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About Granite City Food and Brewery (OTC:GCFB)

This thinly traded, under-the-radar stock is on a steady growth pattern and extremely undervalued at present. It has had a very difficult past and it nearly went bankrupt. Nobody follows the stock, it has limited coverage by analysts and nobody is promoting it.

However, now they have new management and a big influx of capital from a private equity firm. They are opening 2-3 new restaurants per year. They are cash flow positive for the first time in years. They recently made an acquisition of a restaurant chain, and I would not be surprised if they made another. There is a lot of insider buying. I anticipate more analyst coverage during 2013 and more market makers in the stock. As I will explain later, at a minimum, I expect it to quadruple from its present price of $2 to at least $8 per share.

Granite City Food & Brewery Ltd. develops and operates two casual dining concepts: Granite City Food & Brewery and Cadillac Ranch All American Bar & Grill. Granite City Food & Brewery is a polished casual American restaurant that features a dining experience with affordable, high-quality menu items prepared from made-from-scratch recipes, served in generous portions. There is a brewery onsite, serving hand-crafted and micro brews. Granite City opened its first restaurant in 1999 and is expanding nationwide. There are currently 28 Granite City restaurants in 13 states.

Cadillac Ranch restaurants feature freshly prepared, authentic, All-American cuisine in a fun, dynamic environment. The Company purchased its first Cadillac Ranch in November 2011 and has since purchased five additional Cadillac Ranch restaurants along with its intellectual property. The Company currently operates six Cadillac Ranch restaurants in five states.

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Past Problems

Faced with a cash crunch in 2009, a delisting warning from Nasdaq and having to reverse-split the stock, things were not looking good for the restaurant chain. With its back against the wall, GCFB kept its doors open with a last-minute debt-for-equity swap with one of its lenders. But neither side viewed the deal as a long-term solution, and both soon began to simultaneously - and separately - seek buyers for the restaurant chain.

Enter Private Equity

In May of 2011, Concept Development Partners (a subsidiary of the Dallas-based private equity group CIC Partners) took control over Granite City.

Under the deal, Granite City issued $9 million in new, preferred stock to CDP. It also entered into a $10 million credit agreement with the Structured Finance Group of Fifth Third Bank. Granite City used most of those funds to buy 3 million shares of stock back from DHW Leasing for $7.1 million. DHW had been Granite City's largest shareholder by far, having owned two-thirds of the chain's stock. CDP replaced DHW as the biggest shareholder.

As part of the deal, Granite City also agreed to pay DHW $2.6 million for some property in Troy, Michigan, and DHW reduced rent on some of Granite City's leases.

Dallas-based CIC has invested in 40 companies over the years, including Don Pablo's, a former T.G.I. Friday's franchisee, Quiznos, Main Street Restaurant Group and Restoration Hardware. Last year it tried, unsuccessfully, to acquire the bankrupt Max & Erma's chain.

Enter Former McDonald's Executive VP - Rob Doran

Robert J. Doran became the Chief Executive Officer of Granite City in May 2011. Mr. Doran had been a Managing Partner of CDP Management Partners, LLC (CDP Management), a merchant banking firm focusing on principal investments and consulting in the restaurant, food processing, and retail industries, since April 2010. He is the founder of Doran Consulting, a niche consulting group specializing in executive coaching since 1999, which provides services to McDonald's Corporation, Bell South, Boston Markets, and Delphi Auto Parts. Mr. Doran was employed with McDonald's Corporation from January 1967 to March 1999 serving in a variety of regional director and vice president positions, most recently as Executive Vice President of McDonald's USA. Mr. Doran also serves on the board of directors of Hawaii Development Company and McDonald's of Hawaii.

After taking control of the company, he immediately upgraded existing stores and developed a new store prototype, which was designed to be more sophisticated than its existing stores - a change that company officials feel will help the chain grow on the East Coast.

Mr. Doran also brought on board CDP Managing Partner Dean Oakey, now Granite City's chief concept officer.

A change in the board of directors was made with the addition of CIC's Michael Rawlings, a former president at Pizza Hut, and Lou Mucci, former CFO at BJ's Restaurants - a publicly held company traded on Nasdaq under the symbol BJRI.

Acquisition of Cadillac Ranch Restaurants

In January of 2012, Granite City Food & Brewery Ltd. announced that it entered into an asset purchase agreement for the purchase of the assets of the Cadillac Ranch All American Bar & Grill restaurant in Pittsburgh, Pennsylvania, for $900,000.

Granite City previously announced its purchase of the assets of five other Cadillac Ranch restaurants (Bloomington, Minnesota; Miami; Florida; Oxon Hill, Maryland; Annapolis, Maryland; and Indianapolis, Indiana). Under the parties' master asset purchase agreement, Granite City has the right to purchase the assets of a Cadillac Ranch restaurant under construction in Indianapolis, Indiana, and a Cadillac Ranch restaurant in Hallandale Beach, Florida,

Additional Investment

Last June, Granite City Food and Brewery, LTD entered into a stock purchase agreement with Concept Development Partners LLC (CDP), its controlling shareholder, pursuant to which CDP invested an additional $6.5 million in Granite City in exchange for 3,125,000 shares of Granite City's common stock.

The Turnaround

Since CDP's investment, the Company has been developing growth plans for existing Granite City restaurants as well as the construction of new Granite City restaurants, such as the Troy, Michigan, location which opened in 2012. The company recently opened a new store in Franklin, Tennessee, and is reportedly doing very well. Several existing stores have been remodeled. Private dining areas were installed which helped to attract corporate events and other group businesses. Those rooms and the enhanced bar areas also provided additional seating during peak hours when those locations are operating on a waiting list.

All new stores are being launched with an updated store prototype, designed to be more sophisticated than its older stores - a change that the company believes will help the chain grow in the Eastern United States. Presently, stores are being constructed in Indianapolis, Indiana, and Lyndhurst, Ohio.

CDP Managing Partner, Dean Oakey, now Granite City's chief concept officer, is familiar with BJ's Restaurant and Brewhouse (BJRI) as a concept that Granite City now emulates. The West Coast brew-pub chain once suffered the same sort of slow-growth problems GCFB faced, but now has 104 restaurants with $513.9 million in annual sales.

Considerable improvements are being made in cost controls for food and beverage. Rents have been renegotiated at several locations. Salaries have been reduced by the elimination of overlapping management positions.

Insider Buys

In June of 2012, Granite City had 4 insiders who purchased a total of 12,500,000 shares at the total value of $26,000,000. Multiple insider purchases are usually a positive sign. The shares purchased accounted for 254% of the company's market cap at the time.

More recent insider purchases can be seen by going here.

Most recent financial information

Highlights for 2012 were as follows:

  • Total restaurant sales increased 33.3% to $30.9 million for the 4th quarter of 2012 from $23.2 in the same quarter last year.
  • Total restaurant sales increased 29.7% to $120.9 million for fiscal year 2102 from $93.2 million in fiscal year 2011.
  • Same store sales increased 4.5% and 2.6% in the fourth quarter and fiscal year 2012 over comparable periods of 2011, respectively.
  • Restaurant-level Income Before Occupancy (IBO) increased $2.6 million and $8.7 million in the 4th quarter and fiscal year 2012 over the comparable periods of 2011, respectively
  • Company recorded approximately $1.6 million and $7.0 million in Adjusted EBITDA in the 4th quarter and fiscal year 2012, respectively, compared to $.03 million and $3.0 million in the comparable periods of 2011.

What is Adjusted EBITDA and why it matters:

Adjusted EBITDA represents operating income (loss) with the add-back of net interest expense, pre-opening expenses, acquisition costs, depreciation and amortization, loss on disposal of assets, exit or disposal costs, non-cash share-based compensation, termination costs and any provision for income taxes. In this instance, it further adjusts earnings for the difference between the amount of fixed rent recorded on the statements of operations and the actual amount paid for rent expense.

In other words, it strips out all the one-time costs, together with the other non-recurring and unique activities to arrive at the core business operations. It allows for comparison of GCFB activities with the competition.

Outlook for 2013

Management has provided guidance for fiscal year 2013 as follows:

  • Net sales are anticipated to be between $130 and $140 million (compared to $121 million in 2012)
  • Adjusted EBITDA is expected to be between $8.5 and $9.5 million (compared to $7 million in 2012).

Outlook and Stock Price Objective

Based upon an average of the sales and earnings figures supplied by management for Fiscal Year Ending 2013, I calculate the stock price for 2013 as follows:

Sales $135,000,000

Adjusted EBITDA $ 9,000,000

Weighted Avg Shares O/S, 6,417,000

Adjusted EPS $1.40

P/E Multiple of 6-8

Stock Price Objective $8.42 - $11.20

Risks Involved

- GCFB may not be able to acquire companies or interest in companies that complement their business. This would render them less competitive.

- The company has significant capital needs and does not give assurance that financing will be available to pursue expansion.

- The company has a history of losses and no assurance of future profitability.

- The company's principal shareholder, CDP, has substantial control over GCFB which could reduce an investor's ability to receive a premium for shares through a change in control.

- Shareholders may have difficulty selling their common stock. The number of shares outstanding is relatively small and there is a low level of security analyst and news media coverage. This could contribute to lower prices and larger spreads in the bid and ask price of the stock.

- A substantial number of shares are eligible for sale by current investors and the sale of those shares could affect the stock price. Presently, there are 2.0 million shares registered for resale. The holder of the company's preferred shares, CDP, has waived its registration rights. The company is obligated to register for resale approximately 6.0 million additional shares that CDP holds. The trading price of the stock could be adversely affected if it perceived that these share will be sold in the public market.

Conclusion

Despite these risks, Granite City remains a growth company with huge potential. Typically, growth companies trade at much higher multiples than the ones I have used. I chose to be conservative and use a P/E multiple of 6-8 times adjusted earnings. It could be argued that a 10-12 multiple is reasonable, which would price the shares much higher. However, I prefer to be conservative with my calculations.

Source: Former McDonald's Executive VP Will Make Granite City Food & Brewery Golden