Back on 6/4/15 we added Bojangles’ (BOJA) to our Hedgeye Restaurants Short Bench. Since then we have begun to refine our thinking and wanted to share our updates as we work out the final details. As a result we are upgrading it to the Restaurant Best Short Ideas.
Currently BOJA shares are trading at approximately 16.5x 2016E EBITDA, or an approximately 15% premium to the mean of the three other regional chicken companies (LOCO, FRGI, and PLKI). That being said, it’s also not hard to make the case that LOCO and FRGI are overvalued too, making BOJA even more ridiculously overvalued.
KEY POINTS WE PLAN TO MAKE:
Bull Case is Unlikely – The bull case for BOJA is grounded on BOJA’s strong fundamental momentum continuing for years. My read on the fundamentals suggest that there is little leverage in the business model or upside to the current estimates.
New Unit Economics Don’t Add up – Each new BOJA restaurant costs slightly more than $2.1 million. The average unit volume is between $1.7 million and $1.5 million for new units in non-core markets. This puts the concept sales to investment ratio at .68, one of the lowest in the industry and suggests you should be allocating your capital elsewhere.
Same-Store Sales – In the recent past BOJA has used price as a primary driver of same-store sales growth. Going forward, guidance is for low-single digit same-store sales primarily driven by 2%-3% pricing and flattish traffic. All this pricing is due to rising commodity costs specifically on chicken, which leads into our next point.
Commodity Costs – Chicken represents 38% of COGS, and will likely drive a majority of the mid-single digit commodity basket inflation expected in 2015.
Low and Declining Margins – Due to the higher cost of sales, restaurant level margins will contract in 2015, as price increases will not fully offset rising costs.
Valuation – The market is putting insanely high multiples on average restaurant businesses.
Downside – Our bear case has 30% downside in the name.
We will be making our point more clear later this week with more robust details.
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Takeaway: We are adding Zoe's Kitchen (ZOES) to Investing Ideas.
Please note that we are adding Zoe's Kitchen to Investing Ideas today. We will provide an additional update in this weekend's edition of Investing Ideas.
According to Hedgeye CEO Keith McCullough:
If you have patience in this profession, it's almost uncanny how the things you think you "missed not owning enough of" have a way of mean reverting (correcting).
Last week ZOES announced that CFO Jason Morgan has resigned to pursue other business opportunities. Mr. Morgan has been at ZOES for eight years, this decision reflects his personal career choice and in the coming days and week it will be clear where he is going. Importantly, transition to a new CFO will likely not have a material lasting impact on the company's prospects.
On the contrary, Mr. Morgan is a very talented restaurant executive and is leaving the company in a very strong position with a deep bench of seasoned financial executives. Over the coming months James Besch, current Controller will lead ZOES’ financial team as the company begins a formal search for a new CFO.
OUR LONG TERM VIEW IS UNCHANGED - We view ZOES as one of the best small cap growth names. The company is set-up for long-term success for the following reasons:
- Superior brand positioning
- Management philosophy and execution
- Unit opening geographic profile
- Early-stage average unit volumes and returns
Howard Penney remains The long-term Bull. Buy red,
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