BOJA is still one of our Best Ideas on the SHORT side
BOJA reported a decent quarter, but the trends in the quarter raise a RED flag for a company trading at a fast casual multiple of 17x EV/NTM EBITDA.
The goal of every restaurant company should be to grow long term sustainable increases in traffic trends or customer counts. For the past three years, positive traffic has eluded BOJA.
Thus Bo’s dilemma – the concept can’t increase traffic trends year-over-year without significant discounting. Bo’s dilemma is shared by nearly every “mature” restaurant concept we know. In 2Q15, BOJA drove increased profitability by discounting less versus 2Q14, but that resulted in a 90bps drop in traffic in 2Q15. So we conclude, that given the operators desire to grow traffic long term, the current level of profitability is unsustainable, as the discounting and lower margins will return!
The sensitivity to discounting and the company’s inability to drive traffic is troubling. On an annual basis the company has not been able to drive traffic without discounting for the past three years (the only years we have data for.) As such, the company should be trading at a significantly lower multiple relative to its peer group.
BOJA reported a “beat and rise” 2Q15 EPS of $0.23 vs consensus $0.16. Although the system-wide comps of +4.4% beat the consensus estimate of +3.6%. A miss came from the company stores reporting +3.3% vs the estimate of +4.1%, which represents 40% of locations. The franchise same-store sales were +5.1% vs consensus of +3.6%, representing the other 60% of locations. With sales being a little light the company reported revenue of $114.0M vs an estimate of $114.6M
Less discounting and deflation helped food and supplies decrease to 32.2% vs the consensus estimate of 34.0%. With labor leverage the company reported restaurant margin 19.1% vs the consensus estimate of 16.3% and “adjusted” EBITDA margin of 17.1% vs consensus of 13.5%.
- EPS $0.75-$0.78 vs consensus $0.69
- The company reaffirms comps up low to mid-single digits
- Revenue $483.5M-$487.5M vs prior $480M-$487M and FactSet $486.9M
- EBITDA $74M-$76M vs FactSet $67.3M
- The company increased new store openings slightly to 50-57 new system restaurants (22-25 company and 28-32 franchise)