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SECULAR ISSUES FACING THE RESTAURANT INDUSTRY

When you think about the bankruptcy cycle, chain restaurant companies are not the first thing that comes to mind. Most restaurant companies don't need working capital to survive, as a result this is the primary differentiator between restaurants and other consumer companies.




  • Three themes to take away from companies that have gone bankrupt:

    (1) Family dining and Casual Dining make up the bulk of companies that have gone bankrupt.

    (2) Inefficient consumer proposition

    (3) Executive suite revolving door




Inflation Is Finally Consensus!

This morning’s US Consumer Price Index inflation report came in higher than already heightened expectations at +1.1% month over month. This takes the year over year expansion of reported CPI prices to +5%.

Since his predictive models have proven to have little to any short term value, it is critical to understand that Ben Bernanke will be hostage to reported data throughout the coming months. He will blow with the political winds associated with that data.

Stagflation is here.
KM

Eye On Transparency: What's Cramer Saying Now?

Just a link to You Tube. This is embarrassing.
http://www.youtube.com/watch?v=_nkZ3eHeXlc

KM

(Picture:http://justanotheriphoneblog.com/wordpress/wp-content/uploads/2008/04/kramer2.jpg)

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Let me guess..... They need to deleverage!

Dave & Buster's Inc. has filed for an initial public offering that could raise as much as $170 million. Dave & Buster's, which is owned by Wellspring Capital Management LLC., has been trying to sell the business for the last 12-months with not much luck. Interestingly, the timing on the transaction is uncertain.

The S1 suggests the company would use $75 million in net proceeds from the IPO to reduce debt. Including capitalized leases the Debt to EBITDA is close to 8x. Unfortunately, the nature of the Dave & Buster's concept requires significant reinvestment in the existing store base to maintain the appeal of the concept. Under this scenario, it's very difficult for a highly leveraged, capital-intensive company that is losing money to grow.
Judging from the S1, it looks like Wellspring has done a commendable job turning around a very troubled concept. Dave & Buster's was a disaster the first time it came public. In order to be able to execute the strategy laid out in the S1, the company needs a significant equity infusion. If the company does not deleverage the balance sheet, its growth is limited. This could be why the PE firms want out.

So, what is the value proposition for the new equity holders? We have a hard time seeing the upside. (1) Most of the proceeds of the IPO are going to the PE firm and not Dave & Buster's. I would love to see 100% of the proceeds go to deleveraging the balance sheet. (2) No concept is immune from the consumption recession. (3) Not many big box restaurant companies make good public companies.

"Where Is The Money Going To Come From?!?"

That was the question posed by US Government at 1:45 PM EST. If you are not watching today's testimony by Hank Paulson, you should. Hank is being forced to face the accountability card, and he doesn't like it.
KM

CSX: The Other Side of the "Concentrated Activism" Trade

James Mackintosh in London broke a story this morning about TCI's latest returns.

Per his article, "TCI, which manages more than $10bn and made its name taking on Deutsche B

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