locations have to be completed
in the next year, he said that could be a $1.2 million or more
in remodel capex. “To some larger lenders, that incremental
$1.2 million isn’t that interesting. To us, it is. We’re just as
happy to look at a $2 million transaction as we are the $10
million relationship.”
They’ve done a few of them, it seems, because Element will end
up with a loan volume of about $150 million this year. For
2016, Lajeunesse expects that number to be over $200 million.
Where he feels Element adds value, as well as doing smaller
transactions, is that they don’t overcomplicate things from a
structural perspective.
“We are a non-bank lender, one of the few larger public finance
companies in the space today, and while we follow a detailed
due diligence and underwriting process,” Lajeunesse said, “at
the end of the day, we’re underwriting cash flow. We don’t tend
to complicate loan structures with multiple covenants that
often concern franchisees" For example, they don't include a
covenant related to lease-adjusted leverage, but that does not
mean they don’t look at and underwrite current leverage of
the borrower. "In, many cases we have the ability to be more
flexible with structure and covenants than most bank lenders
due to the level of regulatory influence they are required to
adhere to.”
And, they still set up and provide a comprehensive program
financing option to different-sized brands. “We’re not just set
up to do one thing,” Lajeunesse said.
“Banks are typically willing to line up behind tier-one brands,
but we’ll take a look at the brand that has been through
challenging times in an effort to get comfortable with where
they are stabilizing their concept. We’re not doing everything
under the sun, but if we (the lenders) are all going to cluster
around the same brands and opportunities, there’s not much
reason for us to be around.”
For more information on Element Financial, contact Bernie
Lajeunesse, senior vice president and general manager, at (267)
960-4016, or by email at blajeunesse@leaserv.com.
Envoy Adds Acquisition and Construction
Financing
“There’s an appetite for restaurant real estate—it’s a very deep
market,” said Ralph Cram, president of Envoy Net Lease
Partners, a provider of short-term financing for single-tenant
properties, including those in the restaurant industry.
A lot of real estate finance providers offer sale/leaseback
financing to restaurant operators, as does Cram’s group. But
Envoy has added acquisition and construction debt financing
to their line-up of products.
Where Envoy specifically focuses is on the smaller deals—“the
little niches in the market that the big banks don’t want to
deal with”—and they are “opportunistic,” said Cram. The
company offers off-balance sheet financing for corporate or
franchisee clients, so as not to violate bank covenants, or tying
up more equity in the deal.
“With our program, franchisees can close on an acquisition
and then do a sale/leaseback at their leisure,” he explained.
“This allows the client to reduce their rent, or increase their
net proceeds from the sale of the acquired real estate after they
take possession of it by cutting out the middleman.”
Envoy also offer bridge loans: As a result, the client can pledge
real estate assets without using a sale/leaseback or another
equity source to fund new unit expansion.
Envoy offers up to 100% construction loan financing for
single-tenant properties, and up to 95% real estate financing
for franchisee M&A deals. Their deal size is $1.0 million to
$10 million.
Envoy recently completed a Denny’s deal in Northern
California: It was a newly closed Denny’s with four years
left on the lease. What attracted Envoy to the deal was that
the developer had redevelopment experience and could carry
the real estate. And, according to Cram, the land value alone
exceeded the purchase price. Envoy closed on the deal in 28 days.
“We just close faster than most banks,” he said. “You are dealing
directly with the decision makers here. And Envoy’s debt
programs are rare for small franchisees and developers.” For
more information on Envoy, contact Ralph Cram, president,
at rcram@envoynnn.com, or by phone at (847) 239-7250.
Page 3
finance insider
Dennis Lombardi has retired from WD Partners. The longtime restaurant consultant has formed his own firm, Insight
Dynamics. Lombardi will continue to do consulting for private
equity firms, restaurant chains as well as continue to serve on the
Board of Directors of a number of restaurant companies. You can
reach Dennis at dennisjlombardi@gmail.com.
Finance and accounting services firm Global Shared Services
has acquired ACT Outsourcing Solutions, according to Teresa
Moore, ACT founder/managing director. The move, said Moore,
will allow the company "the ability to deliver more scale and meet
an even broader range of client requirements..." Moore brings
expertise in restaurant operations to the table in the acquisition.
Before founding ACT, Moore was with SS&G (now BDO), and
was chief administrative office with an Applebee's franchisee for
18 years. You can reach her at tmoore@gsservicescorp.com.com.
More details have emerged concerning Philippine-based Jollibee
Foods deal to acquire 40% equity in Smashburger for $100
million. According to Philip Albert Felix, research analyst at
Philippine Equity Partners, Smashburger's enterprise value
is $335 million, which will consist of $250 million equity and
$85 million of debt. In his October 19 report, Felix pointed
out: (1) Jollibee will have an option to buy an additional 35% of
Smashburger between 2018 and 2021 and the remaining 25%
between 2019 to 2026; (2) Jollibee's option price may be reduced if
certain targets are not met; (3) Smashburger currently operates at a
loss but expects to be profitable in 2017; (4) Based on an EBITDA
estimate by Felix, the deal is priced at 14x Smashburger's EV/
EBITDA in 2016; (5) Upon completion of the deal, Consumer
Capital Partners will own 38.1% of the equity.
Famous Dave Anderson has returned to his namesake company
as a consultant. The Famous Dave’s founder left the chain in 2014
over a disagreement with management. Anderson says he was
approached by a number of franchise partners who asked him to
come back. He told the Monitor last week the first job is “getting
back to what Famous Dave’s stood for, which was being a fun
family place to eat that’s affordable, and getting back to the best
recipes possible using the best ingredients made from scratch.”
Flynn Restaurant Group bought the company-store assets of
45 Panera Bread locations in Seattle and Northern California
for $26.7 million, including $0.9 million for inventory on hand.
Flynn is the largest restaurant franchisee in the country and
currently operates 480 Applebee's restaurants and over 200 Taco
Bell restaurants. According to Panera CFO Mike Bufano during
a third quarter conference call, the level of profit in those markets
were below the system average.
Roger Lipton, long respected as a restaurant and retailing analyst,
has gone live with an interactive website, LiptonFinancialServices.
com, to provide a “meeting place” for investors and operators.
He plans to provide unfiltered commentary two to three times
per week on corporate developments, industry trends and broader
economic issues. His “Ask Rog” interactive feature will address
specific subscriber concerns. The restaurant industry has long been
a leading indicator relative to broader economic developments, so
this site should be useful to a far wider audience than restaurant
and retail participants alone. Also, you can also follow Roger’s
briefer thoughts on Twitter @Roger Lipton.
Due to the growth of their loan portfolio, Pacific Premier
Franchise Capital is in need of a Portfolio Manager to
periodically review existing clients’ financial statements to
gauge restaurants’ financial trends, compare results with
applicable financial covenants and assign risk ratings. Any
required course of action will be determined by the Portfolio
Manager. Qualified candidates should send their résumé to
ssoltero@ppbifranchise.com.
Scuttlebutt at the Restaurant Finance & Development
Conference last week in Las Vegas: Signature Financial
may acquire GE Capital Franchise Finance before the end
of the year.
Denny's CEO John Miller received a standing ovation from
franchisees at their recent convention in Nashville.
The 41-unit, franchised casual dining chain The Green Turtle
Sports Bar & Grill has been acquired by private equity firm
Stone-Goff Partners. Raymond James provided advisory to
Green Turtle; Arrowpoint Partners provided financing to StoneGoff for the acquisition.
Broadstone Net Lease, a private real estate investment trust
acquired a portfolio of 36 Jack’s Family Restaurants for
approximately $83 million. It was the largest portfolio acquisition
to date for Broadstone. Jack's was acquired in July by Onex
Partners IV, a $5.15 billion investment fund managed by Onex
Corporation, a Toronto-based company that trades on the
Canadian Stock Exchange.
Dennis Monroe, chairman, Monroe Moxness Berg, PA was
honored by Twin Cities Business magazine in its 20th annual
Outstanding Directors Awards program on October 1. The
magazine recognizes outside directors for their dedication and
exceptional work in the course of their board service.
Page 4
CircleUp Looks to Fill Restaurant Funding Gap
Capital is flowing freely these days, as investors look to get a
piece of the restaurant industry.
Private equity firms and family offices are swooping into earlystage companies caught between a friends-and-family round,
bank loans or a large investment.
CircleUp is among a handful of internet investment platforms
investors use to tap into this gap. Ben Lee, director of business
development for CircleUp, said the company aims to fund
businesses with revenue below roughly $10 million to $15
million, which are largely ignored by traditional investors.
“I think where you’ll see the biggest impact is at the early stage
where the process is so inefficient and so hard for so many
entrepreneurs,” said Lee.
Investors can buy a minority stake for an investment set by the
featured company. They can go all-in or crowd together with
other investors—just don’t call it crowd funding.
“It’s a little bit different than many traditional crowd funding
platforms,” said Lee. “It’s accredited investors only.”
All the companies featured on CircleUp are vetted, another
major departure from typical crowd funding entities with a
graveyard of failed projects. Lee said just 5% of companies
that contact CircleUp end up on the site—companies that are
poised to deliver growth for investors.
That mix of private equity and investors—15 to 16 entities
in all—might sound complicated, especially from an
administrative standpoint, but Morgan said investors didn’t
mind being in the unique arrangement.
“The feedback was very positive on the Tava deal,” said Morgan.
He indicated the private equity funds said that of the list of
considerations of why they do or don't invest, the makeup of
the capital table never disqualified a second-round investment.
Harvey Metro, CFO at Matchbox Food Group, a multi-brand
restaurant company looking for growth capital for their casualdining flagship Matchbox, said CircleUp’s ability to simplify
a very complicated process was one reason the company sold
equity on the platform. That and few traditional investors
wanted to get involved with the company's unique mix of equity
and bonds, even though they were a relatively large company.
“There are two benefits, one is the simplicity of the execution
where all the deal documents are up there, when someone wants
to buy, they just click, click, and hit fund and it’s really simple,”
said Metro. “That’s a big benefit to us from an administrative
standpoint. And second is that they’ve got this huge network
of people wanting to make private investments.”
Metro said the company raised “$3.5 million to $4 million”
of their $20 million on the platform, and the communication
stream was another strong point.
“For restaurants, we’ll look at unit economics to make sure
they have a sustainable margin profile at both the gross and
the four-wall contribution levels, and look at the scalability
of the concept," said Lee. "You do need to see the businesses
grow pretty meaningfully. Our average company is growing
at about 80% year-over-year.”
“It’s really a social media-like interaction,” said Metro. “I’m not
telling them what I ate for lunch, but I send them construction
pictures and progress.”
The restaurant company's management team is also critical since
many of the companies featured don’t have proven longevity
and may be heavily leveraged.
“We believe there is going to be a big opportunity to provide
greater access to invest at large,” said Lee, noting that after
going through CircleUp, companies have been able to propel
themselves to greater growth.
“The quality of the management team is a big component.
That’s why we talk with every company before they get listed,
just to be sure we’ve had a chance to hear their story and gauge
the strength of the management team,” said Lee.
One of the first restaurants funded through the platform was
Indian fast-casual concept Tava Indian Kitchen. Management
was looking to add three or four restaurants and expand into
a second market. CEO Jeremy Morgan said they also wanted
to invest in branding and hone the menu.
“We raised $4.5 million in our Series A and basically out of
that, I think about two and a half million was sourced through
CircleUp either directly or indirectly,” said Morgan.
That funding came mostly from investors, including former
Smashburger CEO David Prokupek, who joined the board
of Tava as part of the deal. Private equity firms Kensington
Capital and Agilic Capital also joined in. CircleUp Growth
Fund, a separate investment entity that invests in promising
companies on the platform also kicked in some capital.
For investors, Lee said it’s a great way to tap into a particular
asset class.
“Our average company after they’ve raised with us, they’re
averaging 86% revenue growth the year after,” said Lee.
—Nicholas Upton
Franchise Times Finance & Growth Conference
Franchise Times Finance & Growth Conference will
be held March 14-16, 2016 at the Cosmopolitan Hotel in
Las Vegas. Over 50+ growing franchise company CEOs
and CFOs will make presentations about their business
prospects and expansion initiatives. Lenders, investors
and potential multi-unit franchisees wishing to learn more
about these growing brands and meet with senior company
executives should mark their calendars to attend. For more
information, go to www.franchisetimes.com.
Page 5
outlook
continued from Page 1
For restaurant companies that want to expand and don't have the
benefit of dabbling in the build-to-suit or sale-leaseback market,
we're at that point in the cycle where landlords hold the cards.
The influx of easy money means operators are fighting over the
same 2,000-to-3,500 square foot retail site.
Jim Haslem, a lease workout expert with Huntley, Mullaney,
Spargo and Sullivan, told me he's seen some operators get into
leases that are uneconomic from the get go, just to meet their
development goals. Who thinks this will end badly, raise your
hand?
Refranchising and financial engineering
Refranchising is another area which has been successful to
date because of the low rates and capital availability. Known as
the "asset-lite" model, it's been the preferred strategy of public
restaurant franchisors who favor share buybacks and dividends
over building stores and owning real estate. Refranchising is one
way to get there.
To date, refranchising has been a profitable trade. Chains such
as Applebee’s have unloaded their company stores and pushed
future development and capital expenditures onto their franchisees.
DineEquity's (Applebee's and IHOP's parent) shares are up
almost six times since March 2009 as the company earmarked
store proceeds to buybacks and dividends. (One of these days I
need to apologize to Julia Stewart for my past snarky criticisms
among these pages.)
The problem with the asset-lite strategy is it works best if interest
rates stay low. Without any operating restaurants, or other ways
to generate growth, asset-lite companies are no different than real
estate investment trusts or master limited partnerships. Investors
will value DineEquity's IHOP and Applebee's royalty stream at
some agreed-upon discount rate. It doesn't require a Wharton
degree to predict that when interest rates go up, the value of the
royalty stream will go down.
One share of DineEquity at $80 per share is already yielding
4.6%, and will likely be valued less a year from now, if the Fed
takes action. Short interest (investors betting the shares will fall) in
DineEquity has reached 1.3 million shares, up from approximately
300,000 at the beginning of the year.
Investors seem to be growing tired of the share buyback game.
They want companies to focus on building revenue. Macy's is
under fire for spending $1.84 billion buying back shares at an
average price of more than $60, while the stock is now $39.
On the restaurant front, Famous Dave's listened to their activists
and wasted $18.6 million buying back one million shares over
the past three years at an average price of $18.57. Now the stock
is $8.44 and the company is in debt to the tune of $17 million.
They recently had to enter into a forbearance agreement with
their lender over a covenant default. You have to ask yourself
what good the financial engineering did for the Famous Dave's
brand. Nothing.
Franchise lending
Since 2010, franchise lending has been one of the bright spots in
the finance world. Capital availability has never been better for
restaurant operators. New unit development, refranchising and
large franchisees consolidating other franchisees in their systems
have made it a fertile ground for banks and finance companies
looking to add or build a portfolio.
But, competition has made it tougher for lenders to get the spreads
they're accustomed to in the restaurant business. In order to win
business, some lenders relax covenants or advance an additional
turn of adjusted EBITDA to make the borrowers happy. That's
when mistakes are made. That's also the time when some lenders
consolidate their portfolios, or leave the space altogether.
Change is afoot, too. GE Capital Franchise Finance will probably
be sold before the end of the year, and because of all the competition
right now, some lenders would rather see them go away. That's
not likely to happen and it wouldn't be good for the restaurant
industry if they did.
Still, the restaurant financing pendulum below, while in no way
scientific, has proven itself accurate over 35 years. We're in the
seventh year of the current expansion cycle. How about a few
more years before we have to start over again?
—John Hamburger
Restaurant Financing Pendulum
No
Money
Credit Is
Tight
Money
Parsed
Out
Covenants
Bite
A Tad
More
Money
Covenant
Fight
We
Love
Restaurants
Business
Is Bright
More
And More
Money
Covenant
Light
Page 6
IPOS
and
Expensive
Sites
The
Restaurant
Business
Just Isn't
Right
Call the
Lawyers
Borrowers
in
Flight
No
Money
Credit Is
Tight
Spending Smart as a Digital CFO
Technology is a lynchpin for every restaurant. CFOs who
traditionally would make their decision on the bottom line
are now integral parties in technology upgrades and testing.
integration. But that means a little more work, as sometimes
the best-in-class platform just won’t play nice with existing
systems.
CFOs discussed their increasingly technical roles during the
Restaurant Finance & Development Conference, exploring the
philosophies and how to keep track of all the nuts and bolts.
“I’ve had 100% best in class,” said Jacobs. “It worked, but as
I’ve come full circle in the past five years, the word integration
has meant different things to different people.” He said vendors
will say just about anything to get a new client, even if they
can’t deliver. “Anytime I’ve asked a software vendor, ‘Does
your system integrate with this other system?’ I’ve always
heard, ‘Yes, of course it does,’” said Jacobs. “I learned very
rapidly that they didn’t know what integration meant to me
or they were lying.”
Historically “as a CFO, the first thing I looked at was the
last page, the price. But that is not what I would recommend
going forward,” said Michael Jacobs, a partner at Corner Table
Restaurants based in New York. “Today it’s much different;
hopefully the CFOs play a significant role in evaluating the
benefit of a technology as much as the cost and how you’re
going to pay for it.”
Putting simplicity out front and creating a spending philosophy
is important, was the advice from Brent Johnson, CFO at
Giordano's, as they look to re-brand with a heavy focus on
catching up with the industry technologically.
“When we look at technology, we clearly have certain budgets
and costs that we have to live within. But we are looking at
where is it going to make a difference for us,” said Johnson.
“We’re trying to simplify our technology environment so we’re
not spending a lot of time and money maintaining it but really
looking to get an advantage in customer acquisition.”
Johnson, who sold “bleeding-edge technology” in a previous
life at IBM, isn’t spending too far ahead of the curve.
“We’re looking for things that aren’t out there so far that we’re
going to over pay because technology proves over and over
again that it becomes more and more cheap as technology
evolves,” said Johnson.
Nick Wagner, CFO at Snooze, an A.M. Eatery, said he still
looks at the sticker price first, but then examines new tech.
“I go to the last page of the RFP, start there and work backward,”
said Wagner.
He said there are always two investments, as far as he’s
concerned: the product and the maintenance. He’s trying to
move away from physical hardware as much as he can and turn
the labor-intensive maintenance into a capital-intensive move.
“We try to minimize the IT investments for flexibility and
if it can drive sales and improve operations,” said Wagner.
“We have a relatively simple business, so if we can simplify
two areas—increased sales, improved efficiency—and get the
managers out of the office and onto the floors doing something,
then we think it’s a success.”
He said a single database is ideal.
“To me, integration means a single database. You’re entering
data and it’s going to the same place, that’s true integration,”
said Jacobs. “Anytime you’re moving data, it’s integration, but
it’s manual integration and many times systems just refuse
to talk.”
Of course, every company is a little different: Some may thrive
with one vendor, but many either can’t afford a top-to-bottom
vendor or need to pick and choose based on their objectives.
“I think folks are realizing that nobody can do it all,” said
Johnson, who tries to limit vendors, but makes sure to make
integration central to negotiations, even if it costs more.
“Your best chance to push the integration is before you sign
the contract. But the first person who asks for integration is
usually the first person to pay the toll.”
The sheer amount of data is keeping CFOs up at night; how
to keep it manageable, but also how to use the information.
“What I worry about goes back to the data,” said Wagner.
“Turning tech data into action, you get a ton of data, but it
really has to turn into action.”
To that end, data needs to be freely accessible—beware of the
vendor who charges to look at your data—and actionable.
CFOs can get a pile of reports, but unless it’s actionable, it’s
just noise.
“I don’t want to go back to the office and print that report,”
said Johnson. “I want to tell you the parameters of what’s
important to me and in real time, tell me what to do." So he
says, if it’s an "approaching overtime report," he wants to know
who's going to approve that overtime, and know it quickly.
Smart CFOs are looking for more of those meaty, focused
bites of data.
He said the hardest part is being open to new procedures and
instead “taking the technology and adapting it to what we do
instead of adapting to the technology. That’s how you miss
out on the efficiencies.”
“I think the mantra going forward is getting actionable
information in real time, so we can make decisions in real
time," said Johnson. All, he added, "with the data that we
now have an overabundance of.”
Above all, smart digital CFOs are looking for complete
—Nicholas Upton
Page 7
STRATEGY
Unlikely Concept Creators: Franchisees
In 2003, two engineers wrote a business plan for an Indian
fast-casual that featured tandoori cooking. The clay-oven
concept didn’t get off the ground. “We realized the market
wasn't ready. So we decided to go into fast-casual franchising,”
the plan’s co-author, Raji Sankar recently told me.
Instead, she and Randhir Sethi launched Five Guys Burgers
& Fries in Pennsylvania and Ohio, opening 18 restaurants to
date. Four are planned for next year,
This month, however, the India-born co-CEOs are celebrating
the first anniversary of Choolaah Indian BBQ. Last fall, they
debuted their “original dream” — tandoor ovens in tow — in
a tony Cleveland suburb. Sankar, who declines to reveal sales
(or even a check average), declares she and Sethi are pleased
with the unit economics and will open a second Choolaah in
a Fairfax, Va., mall next spring. “Our vision is to transform
the life of everyone we touch,” she said.
Their project made me wonder what possesses multiunit
franchisees to put capital at risk in a new restaurant venture
without franchisor support. To find out, I interviewed five
franchise groups that have put (mostly) their own money where
their menu is. Two are nascent concepts barely a year out of
the ground; the others have been in operation for several years.
Certainly, having an infrastructure and a talent for managing
people helped these franchisees. Yet scores of multiunit
operators have both and never devise anything of their own.
What these five have in common, I discovered, was an eagerness
to test a new idea against their ability to operate restaurants
without a blueprint or turnkey guidance.
“When you become a successful franchisee and love the
restaurant business, you always have this nagging thought: ‘Can
I create a successful brand that guests will love and want to
return to?’” said Ed Doherty of Allendale, N.J.-based Doherty
Enterprises, who franchises 160-plus restaurants. Since 2008,
the veteran franchisee on his own has opened three Irish pubs
and a chef-driven, small-plate restaurant that has won rave
reviews from Yelp reviewers. (FYI: So has Choolaah.)
“To be a franchisee, you have to be entrepreneurial in the first
place,” Results Thru Strategy’s Andy Simpson, who consults
franchisees, told me. “Yet some don’t want to be thought of as
just a franchisee but as a creative person and a great operator.”
Consider Simpson client Anand Gala, who has opened 11
Famous Dave’s in southern California. He has also been
a multiunit Applebee’s franchisee. His mother was once a
franchisee of Jack in the Box restaurants.
Gala debuted a fast-casual concept called Fresh Griller in
Santa Ana and Fullerton early this year, having identified a
check-average hole in the healthful-menu market. Per-person
averages at several such fast-casual brands in his area had
climbed above $12 with beverage, leaving people with modest
incomes behind.
“We wanted to make a visit affordable for everyone, not just
for the Coastal or highly educated communities,” Gala said.
Meals average $7-$9.50 at Fresh Griller.
Gala, an ardent believer that franchising can change lives,
intends to franchise the 1,800-square-foot concept once he
has a handful of company restaurants open. He concedes that
developing a model with systems that simplify operations for
franchisees is challenging. “The franchisor’s responsibility is
testing everything and proving that [the concept] produces
topline sales and bottomline profitability,” he said.
Franchising plays no part in Doherty's or Sankar’s futures.
“Why become a franchisor and have people yelling at
me?” Doherty joked. Sankar believed it was too early in
Choolaah’s life cycle to think about domestic franchising,
though international development is a possibility. “We’re still
building our infrastructure,” she said, adding she recently
hired someone with batch-cooking experience to scale the
Punjabi recipes written by Sethi’s wife, Simran, director of
product management.
It doesn’t surprise Simpson that neither franchisee is
franchising. “Most restaurants that serve really good food
are not franchisable,” he said. Royalties of 5%-7% usually
mean franchisees can’t afford to hire chefs or buy expensive
ingredients. Some concepts — like Choolaah, the focus of
which is uniquely spiced dishes — are often too complex for
franchisees.
Rudy’s BBQ franchisee Ken Schiller and his partner Brian
Nolan once considered franchising Austin, Tx.-based Mighty
Fine Burgers, Fries & Shakes. Yet the pair, who opened the first
of four units in 2007, eventually decided not to because of their
need for near-total control. “We wanted a fast-casual restaurant
at a similar price point [to Rudy’s] and with interchangeable
people so everything could be done under one umbrella to
leverage resources," Schiller explained. “We’re not franchisors.”
Nor is Rob Alvarado, a Denver-based YUM! franchisee
who operates 145 units. This past summer he and three
partners (including a fine-dining chef) opened Honor Society
Handcrafted Eatery, a trendy fast-casual with a menu that
boasts menu items (at breakfast, lunch and dinner) are “fresh,
local and prepared from scratch.”
Alvarado, an attorney, put up most of the money for the $1.4
million project. “I brought the restaurant background and
financing,” he told me. The partners’ motivation to open
what they’re calling a “fast fine” restaurant, he added, sprang
a desire to create a restaurant with high-quality food they liked
but with lower price points than fine dining. Nonetheless, the
check average is a stiff $17 at dinner.
Honor Society’s LoDo site, in a new office building near
refurbished Union Station, will eventually be part of a thriving
entertainment district frequented by affluent apartment
dwellers. At least, that’s Alvarado’s hope. “We’re here about a
year early,” he said.
—David Farkas
Page 8
LEASING
A Fresh View of Equipment Leasing Today
By Dennis Monroe
Equipment leasing was one of the earliest forms of financing
for restaurants, used typically to fund furniture, fixtures,
equipment and, at times, leaseholds. I got involved in franchise
and restaurant finance in 1980, and one of the major players at
that time was Bell Atlantic—one of the Baby Bells—who had
an equipment leasing program and real estate sale/leaseback
program. Other companies, such as Franchise Finance
Corporation of America, had not yet combined real estate
and equipment leasing into one product.
For many years, particularly during the height of the tax shelter
era, equipment leasing firms utilized operating leases where
the lessor kept the tax benefits, including depreciation and
investment tax credit. When the tax laws governing passive
investments, particularly losses, changed, it was not as favorable
to use operating leases.
Equipment leasing has been very significant in our industry.
Certain vendors (e.g., ice machine makers) have had leasing
programs, as well as some of the early technology companies,
particularly those focused on POS operations. With the
proliferation of securitized lending in the 1990s and early
2000s, separate equipment leasing programs slowed down
and went into the background. The advent of banks and
finance companies offering a higher level of senior debt further
marginalized equipment leasing. In spite of that, equipment
leasing is still alive and well and a vital part of our industry,
particularly for smaller operators.
So how does an equipment lease work in today’s market?
In researching this, I reached out to four individuals who I have
worked with on equipment leasing: Spencer Thomas, executive
vice president of KLC Financial Inc. in the Minneapolis area;
Michael Paszkiewicz, president, and Joe Burns, vice president
of sales of Vend Lease Company in Baltimore; and Joe Haynes,
regional sales manager for Creekridge Capital, LLC, also in
the Minneapolis area.
In so doing, I uncovered some interesting information about
equipment leasing. Here’s what I gleaned from my discussions:
1. Uses—Equipment leasing is now much more flexible and
not just for pure equipment. Leasing can be for leaseholds,
remodels and items that can be clearly identified, including
the soft costs that can be associated with that collateral. Vend
Lease even includes the maintenance contracts in certain
technology products.
3. Terms of the Lease—The lease terms go from one year
to seven years. From what I understand concerning today’s
equipment loans, there is flexibility as to a smaller payment
in early years with an acceleration at the end. Almost all of
the leasing programs I have seen require some type of upfront
deposit.
4. Prepayment­­—The borrowers who use leasing products
sometimes do not realize that to prepay a lease is different
than prepaying a senior loan or SBA loan. When you prepay
a lease, the payoff is all of the remaining scheduled payments;
it is not an amortizing loan with an interest factor.
5. Rates—Rates vary between a low of around 6% to the
mid-teens and look more like mezzanine financing rates.
Equipment leasing is not cheap, but in most cases it is readily
available and should be taken into consideration.
6. Assets—The franchisor’s involvement is not as important
for the equipment-leasing company as it is to a senior lender.
In most cases, the equipment-leasing company will not take
back the ongoing business, whereas a senior lender might. If
a leasing company has assets in a business that has defaulted,
the senior lender will have to deal with the leasing company.
In many cases, a senior lender has to approve the lease
because of covenants the senior lender has made on additional
indebtedness.
7. Residual Buyout—In general, the leases we have discussed
above are based on a $1.00 buy-out. Because it is not certain the
depreciation rules under the tax code will remain unchanged or
that Congress will continue bonus depreciation, there may be an
advantage in getting an upfront deduction for lease payments.
I initially thought equipment leasing had limited use (similar
to my initial thoughts about mezzanine financing). However,
after speaking with my four experts, its clear equipment leasing
is alive and well and may be a great financing alternative
for remodels, equipment upgrades, technology changes and
ongoing needs after acquisitions.
Dennis Monroe is co-founder and chairman of Monroe Moxness
Berg, P.A., a law firm devoted to the restaurant sector in the
areas of M&A and corporate and institutional finance. You
can reach him at (952) 885-5962, or by email at dmonroe@
mmblawfirm.com.
2. Credit—Almost all of these transactions are credit-driven,
and collateral is not the key driving force. Qualified borrowers
range across a wide credit spectrum, and leasing companies have
a much broader base than senior lenders. All four executives
I interviewed said personal guaranties are required except in
rare circumstances.
Page 9
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MARKET SURVEILLANCE
Del Taco Restaurants
Shoot the Moon, LLC
MCD · NYSE
TACO · NASDAQ
Secondary offering of common shares
Transaction Date: October 26, 2015
Shares Sold: 3,372,016
Price per share: $12
Selling shareholders: Private equity
shareholders Charlesbank Capital
Partners, Goldman Sachs and Leonard
Green & Partners.
Use of proceeds: The company will
not receive any proceeds from the sale
as the shares are offered by the selling
stockholders.
Investment
Bankers:
Citigroup
Global Markets; Piper Jaffray & Co.
INCOME STATEMENT
Ten weeks ended September 8, 2015
Revenues..............................$82,035,000
Net Loss................................($2,186,000)
Loss Per Share..................................($.06)
BALANCE SHEET
As of September 8, 2015
Cash.........................................$7,174,000
Long Term Debt.................$174,720,000
Shareholder’s Equity...........$362,186,000
SUMMARY:
Del Taco came public via a reverse
merger process that closed on June 30,
2015. The company now has 548 stores
(55% company-owned and 45%
franchised) across 16 states. California
accounts for approximately 67% of
the system. For the 36 weeks ended
September 8, 2015 system-wide same
store sales increased 6.4%.
Piper Jaffray's Nicole Miller Regan
initiated coverage of Del Taco shares
with a Neutral rating and $13 price
target. She based her valuation on
10x the company's estimated 2016
EBITDA. According to Regan, the
unit-level economics are as follows:
New stores are targeted to deliver
approximately $1.35 million in sales by
the third year of operation and generate
a 25% cash-on-cash return based on
a $900,000 investment and a 17%
store-level margin.
McDonald's Corp.
Franchisee of Chili's and On the Border
files Chapter 11 bankruptcy
Investor Day Revelations
Date Filed: October 21, 2015
Date: November 12, 2015
Company Description: Shoot the
Moon, based in Great Falls, MT
operates 11 Chili's and three On the
Border restaurants in Idaho, Montana
and Washington. The Chili's were open
pursuant to a development agreement
signed between the company and Chili's
franchisor, Brinker International, in
2006.
Summary: McDonald's held its
investor day in New York City where
it invited a number of Wall Street and
mutual fund analysts to hear its plans
for the future.
Reason for Bankruptcy Filing:
The company listed multiple lenders
including numerous cash advance
companies as creditors. The courtappointed Trustee has petitioned the
court to immediately obtain emergency
post-petition financing, "because
the estate does not have sufficient
available sources of working capital
and financing to allow Trustee to carry
on its business operations in the short
term, and is currently unable to fulfill
its post-petition payroll obligations to
its employees."
Equity Ownership: The company
is owned equally by two orthopedic
surgeons and an operating partner.
Listed Debt: The company listed
$21.5 million in secured debt and $3.2
million unsecured. Western Alliance
Bank asserts that it is owed a principal
balance of $6.8 million. The largest
unsecured creditor is US Foods.
Trustee: Jeremiah Foster of Scottsdalebased Resolute Commercial Services
was appointed Trustee of the estate.
Litigation:
The company was sued by Power Up
Lending Group LTD, a merchant cash
advance company based in Great Neck,
New York. Shoot the Moon took down
a merchant cash advance of $150,000
from Power Up in May 2015 and
agreed to repay $185,700 in equal daily
installments of $892.85, which is an
approximate 38% annual interest rate.
Power Up claims the company still owes
them approximately $105,000.
Page 10
McDonald’s reiterated confidence in
creating a “modern, progressive burger
company” and enhancing shareholder
value with a higher franchise mix,
cutting $500 million in administrative
costs by 2017 and extra leverage.
The company announced plans to
extend its refranchising effort from
3,500 restaurants to 4,000 for a 95%
franchised operation instead of the
previously announced 90% mark.
G&A will see further benefit from a
reorganized segment structure that
splits U.S., international, high-growth
and foundational markets into separate
silos with a dedicated segment president.
Q4 Dividend Bump: McDonald’s
plans to return $30 billion to
shareholders in the three years ending
in 2019, a $10 billion increase funded
mostly by incremental debt funding.
The company increased its quarterly
dividend by 5% to $.89 per share.
Confident on Comps: All day breakfast
and a rebound in China after a foodquality scandal are driving system
comps higher. McDonald’s reiterated
high expectations for Q4 comps.
No REIT: The company is not
pursuing any real estate conversion due
to substantial risks and little upside.
McDonald’s also didn’t show concern
about rising wages.
Analysts Raise Outlook: Analysts
gave guidance of $4.80 to $4.83 2015
EPS with target price of $105 to $115.
David Tarantino at Baird said, “We are
holding 2015E EPS of $4.83, including
revenue -8%, system comps +1.0%."
Analyst COMMENTARY
Chipotle
CMG-NYSE
("Not now")
Recent Price: $592.89
Chipotle’s stock was hammered on October 21 by 5.6% when the company
reported same store sales increased a paltry 2.6% and the company’s third
quarter numbers were less than what Wall Street analysts were looking for. CoCEO Monty Moran told investors on a conference call that sales started off in
October “choppy” and that “we took our eye off the ball a little bit.” The stock
took another hit on November 2 when the company closed 43 restaurants in
Seattle and Portland in response to an E.coli outbreak.
CNBC's Jim Cramer took to the airwaves on October 21 during his “Mad
Money” show to plead Chipotle’s positive long-term outlook. “This is Chipotle
for heaven’s sake, one of the greatest growth stories of all time. It’s tough to give
up on these guys right now.”
Cramer wasn't as glowing about Chipotle on November 2. "They've had much
higher wage costs, same store sales are back to where McDonald's are, now they
have this (the E.coli outbreak), the stock's been in a downtrend since last quarter;
these things are very hard to put behind them, now they will, and at a certain
point you might want to own them," said Cramer. Not now, though.
Del Taco
TACO-NASDAQ
(Neutral)
Recent Price: $10.49
Del Taco continues to add units at a consistent unit growth rate of 10%+ per
annum. With more than 550 store locations concentrated in 16 states and a
55/45% company/franchise split, the taco concept was brought public through
a reverse merger that closed in June.
Piper Jaffray analyst Nicole Miller Regan initiated coverage of Del Taco
with a neutral rating and a $13 price target which is based on 10x the 2016 EV/
EBITDA estimates. While the brand is working on realignment efforts that
show promise, Regan said “we remain on the sidelines for now as we await the
time when improved profitability translates to a consistently positive net growth
rate.” Also, Regan added that “new-store development execution risk exists in
terms of the demands placed on human and financial capital” in the near term.
Management hasn’t given guidance, but Regan projects “total revenues of $424
million in 2015 based on relatively flat unit count and a +6.1% systemwide samestore sales estimate.” Margins are expected to grow 1% to 19.7% of sales resulting
in diluted earnings of $.48 per share and EBITDA of $63.1 million. Regan sees
substantial long-term growth potential for the brand.
Chuy's Holdings, Inc.
CHUY-NASDAQ
(Market Perform)
Recent Price: $30.00
Chuy’s Holdings hit on all cylinders in the recent quarter ended in June. The
company reported a 52% increase in EPS to $0.32 per share due to solid revenue
growth brought on by new unit openings and the 20th consecutive quarter of
positive comp sales growth. The company increased its 2015 EPS guidance for
the full year to $.82 to $.85, up from $.76-$.79 previously.
Andrew Strelzik, an analyst at BMO Capital Markets Corp., said, “Chuy’s
3.2% comp growth reflects 3.9% pricing and a 0.7% traffic decline, though traffic
would have remained largely flat excluding the impact of new store 'honeymoon
period' and 'adverse weather.'” He also said that commodity prices should improve
earnings further “over the next 18 months reflecting protein and dairy supply
growth, the likely decline in beef prices in 2016, and a benign lime and produce
outlook.”
Strelzik increased his EPS estimates based on those improvements, but maintains
a Market Perform rating on the stock “as our price target ($32.00) does not justify
an Outperform rating.”
Page 11
AnSWER MAN
Provides Insight On The Latest Restaurant Trends
A year ago you said the lower gasoline prices would help
the restaurant industry. Traffic remains flat to down in
many chain restaurant concepts and the only growth they
are seeing are from price increases taken to offset food and
labor cost increases. What gives?
First of all, energy prices have plummeted since a year ago
(CPI-U is down almost 30%) so you might say restaurant sales
could have been worse. People are driving more, so the impact
isn't as great as analysts once expected. Also, for people at the
lower end of the socioeconomic scale, where disposable income
and consumption move in tandem, many are still recovering
from the recession and attempting to rebuild their nest egg.
Food away from home remains a luxury for many people.
There is something else going on. I think the average American
consumer is finding more value at the grocery store right now
than in restaurants. Food prices away from home are more
than 2% higher than a year ago versus food prices at grocery
stores. It doesn't sound like much but it is. Kroger is hitting
the ball out of the park. Its same store sales have been up for 47
consecutive quarters and its natural and organic business is an
$11 billion dollar business driven by millennials. Most grocery
chains now offer a "food-to-go" section where you can get a
salad or sandwich for less than what you pay at a restaurant.
If you've ever been to a Wegmans, you know what "food-togo" is all about. We've seen major store expansion from Aldi,
Trader Joe's, Costco and Whole Foods. The competition for
traffic in the grocery segment is intense and they are siphoning
off restaurant customers. Two things: The value wave will be
the story for 2016. And, I'd say restaurants are at the point
where pricing power is gone.
Does that mean we'll see another wave of discounting?
We're already seeing discounting. Wendy's has had a nice
same store sales bounce with its 4 for $4 promotion where
you get a burger, fries, nuggets and a drink. McDonald's told
its investor day crowd last week that it will introduce a new
value emphasis in 2016. That will drag Burger King back into
a discount posture, similar to when it ran a $1.49 nugget deal
earlier this year. In casual dining, Knapp-Track reports casual
dining guest counts were down 2.9% in October. Applebee's
is back to another round of 2 for $20 deals while Chili's offers
a family meal for $30, where you get an appetizer, two adult
meals, two kids' meals, and dessert. If that doesn't sound like
discounting, I don't know what is.
What does this mean for the high-flying fast casual chains?
They'll be tested. They're not immune to customer value
decisions. Noodles is offering an old-fashioned kids eat free
promotion this month. I expect to see more discounting in
the better burger and pizza categories too.
Speaking of Noodles & Company, their shares are down
almost 60% this year on top of a drop of 26% last year.
What’s gone wrong with this fast casual chain that once
held so much promise?
Sales are soft, and it doesn't require a Harvard degree to see
why. Calling Noodles a “globally inspired world kitchen” is
a big stretch and whoever in the company came up with it
deserves an award for creative expression. Noodles are noodles
and are served in SpaghettiOs and Campbell’s chicken noodle
soup. Ramen noodles are the absolute, cheapest food available
in any grocery store. No one, not even the densest customer,
will buy the claim that this company’s noodles are from a
“globally inspired world kitchen.” Look for a going private
transaction soon, so management can regroup and get their
message straightened out.
What do you make of Chipotle’s foodborne illness
incidents?
If you ask any restaurant operator what keeps them up at
night, it is the threat of foodborne illness. This could happen
to any operator who received contaminated product from a
supplier, or whose staff mishandled the cooking. Taco Bell
was felled by green onions. Jack in the Box by contaminated
and undercooked hamburger meat. For Chipotle to have three
incidents—E-coli, salmonella and a norovirus—as Chipotle has
had in just three months, suggests the company is either very
unlucky, or has a supply chain issue. I vote for number two.
Darden has finally spun off its real estate to shareholders
in the form of a real estate investment trust. What say you?
In 10 years, the remaining shareholders in Darden will wish
they still owned the real estate. The activists will have moved
on to other prey.
Answer Man, a former restaurant executive, loves the Thanksgiving
holiday. No work, no emails, no phone calls, no shopping......just
copious amounts of food and beverage.
RESTAURANT FINANCE MONITOR
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