Restaurants
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DNUT $15
MCD $280 01 Apr 2024 |
Add a Krispy Kreme doughnut to that Egg McMuffin order
In a rather brilliant move for both companies, Krispy Kreme (DNUT $15) will begin selling its doughnuts at McDonald's (MCD $280) locations across the country with a phased rollout beginning in the second half of this year. This follows a highly successful test of the program at 160 McDonald's restaurants in Lexington and Louisville, Kentucky—a dry run which exceeded expectations by both firms. Krispy Kreme already sells its doughnuts at thousands of grocery stores around the country using its hub-and-spoke model, delivering fresh-baked treats to stores within a certain mile radius of each bricks-and-mortar location. There are just over 350 Krispy Kreme locations in the US, but there are around 14,000 McDonald's restaurants in the US, meaning the opportunity for the North Carolina-based firm is huge. The bakery also operates the Insomnia Cookies brand, which not only has 240 locations but also delivers "warm, delicious cookies right to your door daily until 3 AM." The ramp-up to handle daily McDonald's deliveries will be considerable, but the efficient assembly line system already in place should be up for the task. As for McDonald's, the "sweet" portion of their breakfast lineup has been sorely lacking, and this deal will mark a major improvement. The original glazed, chocolate iced with sprinkles, and chocolate iced cream-filled varieties will be offered throughout the day. While both restaurants' stocks popped on the news, Krispy Kreme was the clear winner—jumping 40% in one day. The sugar high wore off quickly, however, with the shares giving back half of that gain over the ensuing days. McDonald's accounts for around one-third of all breakfast visits to fast-food restaurants, coffee shops, and bakeries, including the likes of Dunkin' and Starbucks. Investors might be tempted to jump into Krispy Kreme shares on this news, but there are other factors which should be weighed—no pun intended. We have written about the farcical share structure of the company under which JAB Holding Company (think Caribou Coffee, Panera Bread, Keurig, and Peet's Coffee) retains 78% control. Furthermore, the company brought DNUT (former symbol KKD) public once again at $21 per share three years ago, and they have yet to regain that price. As for McDonald's, we have a $320 target share price, which would represent just a 14% jump from current levels. |
CAVA $40
23 Jun 2023 |
The Cava IPO proves that (too) many haven’t gotten any smarter since the downturn
It felt like the old days; the New York Stock Exchange was all abuzz about a new IPO. Cava Group (CAVA $40), owner of CAVA Mediterranean restaurants and Zoe’s Kitchen, which the company bought back in 2018 and has been converting to CAVA locations ever since, was going public. How exciting. Never mind the fact that Zoe’s was publicly traded between 2014 and 2018 before agreeing to be bought out at a value below its IPO price, this time is different. With the IPO priced at $22 per share for the Mr. Howells and Daddy Warbucks of the world, by the time us hoi polloi had a chance to buy in at the open the price had doubled—topping out at $47.89 within hours. Unlike Airbnb (ABNB $125) or CrowdStrike Holdings (CRWD $144), however, we weren’t the least bit bummed out that we weren’t part of the trading elite. It seems as though the only carrot much of the investment community needs is a good story to forget their meme stock, crypto, and NFT losses, and pundits quickly offered them one: CAVA was going to be the next Chipotle (CMG $2,045). Cha-ching! Why let discounted cash flow models or actual profits get in the way of a good story? At least with respect to this IPO, it feels like the frothy days of a few years ago. Let the dumb money chase the flashy stories; we still see many unloved bargains sitting out there for astute and selective investors. This is no disparagement of CAVA; in fact, we want to try the place now. However, investors who bought in on day one or who will buy in anywhere above the IPO price will lose on this one. Think Sweetgreen (SG $11), not Chipotle. |
CMG $1,614
30 Jan 2023 |
What layoffs? Chipotle hiring 15,000 new workers for “burrito season”
Every day brings new stories of layoffs, the rising cost of food items, and an impending recession. If one industry should be reeling from these conditions, it is the fast-food category, right? Fast-casual chain Chipotle Mexican Grill (CMG $1,614) begs to differ. Not only is the Penn Global Leaders Club member hiring 15,000 new workers ahead of spring “burrito season,” it is also in the early stages of a new expansion plan which would double its North American and European footprint—from around 3,000 restaurants to 7,000. With nearly 100,000 employees currently, the new hires would represent a 15% increase in Chipotle’s workforce. How deeply is the company going into debt to fund its hiring and expansion plans? The $45 billion Mexican restaurant carries zero debt on its books and has a war chest of nearly $1 billion in cash and short-term equivalents. The restaurant business is notoriously tough, with enormous overhead, slim margins, and a fickle customer base; others in the industry should take note of what CEO Brian Niccol has been able to accomplish. We added Chipotle to the Penn Global Leaders Club in March of 2020 at $590.85 per share. We would place a fair value on the company’s shares at around $1,700. |
DNUT $19
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Krispy Kreme: Love the doughnuts, hate the stock
(02 Jul 2021) More technically, love the doughnuts, hate the financial engineering firm that is bringing the company public...again. Krispy Kreme, former symbol KKD, used to be one of our favorite trading stocks. We actually had a client at A.G. Edwards who would only trade two stocks, KKD and WMT, based on whether the economy was in an expansionary period or a contraction phase. Fast forward to 2016, when KKD was taken private by the powerful German Reimann family, via their JAB Holding Company. JAB had also gobbled up the likes of Peet's Coffee, Panera Bread, Keurig Dr. Pepper, Einstein Bros. Bagels, and a host of other fast food and consumer goods companies. As with all financial engineering firms, the strategy is to make as much money as possible with as little effort as possible, and one popular tactic is the repackaging of companies to bring public once again under a shiny new symbol. That is precisely what JAB did with Krispy Kreme, which now trades under the new—admittedly catchier—symbol DNUT ($19). Perhaps the most insulting aspect of this game of smoke and mirrors is the fact that JAB will retain 78% control of the firm, so suckers...er, investors...beware. Investors did appear to be leery of the game: after planning to offer $26.7 million shares in the range of $21 to $24, soft demand led to the holding company selling 29.4 million shares at $17. While they did rocket up 24% from the offering price on IPO day, the shares steadily declined from there. DNUT shares closed out their first week at $19.12. We have to wonder how many DNUT investors were aware of the company's back story as opposed to just thinking, "cool, Krispy Kreme is going public and the shares are cheap." They are actually not cheap. In fact, Amazon shares at $3,510 are "cheaper" than DNUT at $19. But none of that seems to matter in these days of meme stocks and SPACs. If shares are $25 or less, it must be a good deal, so let's buy in and watch the confetti fall on our iPhone screen. |
DIN $94
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Dine Brands' restaurant IHOP to launch fast-casual spinoff Flip'd this summer
(20 May 2021) It was a plan put on hold due to the pandemic, but Dine Brands' (DIN $95) restaurant IHOP is finally ready to unveil its new fast-casual chain known as Flip'd. The concept is simple: lure on-the-go customers who want to grab some good food fast. Visitors will be able to order the likes of signature pancake bowls, made-to-order egg sandwiches, and a host of other pastry, drink, and food items at either a digital kiosk or the counter, generally taking their food to go. Picture a Chipotle, but breakfast-based. All of the Flip'd locations will be franchise-owned, with IHOP offering $150,000 to each of the first ten franchisees to get them up and running. A few of the very first Flip'd restaurants will be located in Manhattan; Lawrence, Kansas; and several cities in Ohio. A number of restaurants have tried to launch spin-off versions of themselves with a unique twist, but most have had limited success. We will go ahead and predict it: Flip'd will be an overwhelming success. IHOP is owned by Dine Brands, which also owns Applebee's. Dine was under an enormous amount of financial stress during the pandemic, as could be imagined. While we picked up hotel chains, retail stores, an airline, and even a major gambling resort precisely twelve months ago during the heat of the market free-fall, we didn't pick up any restaurants. That was a mistake: Dine Brands is up 132% since then. Fair value would probably be in the $125 per share range. |
MCD
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Already strained, McDonald's just made its relationship with franchisees even worse
(04 Dec 2020) McDonald's (MCD $211) was one of those stalwarts we expected to own in the Penn Global Leaders Club for some time to come. That changed when the board of directors fired one of the best—and most loyal—CEOs in the industry. We took our profits and ran. In a sign that things are returning to normal (not a compliment; rather, a reference to the way things were under Don Thompson), the company has been telegraphing warnings to franchisees about hard times ahead. While the parent company does have about $40 million earmarked for aid to restaurants hardest hit by the pandemic (which seems paltry compared to its $5B in TTM net income), it warned that owners may need to look at selling locations or finding financial assistance elsewhere. Management also announced that it would be ending the $300 monthly Happy Meal subsidy which has been around for decades, and that it expects franchisees to start sharing the costs of the firm's tuition program. To be sure, all of these moves could be justified by corporate, but that doesn't change the perception by franchisees that they are getting nickel-and-dimed by the controlling entity. Yet another reason we continue to steer clear of the restaurant. Jeff Easterbrook knew how to deal with people. Growing up in London, he was a constant customer of the local McDonald's, and his love for the company was evident in the way he treated employees and franchisees. The current management team in place may know numbers, but they sure don't seem to know how to deal with the people on the front line of the restaurant's revenue stream. |
DNKN
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Another great trading stock—Dunkin' Brands—gets gobbled up by a private equity firm
(02 Nov 2020) Back when I was in the broker-dealer world (as opposed to the RIA world with its accompanying fiduciary responsibility) I had a client who only traded two stocks in his portfolio: Walmart (WMT) and Krispy Kreme Doughnuts (KKD at the time). He had a trading system based on the location of the US economy along the economic cycle. Sadly, Krispy Kreme was ultimately taken private by Luxembourg-based JAB Holdings, which also took the likes of Panera Bread (formerly PNRA) and Green Mountain Coffee (formerly GMCR) private. We thought of that client after hearing that another great trading company, Dunkin' Brands (DNKN $106), was being taken out by private equity firm Inspire Brands in an $11.3 billion deal. In our humble opinion, the financial engineers at these firms typically have no interest in the heart and soul of classic American companies; no, it is all about turning a buck and then moving on. Often, that involves squeezing every dime they can out of an entity and then repackaging the rubble as an IPO to a bunch of sucker investors (one reason we strongly avoid warmed-over publicly-traded companies). Inspire is a master at taking out companies we used to like trading: they also own Arby's, Buffalo Wild Wings, and Sonic. There is certainly no crime in a company selling itself to a private buyer, but that doesn't mean we need to like it. At least the members sitting on the acquired company's board will probably turn a nice personal profit in the deal. Back when I had my Walmart/Krispy Kreme client, I worked at a well-respected, century-old firm called A.G. Edwards (ticker was AGE). While it wasn't taken private, top executives at the St. Louis-based mid-cap brokerage decided to sell the firm to Wachovia (and get fat paychecks—we assume—in the process) about fifteen years ago. This occurred shortly after the company placed the first non-Edwards family member in the CEO role. We remember his name with disdain, but it's not worth mentioning. Great due diligence there: Wachovia went belly-up soon after the acquisition and its assets were purchased by Wells Fargo (WFC)—a company with a whole host of its own problems. So, we now say adios to ticker symbol DNKN. You will probably be repackaged and brought back to (public) life one of these days, but we won't be interested. Individual shareholders need to begin taking a more active role in monitoring executives' behavior at publicly-traded companies. The first step in that process is understanding the ties these individuals have to the company. If they have no experience in the industry and a history of moving from one firm to the next using M&A stepping stones, investors beware—or sell on the rumor (and probable spike in share price) of an acquisition. |
LK
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Out of luck and out of time: Luckin drops effort to fight its delisting
(27 Jun 2020) It was a black eye for the normally-adroit Nasdaq. Less than one year ago, the coffee company labeled "the Starbuck's of China" began publicly trading on the exchange; to much fanfare, we might add. By January of 2020, shares of Luckin Coffee (LK $1) had risen from $20 to $50, and the company's market cap peaked at $13 billion. Then came the news that executives had been cooking the books to levels which would make Enron executives envious, and the charade was over. This past week, with shares sitting just north of $1, the company abandoned its appeal to remain listed on the exchange. This news sent the stock down another 50% and dropped Luckin's market cap to $350 million. We remember the glowing reports espoused on the financial news networks about this "Starbuck's killer," and the calls we received from interested investors. For all of the brainpower at the Nasdaq (we won't accuse the financial networks of having that problem), how was this train wreck not averted, even before it left the station? Like the country in which they operate, Chinese entities have all the transparency of pea soup, and an equivalent level of trustworthiness. American regulatory bodies are not allowed to dive into the books, so we accept the numbers in good faith. Perhaps, between Luckin, the pandemic, and a number of other recent examples, that will soon change. |
PLAY
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If Dave & Buster's was a bargain at $42, is it a super-bargain at $16?
(17 Jun 2020) It is instructive to look back at old stock market commentary, either our own or that of others. For example, we still have an Edward Jones report on WorldCom (WCOM back in the day) with its "STRONG BUY" rating. It is as if they knew exactly when that shell of an organization was at its very top to issue the rating—right before it began its descent into the abyss (which meant the federal pen for the CEO). Looking back at our own commentary on Dave & Buster's Entertainment (PLAY $5-$16-$49) from 12 September, just nine months ago, we noted that shares seemed interesting, as they were floating near their 52-week low. They were sitting at $42 per share. Other than the world-changing pandemic that crushed restaurant stocks, we still stand by our thesis: very sharp CEO with tons of experience, a sound strategic plan, and decent financials. Oh, and now it is 62% cheaper! A deep discount play to be sure, but we believe Dave & Buster's is here for the long haul. Although we are pretty sure that line was in the Edward Jones commentary as well. |
LK
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Muddy Waters' prescient January call on China's Luckin Coffee. (03 Apr 2020) Back in January, shares of China's Luckin Coffee (LK $5-$5-$51) cratered after Muddy Waters Research disclosed a short position in the firm, citing highly-questionable financials coming from management. That 50% drop pales in comparison to what happened with LK shares following an investigation confirming those fears this week: the stock fell 80% on news that the firm's COO completely fabricated sales figures. Several other executives were named as co-conspirators.
It was just last year that we were being told Luckin posed an existential threat to Starbucks (SBUX), at least in Asia. A major US business publication wrote, just one year ago, that "(Starbucks') large presence in China is under threat by a new, agile, and fierce competitor." The Xinhua News Agency couldn't have written it any better, and they are an extension of the Communist Party of China. Now, however, the chickens have come home to roost. The news publication that wrote the slanted article will never take responsibility for their irresponsibility ("How could we have known they were cooking the books," we imagine them arguing), but the facts have been laid bare. Luckin's $12 billion market cap has been reduced to $1.5 billion, and nobody has heard from COO Jian Liu. Muddy Waters, which based their short sale on an 89-page anonymous report sent to them in January, has been vindicated. What's next? Will we find out that the latest coronavirus did actually start at a Wuhan wet market and wasn't created in a US Department of Defense lab? It's a crazy world. This story highlights the dangers that come with investing in any China-based, publicly-traded company—even if that company is listed on a US exchange. Understand what you are investing in, and if something smells fishy, dig deeper. |
MCD
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McDonald's just fired one of the best CEOs in the C-suite, not just the industry; we are putting the company on watch list. (04 Nov 2019) To be blunt, we didn't think of touching shares of McDonald's (MCD $169-$191-$222) while Don Thompson was at the helm. He reminded us of a John Sculley at Apple (AAPL) or (yikes) a Ron Johnson at JC Penney (JCP), all of whom were in over their heads. Then Brit Steve Easterbrook came in and completely turned the ship around with his passionate, dynamic, creative, bold leadership. We immediately added the company to the Penn Global Leaders Club (we had followed MCD closely for two decades and knew the moment to strike was at hand). The stock has nearly doubled since Easterbrook took over. Now, over the course of a weekend, Easterbrook is out. A divorced man canned by the board for having a consensual relationship with an employee. It wasn't that he didn't tell the board (though he apparently didn't). It wasn't like anyone was accusing him of promoting this female employee based on their relationship. It was simply that the company had a zero-tolerance policy with respect to senior management seeing anyone at the firm. It is so easy for the usual suspects in the press to come out and condemn Easterbrook, paragons of virtue that they are. We think firing Easterbrook was a cowardly act, however, though we suspect most wouldn't agree with our assessment. We also don't believe the narrative that Chris Kempczinski, the president of McDonald's USA and the new CEO, can seamlessly take over where Easterbrook left off. It's about leadership, not continuity, and the board immediately placing this incident under the moniker of sexual harassment makes us question theirs. Shares of MCD were off about 2% on news of the firing. We didn't necessarily want to place a restaurant in the Penn Global Leaders Club, considering how competitive the industry is and how low the margins tend to be. It was because of Easterbrook and his strategic plans that we made the move. Shares fell below $190 on Monday and we are placing the company on watch for potential removal from the strategy.
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CMG
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Following in the footsteps of Disney and Starbucks, Chipotle Mexican Grill will offer free college to employees. (17 Oct 2019) With so many generational trends heading in the wrong direction, we are happy to point to one recent trend that will have an incredibly positive impact on millions of US workers. Following similar announcements by Walt Disney (DIS) and Starbucks (SBUX), Chipotle Mexican Grill (CMG $383-$829-$858) will begin offering free college tuition to all of its employees. Workers will be able to choose from 75 different business and technology degree options at a number of different universities, with Chipotle picking up 100% of the tuition costs up-front. The restaurant's Cultivate Education program will also allow workers to be paid back up to $5,250 per year by pursuing degrees at other institutions of their own choosing. In addition to the three companies mentioned, Walmart (WMT) is offering free SAT and ACT prep courses to its employees still in high school, and college tuition for a business or supply-chain management degree for $1 per day out of the employee's paycheck. Perhaps some of these programs have come about due to the 3.5% unemployment rate and the battle for workers, but we see this trend continuing as other companies follow suit. The importance of educating the American workforce in an age of automation, digitization, and robotics cannot be overemphasized. We believe that younger job seekers will consider a company's education benefits package as much as the previous generation considered 401(k) matching programs, and as much as past generations of workers considered the near-extinct defined benefit (pension) plans.
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PLAY
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After falling 30% since May, is Dave & Buster's a scorching buy opportunity? (12 Sep 2019) Investors seem to love overreacting to any news on Dave & Buster's (PLAY $37-$42-$67), either pushing shares of the entertainment and dining establishment up rapidly, or helping shares gap down—typically after a less-than-spectacular earnings report. The latter was the case this past week as PLAY shares fell 15% in a matter of minutes following the release of Q2's financial results. What seemed to spook investors most in the report was the 2% decline in walk-in sales from last year. Revenues, however, increased 8%—to $345M—and earnings were up 7%—to $0.90 per share. Besides the drop in traffic, another downward driver for the shares was management's lowering of full-year guidance due to the planned costs and disruptions associated with a major store re-vamp. The company plans a major push into e-sports, sports betting, and increased virtual reality experiences for guests, all of which are sound moves in our opinion. With its P/E ratio of 13, Dave & Buster's is "cheaper" than the S&P with its 21 multiple, and the restaurant industry's 29 multiple. Near its 52-week low, shares of PLAY are certainly worth a look. We place a fair value of $50 on shares of PLAY. CEO Brian Jenkins has over two decades of experience in the food, beverage, and entertainment industry (he was previously the senior vice president of finance at Six Flags), and seems to be executing fairly well on the company's sound strategic plan.
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WEN
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While McDonald's forges ahead with innovative new ideas, Wendy's will go back to a 35-year-old playbook and try breakfast again. (10 Sep 2019) Despite operating in an industry with razor-thin margins, there are actually a number of fast-service and fast-casual restaurants we like from an investment standpoint. McDonald's (MCD $157-$210-$222), which we have held for some time in the Penn Global Leaders Club, is clearly our favorite, but we have also written glowingly about the likes of Dunkin' Brands (DNKN), Chipotle (CMG), Jack in the Box (JACK), and even Dave & Buster's (PLAY) on occasion. One name we have steered clear of, however, has been Wendy's (WEN $15-$20-$23). This week, the Ohio-based company announced it would take a hit to full-year adjusted earnings because it plans to spend $20 million—and hire 20,000 new employees—to launch a breakfast menu. If we knew that McDonald's all-day breakfast would be such a hit (and it has been), why doesn't this excite us? Perhaps it is because this is something like the fourth time they have tried it over the years. This time around, it just feels like an "us too!" move by management. And talk about competitive: Wendy's will now be competing against McDonald's, Burger King, Chick-fil-A, and even Taco Bell, which began serving breakfast four years ago. CEO Todd Penegor proclaimed that Wendy's breakfast menu will "set us apart from the competition." Um, OK. Pardon our skepticism. Apparently we weren't the only ones questioning this move—the company dropped 10% immediately after the announcement.
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CEC
APO LHC |
Financial engineering at its worst: Chuck E. Cheese has no business going public again. (08 Apr 2019) There are so many financial engineering gimmicks out there designed to separate investors from their money that it's not even remotely funny. The question "how stupid do they think we are?" does not have to be rhetorical; just look at the price of a stock between the time the gimmick is foisted upon the investment community and when it is back in the dumpster to answer that question. So, Chuck E. Cheese's parent company, CEC Entertainment, purchased five years ago by Apollo Management Group (APO), plans to go public yet again. Why? What has changed? Despite what Apollo might tell you, here's our belief: this is a quick way to raise a lot of capital for the primary stakeholders. To help it sneak in the back door of the publicly-traded marketplace, CEC Entertainment will combine with Leo Holdings Corp (LHC), a $258 million micro-cap, which will then change its name to Chuck E. Cheese Brands Inc. Slick. Our advice? Run the other way. In our opinion, which we have every right to espouse, this move will enhance the bank accounts of a few "financial engineers" and their teams of lawyers, but the poor shareholders will be left holding the bag. Let's check back in a year and see if we are right or wrong.
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MCD
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Penn member McDonald's buys Israeli startup to improve online marketing, in-store ordering experience. (26 Mar 2019) In its biggest acquisition in a few decades, Penn Global Leaders Club member McDonald's (MCD $153-$187-$191) announced it will buy Israeli startup Dynamic Yield, LTD—a digital efficiency company—for $300 million. The company's digital technology will first be used to enhance the ordering displays at the fast food chain's drive-thru windows. Factors such as what the customer is ordering and what the weather is like outside will be able to immediately impact what is on the screen. For example, if the weather is hot, the technology will tell the system to begin advertising ice cream cones; if a customer orders one type of meal, complimentary food ideas will appear on the screen almost instantaneously. For McDonald's, it's all about creating a personalized experience while improving efficiencies—two components very few companies can make compatible. The chain is reporting great success with its mobile order and pay systems, as well as its digital menu boards, all of which increase efficiency. We can think of a few other fast food chains that could take a page out of McDonald's playbook. McDonald's simply remains the industry benchmark for others to emulate. Burger King (owned by Restaurant Brands Int'l, QSR) can run all of the goofy little ads of the king chasing Ronald McDonald, but that is where they will remain—chasing the leader.
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CMG
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Chipotle's (latest) secret to success: mobile ordering and a lack of new outbreaks. (07 Feb 2019) Chipotle Mexican Grill (CMG $248-$597-$606), the high-growth phenom which exists in a slow-growth industry, seemed unstoppable a few years back. Then the E. coli outbreaks hit, sending shares tumbling from a high of $750 in October of 2015 to a low of $274 two years later. Slowly, however, the company has been staging a comeback. The latest catalyst, which helped CMG notch a double-digit percentage gain on Thursday, was a glowing Q4 earnings report. Sales rose 10.4% Y/Y, to $1.225B, with $1.72 per share filtering down as profit. The earnings report provided the data points, but what led to the increase in sales? Two standouts: customers are embracing the chain's new mobile ordering platform (who wouldn't want to bypass those long lines?), and a lack of issues (or headlines) with respect to food safety. On the former point, the company is pushing full steam ahead, installing new pickup counters and even experimenting with drive-through pick-up windows at some locations. Admittedly, we never stopped eating at Chipotle, even in the midst of the negative headlines. However, the winding lines—often reaching the entrance—have been a turn off. The new mobile ordering system should manifest as more revenue beats in coming quarters. The biggest concern now? The 90 P/E ratio on the share price (compared to a 23 multiple for McDonald's, or a 30 for Starbucks).
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SBUX
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The hedge fund manager we cannot stand just made a trade we do not like. (10 Oct 2018) Pershing Square's Bill Ackman. One of those arrogant guys it is just so easy to dislike. It has been a case of schadenfreude with respect to his recent lousy decisions: buying JCP under Ron Johnson; buying Valeant under Rubenesque blowhard CEO J. Michael Pearson; dogging out well-run company ADP, demanding the CEO's ouster; you get the picture. Now, the former darling of the hedge fund world just made another call we believe he will regret (but never admit to regretting): he bought a 1.1% stake ($775 million if you buy his stated share price) in Starbucks (SBUX $47-$57-$62). Ackman argues that the younger generation is ditching soda for coffee, and China remains a huge under-tapped market for the drink. Both may be true, but Starbucks does not operate in an industry vacuum any longer. Anyway, we find ourselves once again rooting for him to fail.
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SONC
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Sonic to be acquired by private restaurant conglomerate Inspire Brands for $2.3 billion. (25 Sep 2018) Back in early summer, iconic American fast-food chain Sonic (SONC $23-$44-$45) had a market cap of just $879 million. After a nice fall rally, the company grew to about $1.25 billion in size. Double that amount and you have what Arby's and Buffalo Wild Wings parent Inspire Brands plans to spend to take the company private. Shares of SONC shot up 20% after the announcement. Recall that Inspire paid the same amount—$2.3 billion—to buy Buffalo Wild Wings last year after, in our opinion, years of mismanagement at that chain. Inspire seems to be building a fast-food and casual dining empire. Sadly, they are building that empire by taking out publicly-traded companies.
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SBUX
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Starbucks plummets over 7% on downgrades, slowing growth, store closings. A trio of ugly news reports helped drive Starbucks (SBUX $52-$52-$62) shares down over 7% at Wednesday's open. First was the announcement that the embattled coffee chain would be closing 150 stores in "penetrated" markets. Then came management's muted expectations for growth over the coming year—a projection of just 1% same-store-sales growth. Finally, the downgrades. Citing weaker sales in the US and China, Morgan Stanley analyst John Glass lowered the firm's rating on SBUX from overweight to equal-weight, adjusting his 12-month price target down from $72 to $59 per share. Intraday, Starbucks shares hit a new 52-week low of $52.32. For some reason, Kevin Johnson, the firm's new CEO, doesn't instill much confidence in us for the stock going forward. And that is being polite.
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SBUX
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Starbucks' "anti-bias training day" says more about the C-suite than it does workers at the coffee house
(29 May 2018) We often rail against companies that feel the need to insert themselves into the political arena. More than just displaying the arrogance of executives (the "everyone knows we are right" complex), it is also just dumb business: why irritate half of your current or potential customer base? Starbucks' ($53-$58-$65) "anti-bias training day" isn't, in our humble opinion, about creating a more tolerant workforce, it is about the optics and the attention the company hopes to garner from fellow members of the "holier-than-thou" club and the useful idiots in the press. If that is not the case, why don't they require employees to go through this training in a staggered manner instead of closing roughly 8,000 stores for an afternoon? Consider the words of Starbucks COO Rosalind Brewer in a CNBC interview: "We have the ability to start a national conversation (about race)." Last we checked, you are a coffee house. Furthermore, what does that say about Starbucks' opinion of its 200,000 or so front line workers? Here's a thought: focus your attention on selling as much product as you can in a friendly, inviting atmosphere. When something goes awry (as it has/does with every company throughout the history of companies), resolve the issue at the proper level and move on, instead of seeing systemic racism everywhere you look. |
YUM
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Pizza Hut latest restaurant to enhance its delivery service with booze
(08 May 2018) While the experiment will only take place in a few select cities, we expect it to be a big hit. Yum Brands' (YUM $68-$83-$88) Pizza Hut chain has announced that it will launch a pilot test in roughly 100 restaurants in the Southwestern US to add cold beer to the delivery menu. Free delivery will come with the purchase of select six-packs of beer, such as Blue Moon and Coors Light, and the suds will be delivered in a specially-designed cooler to assure they remain frosty on the trip. Last year we reported that TGI Fridays was undertaking a pilot program to deliver mixed drinks to delivery customers in select cities. Nothing (well, almost nothing) sells like booze. |
SHAK
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Shake Shack beats expectations, rockets up 18% on Friday
(04 May 2018) Burger joint du jour Shake Shack (SHAK $30-$56-$59) soared 18% on Friday after handily beating Q1 expectations and raising full-year guidance for 2018. Revenue for the quarter hit $99 million, up from $77 million in the same quarter of 2017, and net income came in at $3.5 million, versus $2.3 million for the same period last year. Financial data company FactSet Research had projected a decline in year-on-year same-store sales; instead, traffic picked up by 1.7%. Piper Jaffray hiked its target price on SHAK from $44 to $62 per share. |
MCD
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McDonald's to open 200 restaurants in Nordic region, begin home delivery service
(19 Apr 2018) Penn Global Leaders Club member McDonald's (MCD $132-$160-$179) announced a major expansion push for the Nordic region, with 200 new restaurants in the planning stages and home delivery ready to rollout this year in Sweden, Finland, Norway, and Denmark. The company currently serves 150 million customers per year from the existing 430 locations in the region. The expansion plans come on the heels of booming growth for McDonald's in Northern Europe, brought about by the company's dynamic CEO, Briton Jeff Easterbrook. More than 5,000 jobs will be created thanks to the new store openings. |
PLAY
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After another rough quarter for Dave & Buster's, is the company undervalued?
(11 Apr 2018) Earlier in the year, after Dave & Buster's (PLAY $38-$43-$73) last less-than-stellar quarterly report, we mentioned that investors may be tempted to jump in with the company's share price sitting at a one-year low of $46; we also mentioned the reason (operating margin) that might not be a good idea. This week, after missing sales forecasts and guiding FY 2018 expected revenues lower, the share price has fallen into the "tempting" category once again. The company's secret recipe for future growth revolves around the launch of a proprietary virtual reality gaming system in mid-2018, and the launch of reduced-format (15,000-20,000-square-foot spaces) stores in smaller cities throughout the country. While we believe the fair value of PLAY's share price is around $60, representing a 40% upside, there are just too many things that could go wrong with management's plans, including a fickle key demographic group which may just decide to stay home and drink their craft beer while playing games on their Sony PlayStation 4 Pro. |
MCD
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McDonald's announces rollout schedule for fresh (never frozen) beef, along with new premium sandwich
(07 Mar 2018) Penn Global Leaders Club member McDonald's (MCD $127-$151-$179) issued a press release outlining its rollout schedule for fresh, never frozen beef patties for its sandwiches. All Quarter Pounders and the company's Signature Crafted Recipe sandwiches will have the fresh beef, and the burgers will be cooked when you order. That immediately leads to the question of how this move will impact the unparalleled efficiency lead (and yes, we consider ourselves drive-thru experts) McDonald's has over its rivals. It will certainly present new challenges to franchisees. Ultimately, this will be another unmitigated success for CEO Steve Easterbrook. As we've said before, leadership makes all the difference. In addition to the fresh beef, McDonald's also announced a new signature sandwich: the Garlic White Cheddar, made with your choice of fresh beef, Buttermilk Crispy Chicken, or Artisan Grilled Chicken. Oh man, now we are really hungry. |
SHAK
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Shake Shack tumbles on slowing same-store sales, expensive growth plan
(16 Feb 2018) Trendy burger joint Shake Shack (SHAK $30-$38-$47), which saw a meteoric rise in its share price straight out of the IPO gate three years ago (before plummeting back into the atmosphere), ended the day down nearly 8%. Cautious forward sales guidance was the reason for the drop, as management warned that it expects same-store sales to be flat in 2018. The company is also planning a big growth push this year, opening between 32 and 35 new restaurants in the US. This will push margins down as these restaurants get up and running, combined with the fact that the new locations probably won't see the same customer volume enjoyed by current Shake Shack locations. Where should the company be trading? With its 65 PE ratio, probably right around where it currently sits, and certainly not near its 2015 high of $97 per share. |
PLAY
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Just as Dave & Buster's seemed to be clawing its way back, its shares fall off of a cliff—yet again
(08 Jan 2018) We mentioned last year, when Dave & Buster's (PLAY $46-$46-$73) was sitting near its one-year high at the time, that we wouldn't touch the stock—though the restaurant did look like a fun place to hang out. The share price subsequently dived to $45.71 per share. Just as it appeared to be digging itself out of that hole, the company released some pretty lousy guidance on Monday, sending the shares reeling 20% at Monday's open. Management admitted that, while they expected strong December sales, trends instead softened further. Comparable store sales were down 5.1% for the quarter. While investors may be tempted to jump in at $46, consider this: the operating margin (what proportion of revenue is left over after paying the variable costs of production) on PLAY is 15%; the operating margin for McDonald's (MCD) is 40%. Not a precise apples-to-apples company comparison, but close enough to get the message. |
Restaurants jump as SunTrust sees big windfall for industry from tax reform
(03 Jan 2018) Restaurant stocks, as a group, spiked on Wednesday after analysts at SunTrust issued a report pointing to a potential big windfall for the industry following the passage of tax reform. Because most of the names in the industry don't have much of an overseas footprint, the majority have been carrying the full load of the 35% US corporate tax bracket; a bracket which went down to 21% with the passage of the new law. The windfall should trickle down to the consumer, as these chains launch new promotions with the loot in an effort to increase traffic. Shake Shack (SHAK) was up about 8%, Chipotle (CMG) 6%, and El Pollo Loco (LOCO) 5% following release of the SunTrust report.
(03 Jan 2018) Restaurant stocks, as a group, spiked on Wednesday after analysts at SunTrust issued a report pointing to a potential big windfall for the industry following the passage of tax reform. Because most of the names in the industry don't have much of an overseas footprint, the majority have been carrying the full load of the 35% US corporate tax bracket; a bracket which went down to 21% with the passage of the new law. The windfall should trickle down to the consumer, as these chains launch new promotions with the loot in an effort to increase traffic. Shake Shack (SHAK) was up about 8%, Chipotle (CMG) 6%, and El Pollo Loco (LOCO) 5% following release of the SunTrust report.
BWLD
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Buffalo Wild Wings latest company to go private in Arby's deal
(28 Nov 2017) In a follow-up to the headline below, Buffalo Wild Wings (BWLD $95-$156-$175) will become the latest restaurant to exit the publicly-traded world as it agrees to be purchased by Arby's in a deal valued at $2.44 billion. Arby's is owned by private equity firm Roark Capital Group, Inc. Activist investor Marcato Capital Management forced out BWLD's lackluster CEO, Sally Smith, earlier this year as the company's share price was hitting a new 52-week low. We've been in a Buffalo Wild Wings enough times to say...yawn. Take it private and let the mediocre chain become Roark's problem. |
BWLD
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Buffalo Wild Wings spikes 24% after takeover bid hits the wires
(15 Nov 2017) We've never considered Buffalo Wild Wings (BWLD $95-$145-$175) to be a good investment, nor have we ever received good service at the joint. Finally, after 20 years at the company, CEO Sally Smith is being forced out, which is a good thing. But investors drove the share price of the restaurant up 24% on Tuesday due to other news: the company confirmed it had received a $2.3 billion takeover bid from private equity firm Roark Capital Group. Once again, a lousy investment spikes double-digits on news it would be taken private. The challenge is finding these dogs and investing right before they are taken private; and that is a herculean task. |
SBUX
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Starbuck's latest attempt to differentiate itself involves a high-end Italian bakery
(07 Nov 2017) Going into 1997, coffee house Starbucks (SBUX $53-$57-$65) had around 1,000 locations worldwide. A decade later, the company was opening its 15,000th shop and had new locations in Denmark, the Netherlands, Romania, and Russia. Critics who had scoffed at the ability of a simple coffee store to maintain a stellar growth trajectory were suddenly looking for ways to get in on the action. Now, as Starbucks faces a slew of new competition, it is getting into the high-end bakery business with its multi-million-dollar investment in Italy's Princi Bakery. Read about the venture in this Sunday's Penn Wealth Report. |
CMG
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What happened to the queso bounce? Chipotle drops on another lousy quarter
(24 Oct 2017) For many value investors, Chipotle Mexican Grill (CMG $295-$324-$499) has looked mighty tempting with a stock price in the low-$300s (if you can say that about a company trading with a 68 p/e). Those who didn't bite, we salute you. The stock is trading down around $299.80 after hours—dropping another $25 per share—following yet another blah quarter. The nationwinde rollout of hot, gooey queso during the quarter didn't provide the boost expected, apparently. Against expectations for $1.65 in earnings-per-share, the company recorded EPS of $1.46—a 12% miss. |
RT
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Buyout deal getting messier for Ruby Tuesday as law firm opens investigation
(16 Oct 2017) Ruby Tuesday (RT $2-$2-$4) could be the poster child for the current state of casual dining. A decade ago, the company seemed to be flying high. With a solid customer base and stock price of $30 per share, the Tennessee-based restaurant chain was one of the top names in the industry. Fast-forward a decade, and the company is negotiating a deal to be taken private by NRD Capital, with the investment firm agreeing to pay $2.40 per share. That deal is being contested, however, by shareholder rights law firm Johnson Fistel, LLP, which is arguing that management did not perform due diligence in attempting to find a better deal. They are not helping shareholders: the $2.40 per share represents a 20% upside to where the stock was trading going into the weekend. Take the money and run—the law firm is just out for a piece of the pie. |
SONC
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Sonic's stock plummeting after hours as data breach announced
(27 Sep 2017) Iconic fast-food drive-in chain Sonic (SONC $21-$25-$30) has confirmed a hack which could have affected millions of its customers’ credit card data. The company’s stock is plummeting after-hours following a report that a breach in its third-party payment system has led to upwards of five million credit and debit card numbers being offered for sale on a notorious black-market site. The batch of stolen data first began showing up on the site on 15 Sep. Sonic is working with law enforcement and forensic experts to piece together exactly what happened. Perhaps, just perhaps, stiffer penalties for hackers are needed to staunch this epidemic—no matter what corner of the earth the hacks are emanating from. |
WEN
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(09 Aug 2017) Wendy's notches its eighteenth-straight quarter of increased same-restaurant sales.
It’s almost as if they are cooking the books. How in the world has fast-food chain Wendy’s (WEN $9-$16-$17) been able to increase its same-restaurant sales for eighteen straight quarters? But that’s exactly what the $4 billion mid-cap restaurant has done (increase sales, that is), with the latest quarter showing a 3.2% increase. While the company’s revenue was down from last year (at $320 million), and net income was actually negative for the quarter (-$1.8 million), these drops are due to “one-offs” related to a strategic push for fewer corporate stores and more franchisees. Wendy’s argues that franchisee-operated restaurants offer a consistent stream of net rental income and franchisee fees. If you are interested in becoming a Wendy’s franchisee, the company requires a net worth of $5 million or more, liquid net assets of at least $2 million, and you can get the restaurant up and running for about $1 million in cash (assuming you finance the land, building, equipment, and signage; otherwise, be prepared to shell out about $2.5 million). It takes about $500 million worth of burgers, fries, Frostys, sodas, and salads sold each year to break even, with the average location generating about $1.5 million in sales each year. (Reprinted from this coming Sunday's Penn Wealth Report, Vol. 5, Issue 02.) |
FRSH
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(02 Aug 2017) Stock of the Day: Papa Murphy's
This may be a fun one to play with using absolutely speculative money you are not afraid to lose. Unlike its pizza peers with much larger market caps, like YUM! Brands ($26B), Domino's ($9B), and even Papa John's ($3B), take-and-bake shop Papa Murphy's (FRSH $4-$4-$7) has a value of just $73 million—a legitimate micro-cap. Sitting near its 52-week low of $3.56, the company churns out consistent revenues of around $32 million every quarter, and typically maintains a positive net cash flow. The company will release its second quarter results on the 9th of August, which should be a catalyst for a price move. The only question is whether that move will be to the upside or take the stock below its 52-week low. |
SBUX
DNKN |
(28 Jul 2017) Starbucks drops 8% in early trading on disappointing Rewards' numbers.
Starbucks' (SBUX $51-$54-$65) management team has cited the ongoing success of the company's My Starbucks Rewards program as the cornerstone of achieving the company's growth targets. This past quarter's results show that the program's growth is stalling, and that was enough to send shares of the coffee house down 8% in early trading. SBUX is also calling it quits on its 2012 pickup, Teavana, and will close all 379 of that subsidiary's locations. Looking for growth in the industry? Why not consider Nigel Travis's Dunkin' Donuts (DNKN $44-$53-$60)? With its $5 billion market cap, it has a lot more room to grow than the bloated, $78 billion SBUX. |
CMG
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(20 Jun 2017) Chipotle, tumbling 7%, shows that its troubles are not in the rear-view mirror. Chipotle Mexican Grill (CMG $353-$427-$499) broke below its recent trading range on Tuesday—falling 7%—after the company announced a lackluster sales forecast. Helping it "achieve" its biggest one-day drop of the year were the flurry of downgrades following the projections. Sadly for the company, this foreboding forecast comes after the Mexican fast food chain broke its seven quarter streak of declining same-store sales. Should investors take advantage of the pullback? We are looking at the company's P/E of 134 and don't see a value play—even if the shares were selling at $750 less than two years ago.
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BWLD
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(24 May 2017) Sally Smith's days at Buffalo Wild Wings are numbered. For a number of reasons—having nothing to do with the overall industry—we haven't been happy with the outlook for chicken wing house Buffalo Wild Wings (BWLD $133-$153-$175). Hedge fund Marcato Capital Management holds the same view, and has been been actively seeking the removal of the company's lackluster CEO, Sally Smith, for months. In an April press release, Marcato wrote of "a deteriorating guest experience...." Hear, hear! Now, proxy advisor ISS is getting in on the act, recommending shareholders vote for two of the three board directors nominated by the activist investor. This will probably spell the beginning of the end for Smith, who really has underperformed in the role. BWLD shares rose 4% on the ISS news.
(Photo: Buffalo Wild Wings—the right concept but the wrong CEO) |
RRGB
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(17 May 2017) Red Robin spikes 20% on earnings beat. The malaise hitting specialty retailers doesn't appear to be having any effect on restaurant chains. High(er) end hamburger joint Red Robin Gourmet Burgers (RRGB $41-$69-$71) jumped 20% on the day following a solid Q1 earnings report. Total revenues were up 4.1% from last year, to $419 million, and net income came in just shy of $12 million. CEO Denny Marie Post said the chain's recent success has come from increased quality of service and the popular "everyday value" Tavern Menu, including the Smoky Jack Tavern Double with bottomless fries. Post, who took the role last August, has enacted a number of strategic moves designed to make Red Robin a "destination brand," rather than a "grab a burger and go" joint.
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MCD
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(03 Apr 2017) Changing its tune, Goldman upgrades McDonald's. After hitting an all-time high last week, Penn Global Leaders Club member McDonald's (MCD $110-$141-$143) finally received some respect from Goldman. The firm raised the restaurant from a neutral to a buy rating—with a $153 price target—citing technology initiatives as the major catalyst for near-term growth.
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PNRA
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Restaurants. We sold our stake in Panera after private equity deal announced. It's official—Panera Bread (PNRA $186-$313-$313) will become just another unit of European private equity firm JAB Holding, which is ultimately just a money manager for Germany's über-wealthy Reimann family. The $7 billion purchase will throw Panera into a stable of other food and drink businesses JAB has purchased over the past several years, to include Krispy Kreme doughnuts, Einstein Brothers bagels, Peet's Coffee & Tea, and Keurig Green Mountain coffee. The Panera CEO we love to hate, Ron Shaich, said that going private will improve the company's level of customer service. Please. This was all about the big, fat paycheck this goofball will receive in the deal. As the stock was busy spiking 14%, we were busy selling our stake in the Penn Global Leaders Club at $312.10 per share. (Photo: a face only a mother could love; CEO Ron Shaich will get a fat paycheck from JAB on deal)
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PNRA
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(03 Mar 2017) Panera spikes 8% on takeover rumors. Could it be our dream is coming true? A restaurant we love, minus the CEO we cannot stand? Regular member of the Penn Global Leaders Club, fast-casual joint Panera (PNRA $186-$283-$262), jumped $21 (8%) Monday on reports that it may be looking for a suitor. The company is in the mid-cap sweet spot (market cap $6.4 billion after the spike), so it is feasible that a larger industry player like Starbuck's (SBUX $51-$58-$62), with its $85 billion valuation, might be interested. It is all speculation at this point, but others rumored to be interested in Panera include Domino's Pizza (DPZ $117-$186-$192) and JAB Holding Company of Germany, owner of Peet's Coffee and Krispy Kreme Doughnuts. For the record, three other restaurants have already been gobbled up this year: Popeyes, Cheddar's, and Checkers Drive-In. Actually, we wish the company would remain independent and just lose Ron Shaich, but that won't happen.
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MCD
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(31 Mar 2017) McDonald's will begin using fresh beef in their Quarter Pounders. Penn Global Leaders Club member McDonald's (MCD $110-$129-$132) announced that, after forty years of frozen meat, it will begin using fresh beef in its burgers. The change will initially affect only its iconic Quarter Pounder, but will be rolled out to its other burgers soon. One of the best moves MCD has made in recent memory has been the elevation of British-born Steve Easterbrook to the role of CEO. Dumping all of the foo-foo experiments to attract health nuts into the restaurant, the burger chain has returned to its roots of being just that—a burger chain. Easterbrook's first strategic move, the all-day breakfast, has been an unmitigated success. That being said, revenues and profits have been relatively flat over the past several years, stuck at $25 billion and $5 billion, respectively. Still, McDonald's remains one of the few restaurants we would hold in the Global Leaders Club.
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PLAY
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Restaurants. Dave & Buster's reports solid earnings, but falls on same-store sales figure. In full disclosure, I've never stepped inside of a Dave & Buster's (PLAY $37-$60-$63), but the image I've painted in my mind amounts to an adult version of Chuck E. Cheese's (which I hope to never step in again). Needless to say, the company has never been in a Penn portfolio, so we missed the stock's 56% run-up over the past year. Q4 Earnings were in-line (in fact the company just passed the $1 billion/year revenue mark for the first time ever) and profits rose 19% from last year, but same-store sales grew just 2.3%. In a saturated industry where many players are watching all of these metrics decline, today's 3% decline in PLAY's price shouldn't worry current holders. Eat, drink, play, and watch sports!
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PNRA
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(28 Feb 2017) Perennial Penn member Panera completes its "100% Clean Eating" menu. Just over two years ago, Panera Bread (PNRA $186-$231-$236) promised its customers that, by the end of 2016, its delightful array of menu items would be made using only "clean" ingredients. CEO Ron Shaich has now pronounced that herculean strategic goal completed. Working with scientists and health experts, about 100 ingredients made the company's no-no list—from high fructose corn syrup to saccharin to artificial smoke flavoring—and are now gone. Why was this so difficult a task to complete? Consider this: Panera chefs made some 60-odd tweaks to the company's broccoli cheddar soup to remove "no-no" ingredients without diminishing the item's taste or texture. Take that one example and expand it to the entire menu, and it becomes pretty impressive that the project has been completed this quickly. For the record, we love the company but love to hate the CEO, Ron Shaich. Ideally, the company would continue on its growth trajectory but with new leadership in the top spot.
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PLKI
QSR |
(21 Feb 2017) Popeyes jumps 20% on takeover news. Popeyes Louisiana Kitchen (PLKI $49-$79-$79) jumped 20% at the open on news that Burger King and Tim Horton parent Restaurant Brands International (QSR $32-$58-$58) will buy the chicken house for $1.8 billion. The transaction is expected to close within two months.
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DNKN
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(09 Feb 2017) Dunkin', now 100% franchisee-owned, pops on earnings beat. Shares of donut and coffee retailer Dunkin' Brands Group (DNKN $40-$54-$56) were up 4% on Thursday after announcing a revenue beat in Q4—they raked in $216 million versus $204 million in Q4 of 2015. Additionally, the company completed the sale of any remaining corporate-owned locations, making the restaurants 100% franchisee-operated. Lovable CEO Nigel Travis (think Austin Powers) also unveiled a six-point strategy to make Dunkin' the "to go" coffee beverage brand, with various bottled varieties becoming available in grocery stores later this month. Dunkin' also owns the Baskin-Robbins ice cream brand.
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Jack's virtual burger launch
(18 Jul 16) Fast food chain Jack in the Box, Inc.JACK has a new burger they want you to try, and they are using an unorthodox medium to get the word out.
Let’s start with the delectable designer treat: it’s a signature patty topped with grilled onions, smoked bacon, a Porter Ale cheese sauce, tomatoes, and lettuce. Holding it all together are two sides of an artisan potato bun, each half smothered in a creamy pub sauce. Yowzers.
To market the new high-end burger, JACK is using virtual reality to entice both the media and patrons. After donning special “brew goggles,” food reporters become immersed in a two-minute experience at a virtual bar. After this cool experience, they take off the goggles to see a real Brewhouse burger sitting in front of them, waiting to truly be experienced.
It sure beats the heck out of a boring, dry (and untasty) press release. Kudos to JACK for utilizing this unique marketing strategy. Want to get a taste of the experience yourself? Just visit the company’s YouTube channel.
Jack in the Box is a San Diego-based quick-service burger firm operating about 2,200 locations around the US. At $88 per share, Penn has a hold rating on the stock.
(Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 29.)
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(18 Jul 16) Fast food chain Jack in the Box, Inc.JACK has a new burger they want you to try, and they are using an unorthodox medium to get the word out.
Let’s start with the delectable designer treat: it’s a signature patty topped with grilled onions, smoked bacon, a Porter Ale cheese sauce, tomatoes, and lettuce. Holding it all together are two sides of an artisan potato bun, each half smothered in a creamy pub sauce. Yowzers.
To market the new high-end burger, JACK is using virtual reality to entice both the media and patrons. After donning special “brew goggles,” food reporters become immersed in a two-minute experience at a virtual bar. After this cool experience, they take off the goggles to see a real Brewhouse burger sitting in front of them, waiting to truly be experienced.
It sure beats the heck out of a boring, dry (and untasty) press release. Kudos to JACK for utilizing this unique marketing strategy. Want to get a taste of the experience yourself? Just visit the company’s YouTube channel.
Jack in the Box is a San Diego-based quick-service burger firm operating about 2,200 locations around the US. At $88 per share, Penn has a hold rating on the stock.
(Reprinted from this coming Sunday’s Penn Wealth Report, Vol. 4, Issue 29.)
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Chipotle’s “holier than thou” campaign has a serious bug in it
(30 Dec 15) I could probably eat at Chipotle Mexican GrillCMG three times a day, every day, for the next year. Despite all of the company’s “health” claims, how long would it be before I weighed 400 lbs? Likewise, I could eat at McDonald’sMCD with reckless abandon. Sure, I know that it wouldn’t be healthy, which is a major reason why most Americans don’t patronize these restaurants in excess. The real difference between Chipotle and its former owner, McDonald’s? The latter isn’t bashing the burrito joint ad nauseam while making highbrow claims from atop its puffy white cloud. After what has happened to CMG over the past few months, corporate may want to rethink its strategy.How the outbreak surfaced
The story began making headlines this past October. According to the Centers for Disease Control and Prevention (CDC), 53 people across nine states became seriously ill after eating at a Chipotle. Of these 53 diners, 20 required hospitalization. The culprit linking the victims together? All had been exposed to STEC 026, a vicious Shiga toxin-producing strain of the E. coli bacteria. E. coli is a bacterium found in the intestines of humans and animals; while typically harmless, some strains can cause serious food poisoning, as was the case with these unfortunate souls.
While these instances brought nationwide attention to the issue, health concerns began swirling around the company’s restaurants in the Northwest corridor in late summer. In July, five people got sick from E. coli after eating at a Seattle location. Then, in August, 230 individuals in Simi Valley, California contracted a norovirus probably spread by an ill Chipotle team member.
Suddenly, the threat began spreading across the country. In August and September, 64 Chipotle customers got salmonella poisoning, probably from infected tomatoes. In December, 136 people (including half of the Boston College basketball team) became ill with a norovirus after eating at a Boston Chipotle. As of this report, at least 500 people have become ill due to eating at a CMG restaurant since summer.
Root causes
It is a bit ironic that Chipotle has made the attack of other restaurants in the industry a cornerstone of their marketing campaign. It wasn’t enough for the company to embrace non-GMO foods, they felt the need to publicly wag their finger at everyone in the peer group who didn’t. The only thing missing in their ad campaign was a picture of Chet from Weird Science sitting in a McDonald’s eating a Big Mac as he oozed so-called “pink slime.” The attacks were so relentless that, following the outbreaks, some began to question if Chipotle had become a victim of corporate sabotage. That would be suicide for a company, as any smoking gun would probably destroy a brand.
No, it wasn’t corporate sabotage or a simple case of ill workers preparing food. The problem is more systemic, which makes it all the more difficult to deal with. CMG’s diffuse system of sourcing local farms (which remain overwhelmingly unnamed) for food items has created a nightmarish system for record-keeping. This became frustratingly apparent to the CDC experts who tried to identify the “ground zero” source of the viruses.
For its part, the chain began closing affected restaurants to give them thorough cleanings. Additionally, CEO Steve Ells has announced a comprehensive food-safety program that would exceed what is required for the industry. That sounded a bit like Target’sTGT CEO proclaiming that his stores were now the safest place in retail to use a debit or credit card. He lost his job a few months after making this silly claim.
Talk is cheap, and it feels as though the CEO is underestimating the Herculean task ahead of him. Market leaders like McDonald’s may not have sworn allegiance to the non-GMO banner, but they have something Chipotle doesn’t: an efficient and effective food sourcing system. Food items come in, for the most part, prepared in advance, limiting the excessive food handling and preparation that is required at CMG locations. Investors seem to agree with this analysis, as the stock price of CMG has fallen from $750 to $485 per share since the start of the crisis.
The sky-high valuations of Chipotle have fallen to earth and are now in line with the peer group. A 35% drop in share price may look tempting to investors, but we don’t see the value—at least not yet. We want to see the company focused more on microbes and less on bashing others.
(Reprinted from this coming Sunday's Journal of Wealth & Success, Vol. 4, Issue 1.)
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Penn Member McDonald’s Pops 8% on Quarterly Earnings Report
(25 Mar 15) In numbers reflecting results before implementing its all-day breakfast program, Penn Global Leaders Club member McDonaldsMCD knocked it out of the park with Q3 earnings. More evidence that the company has a CEO who knows what he is doing.
Thursday’s report showed the company growing its domestic same-restaurant sales for the first time in two years, well beating analyst estimates for another decline. International markets performed even better, growing same-store sales by 4.6%.
While top-line revenue fell 5.3% to $6.6 billion, it would have grown were it not for the currency impact of the strong dollar. Bottom-line profit still grew; the company netted $1.31 billion versus $1.07 billion same quarter last year.
Leadership is at the heart of the nascent turnaround story at McDonald’s. One of the most persistent and obstinate challenges for the restaurant has been management’s relationship with its franchisees, many of whom had become more vocal in opposition to the direction of the company.
While the all-day breakfast menu wasn’t baked into the Q3 numbers (the rollout began 06 Oct), CEO Easterbrook performed an extraordinary feat by getting the franchisees on board around the idea early and with aplomb. It will take time for the skepticism to abate, but Easterbrook is proving he is no Don Thompson (his predecessor).
McDonald’s cited the new buttermilk crispy chicken sandwich and increased breakfast flow for the rosy results at home. Abroad, it was the emerging markets in areas like Poland and Spain that offered the most explosive growth. That is good news for the company’s expansion plans.
There is one other restaurant currently in the Penn Global Leaders Club. Any ideas? Check it out on the most recent list in the Journal.
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 41.)
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YUM Brands Tanks on Bad China Numbers
(08 Oct 15) YUM BrandsYUM, owner of iconic franchises Taco Bell, KFC, and Pizza Hut, dropped 20% on Wednesday following the company’s announcement that it was going to badly miss its Chinese growth estimates. Despite getting $7 billion or so of market cap lobbed off in the matter of a morning, the CEO was sanguine about the company’s performance going forward.
In a refreshing twist, CEO Greg Creed took personal responsibility for the bad numbers in China, pointing to the fact that the mainland is still on a growth trajectory, despite recent economic and market woes. He also refused to join the chorus of whining about the strong US dollar—a common scapegoat over the past few quarters.
Our first thought was that KFC was still having issues in China, but Pizza Hut turned out to be the weak link. Even at a 52-week low stock price, we aren’t biting. (Reprinted from next Sunday's Journal of Wealth & Success, Vol. 3, Issue 38.)
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McDonald’s Ready to Roll Out All Day Breakfast
(02 Sep 15) As disenchanted as we were with former McDonald’sMCD CEO Don Thompson, we are equally as optimistic with the Brit now heading the company, Steve Easterbrook. Easterbrook grew up on the streets of North London, where he and his mates would hop on “the Tube” to hit the McDonald’s in Harrow. His passion for the chain became evident as he turned around McDonald’s UK, with a focus on employee training, adding healthier options to the menu, and redesigning the look and feel of the 1,200 outlets under his charge.
Since taking over the flagging chain earlier this year, he has shown that he is not afraid to make the same bold moves that he did in England. His latest initiative, which will be rolled out Oct. 6, is an all-day breakfast menu at its 14,000+ restaurants across the US. This is fitting, as McDonald’s pioneered the fast-food breakfast, and patrons have never been happy with the 10:30 cut-off time. We expect the move to be a rousing success. (McDonald’s is in the Penn Global Leaders Club.)
(Reprinted from the Journal of Wealth & Success, Vol. 3, Issue 35. Not a member? Click Here.)
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At Starbucks, Howard Schultz is making a Real Impact on the Quality of his Employees’ Lives
(07 Apr 15) Maybe it is because he was raised in a working-class family and, unlike so many other executives, didn’t have a silver spoon to play with or a trust fund on which to rely. Or maybe it was because he was treated so poorly in his early working years. Whatever the reason, Starbucks employees have an exceptional leader in CEO Howard Schultz.
The latest gift to his workforce? A free, four-year education from Arizona State University…read the entire story in this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 15.
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Another One Bites the Dust—Brazilian Company 3G Attempting to Buy Kraft Foods
Update. (25 Mar 15, 0900) The deal is done. 3G is buying Kraft through its Heinz unit, with those two entities merging. KraftKRFT shot up 33% Wednesday on the news. It appears that KRFT shareholders will get a $16.50 special dividend and 49% ownership of the new entity. Kraft, a.k.a. Buffett and 3G, will retain 51% ownership. We had Kraft in the Penn Global Leader’s Club, but would not be in a hurry to buy the new entity when it goes public. Our guess is that it will be priced around the low- to mid-80s.
(24 Mar 15) Apparently, if US food and beverage companies are not willing to operate in an efficient manner, there is a Brazilian firm ready to buy them, take them private, and implement a scorched earth policy—with a willing accomplice in the form of Warren Buffett.
3G Capital, a Rio de Janeiro-based private equity company, is best known for its 2010 takeover of Burger King for $4 billion. Three years later H.J. Heinz was its target, soliciting the help of Warren Buffett’s Berkshire Hathaway and slimeball William Ackman’s Pershing Square to end American ownership of the company Henry Heinz founded in 1888. The price tag of that purchase was roughly $25 billion, much of which came from Buffett and Ackman.
The face behind 3G is $25-billionaire Jorge Paulo Lemann, Brazil’s richest citizen and a dear a friend of Buffett’s. He owes most of his wealth to his stake in AmBev, which morphed into InBev when Belgian-based Interbrew merged with them, subsequently taking over that other American icon, Anheuser-Busch. Lemann was an instrumental figure in ending American ownership of Bud.
Fresh off of its takeover of Canadian coffee giant Tim Hortons, 3G now has its sights set on Kraft Foods Group, Inc. The company uses a process known as zero based budgeting (ZBB). This accounting scheme turns the traditional budgeting method on its head. Instead of automatically approving a static base amount each year for a certain division, then requiring that unit to justify any increases in allocation, ZBB forces every amount to be approved anew at the start of each calendar year (perhaps Buffett can suggest this method to his buddies in D.C.).
It (3G and its ZBB model) has argued that Kraft has become fat and lazy. The company made the same argument about Tim Hortons, right before it made the purchase and proceeded to shove 30% of that firm’s corporate workforce into the unemployment line, causing quite a stir north of the border. Based on Mr. Buffett’s public peace-and-love rhetoric, who would have thought that he would support such draconian cuts?
When America soup giant Campbell saw 3G in its rear-view mirror this past February, it took the bull by the horns and implemented the ZBB method to stave off the firm’s early advances.
Budgeting methodology isn’t the only aspect of 3G that makes it different. Instead of culling money from a large number of investors, like most private-equity firms, it turns to a small group of the world’s wealthiest individuals, like Lemann, and Buffett, and Ackman. This explains why a company that just spent $25 billion on Heinz and $12 billion on Tim Horton’s can find the $40 billion or so to snag another American company.
As for Kraft, both its namesake brand and the Oscar Mayer member of its portfolio generate over $1 billion in sales annually, and another 10 units contribute in excess of $500 million each per year. The firm has undertaken some cost cutting measures, and its products still account for around 5% of all grocery store sales, but the changing American diet threatens to leave many of its packaged products languishing with the day old bread. One thing is certain—if and when 3G buys them, you can count on first-time unemployment figures spiking shortly thereafter.
(Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 14.)
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Kareem Abdul-Jabbar Nailed it on Starbucks’ #RaceTogether Campaign
(19 Mar 15) This one really falls into the “what the hell were they thinking?” category. Obviously, Starbucks CEO Howard Schultz is a business mastermind. He turned something as ubiquitous as a coffee shop into a $74 billion global powerhouse, silencing critics nearly every step of the way.
Brilliant people, especially when they get in the billion-dollar-net-worth club, also tend to be a little eccentric. Take Schultz’ most recent campaign, #RaceTogether. The concept is to bring people together by talking about race. Awesome, right? Absolutely, especially with respectful individuals in a social media setting.
But Schulz wasn’t talking about posting positive, thought-provoking questions online. Instead, he encouraged the company’s famed baristas to spark the conversation! Gee, what could possibly go wrong with that idea?
The campaign kicked off with a full page ad in the Sunday NYT, urging readers to join the “RaceTogether” cause. The following Monday, baristas were encouraged to handwrite “#RaceTogether” on the company’s iconic coffee cups as orders were handed out, and to feel free to “start a discussion about race.”
As one could imagine, this provoked a meltdown on Twitter and other social media sites. Was it a ploy to get people talking about Starbucks? Doubt it. In the first place, why would you try and alienate (or at least make feel uncomfortable) a good percentage of your customer base. Secondly, we know from their misguided gun control efforts that these campaigns are more about Schultz’ own views than they are about driving traffic. Finally, if it was supposed to turn out this way, why did a Starbucks executive who helped spearhead the campaign shut down his Twitter account when the conversation just started getting interesting?
Famed basketball legend Kareem Abdul-Jabbar had the money tweet that brought it all home: “I’m in shock and awe—awe that the company is trying it, and shock that they think it will work.” Classic. This one almost makes us forget about the silly McDonald’s “call your mom and get a free burger” campaign. (Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol. 3, Issue 12.)
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Consumer Discretionary: Restaurants
CEO Change at McDonald’s had little to do with Healthier Eating Habits
(29 Jan 15) It’s a rough life, being a CEO, but who wouldn’t take the $14 million per year Don Thompson made during his lackluster, three-year reign at McDonald’s. On Wednesday, however, the board gave Thompson his walking papers, replacing him with Steve Easterbrook, the company’s chief brand officer—also the first British CEO of the fast food chain.
Thompson was what we would call a “governor,” not the visionary leader needed in the industry to set you apart from the competition. We don’t buy the conventional wisdom that consumers are turning away from the Golden Arches because of the health food craze; we believe it is simply a case of too many missteps by the world’s largest fast food company.
After all, we are talking about a company which spun off the likes of Chipotle and Boston Market—not exactly relics of the past. No, it has more to do with the complicated maze of new food items and procedures that have hamstrung—and greatly angered—the company’s franchisees, who control over 80% of the chain’s locations. While workers are trying to stay trained on all of the new items and methods, the corporate office has been coming after franchisee-owners to take on more of the cost burden. The situation simply got to the breaking point.
Steve Easterbrook appears to be an excellent choice to turn around the burger giant, which operates 36,000 restaurants in 119 countries. Born in North London, he told The Guardian that he and his friend used to “go into (town) with three or four quid in our pockets...always stopping at McDonald’s for a shake and fries.” As head of McDonald’s UK, Easterbrook turned around a flailing business by focusing on employee training and a new design for the restaurant.
As the global chief brand officer, he is acutely aware of what consumers, especially younger ones, want. Adroit at social media campaigns, he aims to get back the millennials lost to competitors over the past several years. We believe he will pull it off. While we are not jumping in now, as the turnaround will take time, we would use a $75-$80 range as a buying opportunity. (Reprinted from this coming Sunday’s Journal of Wealth & Success, Vol 3 Issue 5. Not a member? Click Here.)