Heavy duty talk about an economic recovery being underway hardly has any meaning for a middle income American. All that he sees is that his wallet is considerably lighter than what it used to be. Social security taxes have increased to 6.2% from 4.2% and prices of unleaded gasoline went up to $3.67 in mid-July, while salary increments have been slow to come. Commerce department data shows that consumer spending grew by just 0.1% in July probably due to price increases rather than an increase in consumption, as personal income inched up by a similar percentage.
The obvious conclusion is that people are being more careful about their purchases. Now, housing and auto market data are showing good growth numbers; then who is facing the flak? Reason dictates that it is likely to be the sectors driven by cravings and not by necessities. With department stores seeing lesser footfall and restaurants having lower guest counts, this might be exactly what is happening.
Restaurant industry trends
Recent data shows that in the U.S. people have not been eating out a lot. Sales at casual dining restaurants were down 2% in June and by 3.5% in July as per the Knapp-Track Index. Most of the casual dining chains like Brinker International (EAT), Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Bloomin' Brands (BLMN), etc have all reported lower sales growth. Brinker has just started its fiscal 2014 with expectations of mere 1%-2% comparative same store sales growth while Cheese Cake has cut its earnings guidance for the current fiscal.
The hamburger chains are also struggling. In their most recent quarter, the mighty McDonald's (MCD) reported domestic same store sales growth of a mere 1% while Burger King (BKW) posted a 0.5% decline. Both chains are touting their value menus like never before and hoping for an occasional indulgent guest to order a premium item now and then.
This is making a lot of investors jittery about putting their money in restaurant chains and the concern is not unfounded. However, if we look beyond the obvious names we can still find some growing companies that are value for money and offer good possibilities. One I'd like to go into a little deeper is Chanticleer Holdings (HOTR) - one of the owners of the Hooters franchise.
A new restaurateur
Chanticleer was originally an investment management company but after eyeing the returns potential in owning franchisees of Hooters of America, it has changed its tracks completely. Since March this year the company's sole focus has been on its restaurant business.
Hooters is an iconic American beach-themed casual dining chain of restaurants with around 430 locations in 28 countries. It entertains its guests with sports on television, loud music, and of course, the glamour of Hooters waitresses. The fare includes spicy chicken wings, seafood, sandwiches, salads, beer, and other alcoholic and non-alcoholic drinks.
Chanticleer got into the Hooters business back in 2011 and currently holds the franchisee rights to independently expand the chain in international markets like Brazil, South Africa, Australia, and Europe. It presently operates six Hooters locations, all on foreign soil, and is planning to increase the number to 10 by the end of this year.
For investors who believe in owning a piece of a business in its early stages of growth, Chanticleer can be a good proposition. We have already seen the kind of results that are possible with Buffalo Wild Wings (BWLD) - another sports bar concept centered on wings and beer. For Buffalo, in a short span of 10 years since the company made its public appearance with an IPO price of $17, patient investors have seen share prices crossing the threshold of $100.
Removed from domestic limitations
Chanticleer it is going to be an all-international play whereas Buffalo Wild had been a pure domestic play. It had to combat tardy economic growth rates and an official recession. In fact, despite its limited exposure in Canada and its recent announcement to foray into Philippines, Buffalo Wild still derives almost all of its revenue from its home turf. So, it still remains dependent on the budget strapped Americans for boosting its sales.
But, the erstwhile investment manager has already shortlisted four different continents - Latin America, Africa, Europe, and Australia - to serve as its launching pad in the global arena. The company currently has four locations in South Africa, one joint venture location in Australia, and one in Budapest in Hungary. It is also in the process of opening its second jointly owned location in Australia and has recently bought the Hooters location at Nottingham in the U.K. from another franchisee.
Each of the locations is in strategic markets and allows sizable growth opportunities. But, this is just the tip of the iceberg, for the real game changer for Chanticleer is likely to be Brazil.
With the FIFA World Cup and the Olympics coming up in the country, Brazil is currently the Mecca of all sports fans. As sports lovers flock in to the country from all parts of the world, analysts estimate that the 2014 World Cup will inject an additional $70 billion into the Brazilian economy and the 2016 Olympics another $51 billion. It is also estimated that the biggest beneficiaries would be brewers, fast food joints, and convenience stores.
As the nation gets caught up in the frenzy of excitement, the backdrop is just right for some Hooters locations to add to the fun and frolic. Chanticleer has no intentions of letting such an opportunity go to waste. It has acquired the development rights for Hooters in five Brazilian states with one at the action epicenter - Rio de Janeiro.
Even after the games are over, Brazil, with a middle class consumer base of almost 200 million, will continue to remain a strategic market for Chanticleer.
The recent acquisition
Another development that drives optimism about Chanticleer is the recent acquisition of a small burger chain called American Roadside Burgers. The 10-year old chain has five domestic locations at present and while it is definitely no McDonalds or Burger King, it does have a ringing name and a neat menu with a wide selection of salads, sandwiches, and drinks.
The acquisition itself is nothing very big per se, but it gives Chanticleer another brand to leverage in its international markets. Given that each market has its own dynamics and it takes time to understand the pulse, having two brands could be the starting point of a composite multi-brand strategy for Chanticleer.
Let's talk Cash
For all its returns potential the stock is still in the $4.50 to $5 range and has a price to sales ratio of 2.45 in line with the industry average of 2.3. It also has close to $3M in cash, a debt load of $641K, and a cash burn rate of $700K per quarter, pretty conservative for a start-up.
But, the biggest advantage for the stock is that it has just 3.7 million outstanding shares and a float of only 2.86 million shares. Over the next few quarters, there is going to be a lot of interesting news from the company's restaurant openings in Brazil, possible acquisitions, venturing into new markets, etc. All these could propel Chanticleer under the public eye and the stock should be in demand while supply should remain limited, as cash should last a year given the current burn rate and any possible future financing is still a few quarters off. This can translate into big gains for investors holding the stock. Possibilities will multiply significantly if and when the company starts posting profits.
True, earnings are still in the red with a net loss of $3.1 million in 2012 but what is significant is that restaurant revenues have increased from $980K in 2011 to about $6.8 million in 2012. Management expects that it can be profitable in its Hooters franchisee business if it has around 10-12 operating restaurants due to economies of scale.
This is not far off. The new Nottingham location in the UK brings the count of Hooters restaurants to seven. The second Australian location as well as the upcoming Brazilian locations would bring Chanticleer very close to the threshold of 12 and chart profitable territory. The company is thinking in terms of having 75 Hooters locations around the world eventually. Over and above this, there would be American Roadside locations. So, the prospects for future sales and earnings remain bright.
What should be encouraging for investors is that management believes in having its plan B ready at all times, just in case things don't go right with one market. In the present times, where currency volatility and economic downturns are ruling the roost in most major economies of the world, the importance of this diversification strategy cannot be emphasized enough.
All in all, Chanticleer remains poised for good growth and investors who are willing to back it in these early days may receive handsome rewards for keeping faith.