What’s the conclusion? There is virtually zero optionality on many operating leases – for more companies than Goody’s. Their respective values are simply under water – or just so inflexible given anchor tenant status such that hurdles are too high to attract bidders. In other words, the properties need to be ‘marked to market’, instead of ‘marked to model’. Unfortunately, this is not done proactively by most CFOs, it is done in a bankruptcy court.
This is a great example as to why I look at more than debt levels in evaluating bankruptcy candidates. The key is to pinpoint REAL debt (capitalizing operating leases) and adjusting for the duration and/or flexibility of those leases. This is a key theme I discussed on our 7/16 bankruptcy conference call, and continue to think will be front and center for a while.
BWLD has clearly been a beneficiary of lower prices as the company has seen a significant decline in chicken wing prices. Additionally, over the past 12-months nearly every major QSR chain has announced new chicken based products. McDonald’s has been very aggressive, adding a southern style chicken sandwich at breakfast and lunch. As a result, demand for fillets has increased, while the value of the by-product of fillet production (trim) has declined, resulting in greater supplier losses.
As we wrote earlier this week on July 29, the poultry operations of the two largest poultry suppliers, Pilgrim's Pride and Tyson, reported significant losses for the first three months of this fiscal year. Not surprisingly, the outlook for the next quarter is for more of the same.
Nearly all chicken suppliers need to significantly reduce production levels in an effort to generate higher prices. A return to profitability is necessary to ensure solvency for some companies. On the TSN conference call, the company alluded to the fact that a lot of its contracts are cost-plus, which means parts of the restaurant industry, will be seeing higher chicken prices in 2H08.
The marketplace for chicken processors remains volatile, which is not good news for the restaurant industry.
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COGS up 540 bps and SG&A down 610 basis points – You can only cut SG&A so much to make up for lower gross margins!. Despite incremental promotional expenses and a new manufacturing facility in TN, the company expects to get additional leverage on SG&A in 2009.
I still contend that by Q4 the signs of stress will be much more evident that they are today.
Did I mention they don’t generate enough operating cash flow to cover their capital needs and the stock trades at 17x EV/EBITDA!
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