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Some of the topics on the call will be his Restaurant Survival checklist and the implications for the highly leveraged asset-light restaurant companies. His list gets at the heart of the investment case for asset-light companies and what franchisees can do to survive. We will touch on some of the critical issues affecting future profitability.
Here are some ideas on Mr. Hamburger's Restaurant Survival checklist to ensure the viability of a restaurant business. We have emphasized in bold the ones that are important to the publically traded asset-light companies:
1. Communicate, Communicate, Communicate: Now is not the time to crawl into a hole. Keep your employees informed and working as much as possible. You will need your employees to return to work eventually. Employers who do not take care of their employees, as best they can, face a painful recovery. Also, make sure to keep the safety of your employees and customers in front of the mind. They must even know that you're concerned about their safety. You will need a designated point person for communicating with customers, vendors and landlords. As for the bank, get a phone meeting ASAP to share your plan.
2. New Store Development and Remodeling: Stop all new development and image enhancement projects immediately. It makes no sense to build new restaurants or remodel others right now. Forget about your franchise development agreement. It doesn't mean anything right now. You need to preserve cash for your operation, and that means stopping the money going out the door towards construction.
HEDGEYE: To varying degrees, the subject of unit growth and remodels are important to earnings and valuation.
3. Royalties: If you are a franchisee, defer the payment of royalties and ad fees immediately. Let's get one thing clear: You will eventually be required to pay these fees back; however, the asset-light franchisors understand they need you to stay in business to support their stock value and not spook Wall Street any more than they are already frightened.
HEDGEYE: With 1/3 of the world in lockdown, this issue extends well beyond the U.S. The question becomes, how does this impact the P&L, cash flows (receivables), the balance sheet, and ultimately liquidity.
4. Rent: You've paid March rent, but if your store is temporarily closed, call or send your landlord an email and let them know you can't pay the April rent right now due to something entirely out of your control. Tell them you need to get through this crisis first and that you will eventually pay them or restructure the lease. Keep in mind that workouts happen all the time in real estate. As a precaution, remember to disable any auto-pay features on your bank account.
HEDGEYE: To varying degrees, the subject of unit growth and remodels are important to earnings and valuation. Rent is one issue that can impact MCD the most, but is a big negative for JACK given the health of that franchise system.
5. Off-Premise: This is where the game will be played in the next few months. Focus all of your efforts on delivery and takeout. Staff only those employees needed to run that aspect of the business.
HEDGEYE: If you don't have off-premise right now, you are in big trouble.
6. Utilities: Municipal utility companies are not going to turn off your power and light during a crisis. Use them as the bank as long as they will let you.
HEDGEYE: Good advice!
7. Bank Credit Agreements: Start the discussion immediately with your lender. Ask the bank to suspend any principal payments for the next 90 days, with a right to extend for another 90 if circumstances dictate. Banks are in better shape than they were in the 2008 financial crisis, and right now, you need their help.
HEDGEYE: How many franchisees are doing this?
8. Taxes: There may be penalties for non-payment of sales and use and real estate taxes. Don't violate any laws, but check with your attorney about stretching them.
9. Marketing and Advertising: Focus your spend on your customers. Curtail all unnecessary media unless it is used to drive delivery, takeout, and drive-thru orders. Radio advertising is worthless right now as no one will be in their cars driving to and from work. Television might work, especially with so many people stuck at home.
HEDGEYE: It is all about saving cash and spending smart!
10. Store Rationalization: If you can keep the restaurants open, that will be your best bet. However, you may be forced to close restaurants located near sports venues, malls, and airports. Make sure you have security around them. As individual people get bored with staying home, vandalism and looting could occur.
HEDGEYE: I think of this subject differently. During the great recession, the restaurant industry still grew restaurant openings when we expected store closings. This time will likely be different! Every franchisor wants to keep every store open, but that might not be possible. What concepts are at risk of seeing a high rate of store closings?
More on John Hamburger:
John Hamburger is the founder and president of Franchise Times Corp., a national publisher of business trade journals in franchising and finance. He publishes Franchise Times Magazine, a national franchise industry trade journal, the Restaurant Finance Monitor, a monthly financial newsletter that covers the capital markets in the restaurant industry, and Foodservice News, a monthly newspaper for independent foodservice and restaurant operators in the Upper Midwest. He also produces several industry executive conferences, including the Restaurant Finance & Development Conference and the Franchise Finance Conference.
