- 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.
"Downside risks to economic growth remain" is still the party line. Gee, thanks for that revelation Ben.
There will be more risk to the US economy tomorrow, and the day after that, as a result of this spineless rhetoric.
Sellem' if you havem'.
- Yes, FX risk is important. In fact as I’ve recently noted, I think that a strengthening dollar will ultimately expose the broken margin structure for many companies in this industry. But let’s not forget the actual organic sales growth outside of the U.S. either. Euro-zone retail sales were down 3.1% in June. As far as I can tell, that’s just about the lowest number since the Euro was born.
- As I highlighted in greater detail in my 7/25 ‘Trouble Brewing in Europe?’ post, Europe appears to be feeling a disproportionately higher import cost hit on raw materials than the US to higher dependency on China. Keep in mind those companies with significant European exposure. Things can turn… FAST.
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Bankruptcy is good for the market share leader so Brinker should have the biggest opportunity to capture incremental share as supply comes out of the market. To that point, management stated that it is already seeing an uptick in sales and traffic in those restaurants that are located next to a Bennigan’s that has closed.
“I think bigger than that is the transformation that you’re seeing in the industry, and that it used to be situations like that, companies went from some kind of financial straights to chapter 11, and just never stopped opening their doors, but certainly changes in debtor and possession or debt financing has made it much better for brands like ours as these brands are going away and that’s a positive because that takes supply out of the industry, and I think everybody has been looking for a correction in supply, and I don’t think this is the first. We have seen a lot of restaurants here in Dallas, some at the higher end, some of the lower end go away, and I’m sure if you look around the city you’re in, you’re seeing similar situations. So supply is starting to rationalize itself which a good thing for us in the grill and bar segment and it’s a good thing for restaurants overall especially if you’re well capitalized and have a good balance sheet.”
“There will be a lot more private single mom and pop restaurants going away and will be some more chains going away as well because the cost side is just too onerous right now, and that’s why the things we’re doing in our restaurants this technology hospitality, part of it is trying to figure out how to make the P&L better as well. Part of it is trying to figure out how to make more money and provide faster food experiences and better guest experiences.”
“I think you’re starting to see some of those weaker competitors go away, and they’re going to go away for good. That’s the best news of all. So I think the supply cycle is getting better. I think we’re improving ourselves in the sales cycle of casual dining, but I wouldn’t say that it’s getting ready to take off.”
The good news is that journalists are finally biting on this story and tracking down some pretty horrendous 2008 performance numbers. This makes me less of the “negative guy”, and more like the “right guy”. “Hedgies” really like guys who are right – that’s why we get paid the big bucks, remember?
There is an article by Julie Scuderi at Hedgeco.Net today that walks through the travails of “New York’s top 100 Hedge Funds”. It’s an inside joke amongst sober analysts in the hedge fund community that there is a proverbial “NY Hedge Fund Mafia”, and now you see the liabilities associated with some of their group think. I’ll let you read the article and see how bad some of these performance numbers are. Levering up long is not a hedge fund. Real hedge funds hedge!
This oversupplied industry picture is allowing the strong like Phil Falcone at Harbinger (hockey player from Minnesota’s Iron Range) get stronger. Great job to Mr. Falcone and his team.
- "Cashmere Mafia"?
The short term "Trade" in the CRB is lower. The "Trend" will remain higher, until I see a face plant closing price under 382 for the Index.
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