Seeking Alpha

John Gordon's  Instablog

John Gordon
Send Message
John A. Gordon is Principal and Founder of Pacific Management Consulting Group (, an independent restaurant analyst providing research and niche earnings analysis, management consulting and advisory expertise to those who need to know about chain... More
My company:
Pacific Management Consulting Group
My blog:
John A.Gordon real time restaurant analysis newsline
View John Gordon's Instablogs on:
  • Is Noodles The Next Chipotle?

    In one of the best IPO results of the year, the first restaurant IPO of the year, Noodles (NASDAQ:NDLS) raised almost $100M and stock price more than doubled from its initial pricing at $18 to close at $36.75 on its first day. The Noodles CEO, Kevin Reddy, came from Chipotle (NYSE:CMG), at an earlier stop in life.

    Is Noodles today's Chipotle? Chipotle IPO'd in June 2006. They are both fast casual concepts, Colorado based, both early movers. And there are many fundamentals comparisons. See the table below, prepared from both the Noodles and the Chipotle SEC S-1s, for their last full fiscal year before IPO, which shows the key fundamentals drivers:

    Fundamentals ParameterChipotle, FY 2005Noodles, FY 2012
    IPO TimingJune 2006June 2013
    Enterprise Revenue$627,695,000$300,410,000
    Average Annual Sales/Unit$1,440,000$1,178,000
    Restaurant Level Margin18.2%20.3%
    Enterprise EBITDA % (book)9.4%9.2%
    Net Income $$30,240,000$5,200,000
    Number of Units481327
    Same Store Sales+10.2%+5.2%
    % Company owned100%84%
    Lead UnderwritersMorgan Stanley, CowenMorgan Stanley, Cowen
    SponsorMcDonald's (NYSE:MCD)Catterton, Argentia/Canadian Pension

    Store economics look similar? Yes, in some ways:

    · Fast casual operators, new buildings, new food types and popularized styles.

    · Average Annual Restaurant Sales in the $1.2M to $1.4M range.

    · Solid restaurant margins-Noodles now actually exceeded that of Chipotle in 2005 by 210 bpts.

    · Totally or primarily company operated model.

    Noodles' success demonstrates there is investor demand for new restaurant offerings and validates fast casual investor demand. I understand NDLS was twenty times oversubscribed. Catterton, Morgan Stanley and Cowen did a nice job.

    The issue to keep in mind is the United States consumer space is not the same as it was in 2006. Recession, fundamental changes in population, income, eating and dining preferences, commercial real estate site characteristics, and more US restaurants in operation each year make for a more difficult 2013 and out conditions.

    Noodles must deliver good quality, service, cleanliness and price/value, in a differentiated fashion, with good corporate stewardship and continue to build connections with guests, employees, investors and other stakeholders via it's culture.

    Mathematically, as it expands, it has to think a lot about occupancy costs. NDLS occupancy costs are now 9.9%. Chipotle's was 7.6% in 2005. Site supply is tight. Many legacy brands, the real first movers, like McDonald's (MCD) and Dunkin Brands (NASDAQ:DNKN) got the early best US sites. Restaurants economics was built on 6-8% rent, but some restaurant operations are facing 15-20% rent for some sites. Too much push for too fast expansion will test the rent leverage especially for a $1.2 million sales concept.

    The imputed IPO valuation from the NDLS IPO is already $800M, or an EV/EBITDA multiple of 26.6X. That's rich. But it's just the first day. I hope the pressure cooker investment world will take a break and give them a chance to grow smartly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 01 11:11 AM | Link | Comment!
  • 2013 Restaurant Themes: Comps Cliff Coming

    The restaurant space will be interesting in 2013. Sales issues, cost issues, expansion issues, franchisee issues. There are still too many restaurants in the US and x-US markets sales increases have slowed. The two industry leaders, McDonald's (NYSE:MCD) and Darden (NYSE:DRI), are both somewhat in the penalty box and under pressure. Here are our thoughts on 2013 issues and opportunities.

    Comps Cliff Coming: In looking at 2013, its likely restaurants will get off to a bad start. In Q4 and Q1 2013, the restaurant space will fall off a cliff of sorts: the comps generated last winter. Driven then both by warmer weather, price increases, a bit lower sales of discounted items and the peak of the 2010-2011 restaurant recovery, the January-March 2012 number will be hard to beat.

    The following chains will likely have the hardest sales comp comparisons in Q1. Every single chain had lower comps most recently reported than the Q1 peak:

    Company/symbolFY 2012, Latest Trend2012 Q1 Jan-March Comp
    McDonalds (MCD), worldwide+2.4% (November)+7.3%
    Starbucks (NASDAQ:SBUX), US+7.0% (9/2012)+9.0%
    YUM, China company units-6.0% (1/7/13 )+14.0%
    Jack in Box, JACK, system+3.1% (9/2012)+5.6%
    Chipotle, CMG+4.8% (9/2012)+12.7%
    Texas Roadhouse, TXRH+3.6% (9/2012)+5.8%
    Bloomin Brands, BLMN+3.6% (9/2012)+5.3%
    Buffalo Wild Wings, BWLD (system)+6.0% (9/2012)+9.1%
    Panera, PNRA (system)+5.8% (9/2012)+7.7%

    More sales news. In the QSR space generally, traffic now is very marginally positive and average check app. 2-3% favorable, but in the overall casual dining space, traffic is negative and totally offsets about a 2.5% check increase. There were a few standouts, however: TXRH, PNRA, SBUX, and AFCE.

    One question is why was investor disclose so poor at YUM? The China same store sales trend is so stunningly negative-large sequential decreases from +19% in FY-11 to -6% just noted this week for Q4 2012, perhaps the largest decline anywhere over such a short time.

    Extreme discounting is the newest news but is really old news. The current price spectrum of restaurant TV ads runs from $.99 grillers at Taco bell to $11.99 30 piece shrimp at Red Lobster. Doesn't portend well for average check. The comps cliff has affected marketing strategies everywhere.

    Earnings standouts: Texas Roadhouse (NASDAQ:TXRH), Panera (NASDAQ:PNRA), Starbucks (SBUX) and Popeye's (AFCE) were Q3 (and Q2) positive standouts: positive sales and traffic, sales beat and earnings beat $.01 or more over estimate. Does prior performance guarantee future results?

    Dividends as the goal: Dividends will be important in a low growth, low return world. The US restaurant market is way overdeveloped and worldwide development takes time and proper store level economics.

    We'll be glad to see companies like DNKN (1.80% yield), BKW (.90% yield), and BLMN (0%) finally work their way out of private equity positions so that more substantial dividends can be paid.

    THI, another pure play 100% "capital light" franchisor, is also low at 1.70%. That there are two coffee sector players in this group is interesting. Lower coffee commodity costs advantage will accrue to the franchisees not the corporate entities.

    IPOs and M&A Pending: we still wonder when Noodles will be ready for their IPO. Fast casual is "hot". Another fast casual brand, Pei Wei could be a candidate once its lower newer unit open sales problem is fixed.

    It was clear from the 2012 SBUX and DRI transactions that the path to a rich valuation is to develop a unique but mainstream product that well-heeled restaurant majors can buy for entry at rich multiples.

    There will continued private equity churn, they always have fresh powder to deploy. The wave of 2006-2008 PE acquisitions will soon come due to sell.

    Turnarounds to watch: Interesting that the two worldwide restaurant leaders, MCD and DRI are both challenged. No surprise that MCD went into a new news decline as it changed CEOs in 2012. When will it change?

    It will be fascinating to watch Darden (DRI) work out of its current tight cash position caused by lagging big brands and resulting profit shortfall, big remodeling CAPEX requirements and now debt service for its 2012 acquisitions. Of necessity, they will look for another acquisition in 2014, once its free cash flow position improves.

    We wonder if BKW has the worldwide AUV sales base potential except Latin America for franchisees to expand profitably.

    Restaurants must more creatively test revenue and expense solutions: Restaurants can offset negative cost pressure and difficult comps pressure by looking at revenue increases beyond price increases and cost reductions beyond food portion cuts and labor hour savings.

    Unique store level pricing tiers and dual wage tiers to offset Obamacare are but two examples. The industry needs to test aggressively new ideas. I've published more details on my website,

    Defrancising v. Refranchising divergence will continue. Those who can operate restaurants well will continue to do so, those who can't, refranchise. Panera (PNRA), Texas Roadhouse (TXRH) and Qdoba (NASDAQ:JACK) are building new units /converting franchisees to company operation.

    Franchisors still need to improve investor reporting and franchisee disclosure if they hope the franchising "capital light" business model will be sustained. How can DineEquity (NYSE:DIN), now 100% franchised, be properly analyzed if there is no franchisee profitability reporting?

    Reasons for optimism: always. Commodity costs thus far are coming in at the light end of what was feared some months earlier. Some companies have finally fixed their marketing focus, example Sonic (NASDAQ:SONC). The revenue and cost challenges so often noted can be offset. And finally, this is a very adaptive industry. It just needs to get more creative.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jan 09 1:57 PM | Link | 1 Comment
  • Memo To McDonald's: Fix The Reporting

    Note to McDonald's: Fix the Reporting Calendar

    It's happened again: McDonald's (NYSE:MCD) weak same store sales results for October announced today threatened to take down the entire restaurant space stock platform.

    To be sure, McDonalds was weak (minus 1.8% worldwide). Weaker than most expected. Wendy's (NASDAQ:WEN) same day reported plus 2.7% system same store sales and Burger King Carrols (NASDAQ:TAST) reported a strong plus 6.2%, and an 'OK trend' thus far in October. What was of greater concern were the MCD sales components: with some analysts projecting an embedded 3% price increase in the US, either customer traffic was almost 5% lower or product mix shifted lower.

    McDonald's sales momentum deterioration in the US and Europe was the most pronounced. APMEA (rest of world) had poor Japanese trends and bouncing Australian results, has been weak or negative for some time. The MCD powerhouse markets of France and Germany had to be down big time as MCD reported the UK was up.

    One of the problems is MCD reports by calendar month. But not every month has the same number of weekdays and weekends each year, and MCD missed a Saturday and a Sunday this year.

    This could be fixed. Fiscal year formats of 13 periods of 28 days have been standard for 30 years plus in this space and could so be adopted. Every back office system in the world has such flexibility.

    I suspect the problem is getting franchisee reporting lined up. It's a change and will cost something. But we expect such systems from the QSR industry pioneer. And less stress on the publicly traded company is good for all.

    Finally, while the same store sales metric is commonly understood in the business press, comparing to one prior year is not really the best measurement. It misses cumulative history. McDonalds was down versus 2011, but still up versus 2010, 2009, 2008, and so forth, likely all the way back to 2003. Wendy's and Burger King do not have the same advantage. Additionally reporting same store sales on a five year compound average growth basis could be more meaningful.

    Nov 08 11:40 PM | Link | Comment!
Full index of posts »
Latest Followers


  • $SONC: @RonRuggless features the key profit center in HQ, not franchising but R&D/concept development.
    1 day ago
  • More rare Sun Capital #restaurant #PE vis: Boston Market SSS up 25% over 3 year period, no IPO plans.
    2 days ago
  • #restaurant #MNA #PE Sun Capital Fazolis being shopped, PE folks said they have improved it.
    2 days ago
More »

Latest Comments

Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.