If it’s going to be different this time - Food and Labor inflation are going to be the driver of this bankruptcy cycle. Clearly, the trend in these costs is disconcerting, and there does not appear to be any relief in sight for the foreseeable future. In my mind, food or labor costs, alone, are not going to bankrupt any single company, but rather the risk lies in how a management team manages these inflation pressures. To date, inflation pressures have been partially sidestepped by raising prices. However, as I have seen over and over again, excessive pricing can kill a concept.
  • As a result, I believe that restaurant analysts are going to increase their scrutiny of traffic trends as traffic is the primary indication of the health of a concept.


Research Edge recently held a consumer bankruptcy conference call. One of my slides covered the impact of a hypothetical smoking ban across the regional gaming markets, a distinct possibility over time. Following sharp declines in revenues in Illinois and Colorado, some short sellers have focused on the smoking ban to press the regionals. I estimate a worst case scenario of a 20% decline in EBITDA. The impact on the credit ratios is not as severe as I would've thought. Leverage obviously increases but with only ISLE in the danger zone. With the exception of ISLE, coverage ratios remain in good shape even after the EBITDA reduction. ISLE will still cover interest and should have liquidity until 2012. ASCA and PNK have large credit facility maturities in late 2010 which could present a liquidity problem for both companies should the credit environment remain unfavorable.

Even after 20% decline from a potential smoking ban, most regional operators maintain decent credit ratios


The other side of the washout that is going to occur in the hedge fund community is the squeezing of their consensus shorts.

Fannie had a +30% squeeze move today on huge volume to close at $9.20.

My model has this stock with the potential to run-up to $13.02, and nothing changing in terms of its bearish formation. If it does, how many short selling geniuses out there can manage that risk?


  • Fannie (FNM)
chart courtesy of

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The Bankruptcy Cycle Chart

The spike in the 2008 part of the chart is Indy Mac. Don't forget this was the largest US Bank failure since Continental Illinois in 1984. The people lined up at the 33 branches they closed over the weekend don't foget.

  • From the Research Edge Conference Call 7/16/08


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.

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