- In the most recent quarter, management reduced G&A expense slightly (down 10 bps YOY as a percent of sales), but there appears to be room for further cost cutting. And with Ramius LLC's recent letter raising concerns over CKR's high G&A expenses (relative to its competitors), management appears motivated to bring these costs down in the near-term, with CEO Andrew Puzder citing that keeping G&A under control is one of the two big strategic initiatives within the company (the other being managing commodity costs).
- Looking out over the next few quarters, things should to improve for CKR as the company is lapping some easier revenue and margin comparisons in 2Q and in the back half of the year. CKR's refranchising efforts at Hardee's really picked up in 2H08 with the company refranchising 60 restaurants in 3Q and 30 in 4Q, which negatively impacted company-operated revenue growth. Although the company plans to refranchise additional units in FY09, there are only 40 units remaining under CRK's current refranchising schedule so the negative impact on revenues will be minimal relative to last year. Management continues to maintain that each refranchised restaurant reduces G&A spending by about $22-$24 thousand and that the costs are eliminated immediately when the stores are sold, but these savings have not yet helped to bring the company's overall G&A spending down to a more reasonable level.
- From a margin standpoint, CKR should see some benefit in 2Q because it will be lapping the initial spike in food and packaging costs that it experience last year, particularly at Hardee's (up 130 bps YOY as a percent of sales on a consolidated basis and up 200 bps YOY at Hardee's in 2Q08). Increasing beef costs should offset some of this year-over-year favorability, however, as the company mentioned that it is already seeing beef prices rising in 2Q, which was not an issue in 1Q. The company's stance on discounting ( we will not deal with the issues by trying to drive business through discounting our products, serving inferior products or massively couponing ) should also help protect margins going forward as long as its ongoing price increases don't hurt traffic growth, like we saw at SONC and CBRL.
"Me-Too" activist investing is a by-product of the leverage cycle. As cost of capital increases, and access to capital tightens, some of these concentrated "activist" funds will just go away.
(chart courtesy of stockcharts.com)
If you're interested in our Healthcare research, please email Tom at
Here's his MYGN note from the morning of 6/30/08:
"The exclamation points are probably not necessary given the near universal dismissal of the compound. What's left is a fast growing, profitable, bankers dream of a diagnostics company.
I am sure there are pitch books on the desks of company management discussing the merits of splitting the Pharmaceutical and Molecular Diagnostics companies. I agree with the move. Management is killing the Flurizan development program after $68M in costs and they should probably kill drug development altogether and get on with the business of genetic testing.
Molecular Diagnostics revenue growth is running above 50% with EBITDA margins at 51%, and EBITDA of $29M for the March quarter. MYGN shares look like they will open around 42, or 12X EV/EBITDA on just the Molecular Diagnostics business. With the short interest at 30% of the float, I'd bet the shares are higher from here.
(Chart courtesy of stockcharts.com)
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Oh, and by the way, there was no "take under" today.
*Full Disclosure: I am long LEH
(chart courtesy of stockcharts.com)
This just in from USA Today.com of all places: "Utah this summer will become what experts say is the first state to institute a mandatory four-day work week for most state employees, joining local governments across the nation that are altering schedules to save money, energy and resources"...
The best part of the whole story is what is being reported by the Winston-Salem Journal. The article questions the legitimacy of Dee Guess, the managing director of MGL Asset Management. Apparently, Mr. Guess has had multiple lawsuits filed against him and has used known aliases including Mario Guess, J.D. Guess and Jerry D. Guess. The paper also said, "There is no listing of principals in the company, no companies under MGL's management or ownership, and no track record of the principals managing and owning businesses." MGL was listed as incorporating in January on the N.C. Secretary of State's Web site.
There is nothing better than a warm glazed Krispy Kreme doughnut. Unfortunately, stiff competition, razor thin margins and rising commodity costs put significant pressure on the business model. The international opportunity is real, but not enough to offset the pending pressure on the domestic business.
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