- While 18 to 34 year-olds comprise only 24% of the total U.S. population, they account for 26% of the total occasions at casual dining restaurants. The 35-49 age group accounts for 24% of casual dining visits.
- While the number of people in this demographic is still growing year-over-year, it's at a decelerating rate. Beginning in 2009 the trends for this key demographic begin to flatten out and actually decline over the next five years.
- The current consumption recession is putting significant pressure on an industry that has excess capacity. It appears that the demographic trends will complicate this issue.
Specifically McCormick & Schmick's said on its 1Q08 conference call that its beverage sales had fallen 4.5% YOY on a comparable basis, which they indicated was a small decrease relative to a more significant decrease in on-premise liquor consumption in the broader economy. Alcohol sales, predominantly from the company's bar, represented about 28% of MSSR's 2007 sales and contributed higher gross margins than food sales.
Morton's, which generated about 29% of its 2007 sales from alcoholic beverages, however, stated that it has not seen any discernible changes in its beverage check, which is a good sign as the company is betting on continued strong off-premise consumption with 44% of its restaurants now outfitted to include its Bar 12-21. Additionally, all new restaurants will be built with the Bar 12-21.
Liquor sales are a significant contributor to the overall profitably of most casual dining restaurants. On top of everything else, the last thing the industry needs is declining liquor sales.
The following chart details the results from regressing quarterly YoY change in regional gaming revenues to quarterly changes in average Las Vegas airfare for the last 10 years. Airfare proves to be a statistically significant causal variable in explaining a decent percentage of the move in gaming revenues. Because of the potential that the independent (airfares) and dependent (revs) variables are autocorrelated with economic growth, I needed to control for this. In other words, a strong economy could be the driver of both higher LV airfares and higher regional revenues rather than the original thesis. Even when including the economic proxy variable, airfares remain a statistically significant explanation of movements in regional gaming revs.
As can be seen below, the Airfare t Stat remains significant (greater than 2) even after the economic variable is introduced in the multiple regression. R Square is .3 so LV airfare (variable 1) and the economy (variable 2) together explain 30% of the variance in regional gaming revenues.
Maybe there is hope for the regional gaming stocks after all. They could use the help. The precipitous fall in these stocks has driven Free Cash Flow Yields to almost 20%.
I have said before that SBUX's shareholders are paying dearly for the ill-conceived capital allocation decisions over the past three years. In the coming quarters, SBUX shareholders will be richly rewarded as the company corrects the excesses of the past and makes smarter capital allocation decisions for the future.
I love the shrink to grow stories, as the benefits to the P&L are immediate. First, by closing 600 stores that are losing money, EBITDA will improve. Second, 10% of the store base should see improved sales and profits due to the excess capacity taken out of the system.
This is a significant inflection point for the company.
- 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)
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