MSSR – Eye on Operating Leases

MSSR is scheduled to report 2Q earnings tomorrow after the close and I would expect results to be less than pretty as the company does not begin to lap easier comparisons from a same-store sales and operating margin standpoint until 2H08. That being said, the street is forecasting a 55% year-over-year decline in 2Q EPS so expectations are not high.
  • As of its 1Q earnings call in early May, the company stated that it had seen Friday and Saturday dinner comparable sales stabilize after posting very negative same-store sales on those two days beginning in mid-February. Management did go on to clarify that relative to stabilizing sales on those two days, “that the group is not eroding as quickly as it was before,” which sounds less than positive. According to NPD data, the fine dining segment (includes MSSR) posted the biggest traffic declines in the March-May 2008 time period, down 4% relative to casual dining up 1%. NPD also reported that the dinner day part was the weakest segment across all restaurant categories which does not bode well for MSSR as dinner sales accounted for 75% of the company’s 2007 sales.
  • MSSR’s operating margins fell over 500 bps YOY in 1Q to 0.5% (among the lowest reported in 1Q08 for casual dining operators) and close to 450 bps sequentially from 4Q07. Management attributed these significant margin declines to a deleveraging of commodity and labor costs as a result of lower comparable sales and to there being a larger proportion of newer restaurants in the company’s portfolio, which are not as efficient at managing food and labor costs. Management expects to see an improvement in margins in 3Q and 4Q (which matches up from an easier comparison standpoint) as they become more efficient in labor scheduling and drive higher average checks from their menu focus on wild species (which generate higher price points) in 3Q.
  • Relative to the company’s development pipeline, MSSR still expects FY09 unit growth of 13%-15% on top of its 15% unit growth forecast for FY08. Management stated, “we have sought and in some cases received additional concessions from our landlords on charges and even more favorable rent terms for the 2008 and 2009 signed lease.” According to MSSR’s 2007 10-K, however, the company’s future operating lease obligations are up relative to its minimum rent expense in 2007 (in the 10-25% range), which is concerning as it relates to company margins going forward. For reference, as of their most recent 10-Ks, DRI and EAT are subject to operating lease obligations that decline each year.
MSSR's Operating Lease Obligations Relative to 2007 Expense

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