|Shares Out. (in M):||29||P/E||50.0x||40.0x|
|Market Cap (in $M):||760||P/FCF||nm||nm|
|Net Debt (in $M):||-40||EBIT||19||25|
BJ's Restaurants is an expensive, gravity-defying stock. It is heavily shorted, and it "acts" very well, especially recently, so these are the key risks. However, the following issues are worth considering, and make this an extremely attractive short in my opinion.
It is difficult to justify. Management claims that they can get to 300 stores, though it is worth noting that the most comparable concept, Cheesecake Factory, is stuck at 150. Say that they get to 300 though, and hit their metrics: $5.5m of sales and a 20% 4 wall EBITDA margin. Then this concept will be generating $1.65b of sales and $330m of restaurant-level EBITDA. At that point, assume they would have $70m of corporate g&a (double the g&a on triple the stores from the current level), and $90m of depreciation. This is around $100m of net income. Since they will burn cash for the next 7 years to build out their store base (at $3.5m each, net of landlord contribution), and probably issue 14m shares in addition (basically, 25 new restaurants a year at $3-$4m over time, less an average of $40m net income until 2017), I am using a final share count of 42 million (raised at an average price of $30), which leaves me with $2.40 of eps. A mature concept should get 15x so $36 in 2016, or an IRR from here of around 5%. And that is assuming that everything goes right.
BJ's has discussed the strength of its comps in many calls, but I believe that comps are misleading. Specifically, revenues per average operating week were down 3.7% in 2008 and 1.4% in 2009, while comps were only down .3 and .8%, respectively. Not terrible, but not great. The company also breaks out the sales from restaurants open in the last year, from which one can deduce the sales from restaurants open in the last 2 years that are not yet in the comp base. It is difficult to quantify, but are some strange fluctuations in this measure (sales per restaurant not yet in comp base but opened in last two years).
3) Average check
Management is very promotional about the concept's appeal to consumers, saying that average check is $12 and thus is very affordable. I find this misleading. The average entree is $12, so the average check for a full meal is well in excess of this (a beer and 2 slices of pizza would hit the average though). My guess is that there are a lot of customers that come in for a beer and that's it, and this brings down the average check. But this is misleading-this is a high-end concept, competing in a very difficult and promotional casual dining space. Pizza Hut's "$10 for any pizza" offer in January highlights the ongoing competition.
4) Related party transactions
A 15% shareholder of BJ's also own the distribution company (Jacmar) that provides all food, beverage, and paper goods to their California and Nevada restaurants. Now, normally the issue is that related parties are being paid too much, but here I think the issue is that they are being paid too little. Specifically, the company's California restaurants are responsible for 48% of the chain's COGS but 56% of their restaurants. Oddly, in 2006 this number was 44% of the costs and 69% of the restaurants-one could easily paint the scenario that Jacmar was cutting BJ's a highly favorable deal in 2006 to allow them to "beat" numbers in the year after the IPO. In any case, the change from 2008 to 2009 added around $1.3m to operating profit, or 6.5% of the company's total. Further, one could argue that EBIT would be reduced by 43% if Jacmar was charging market rates:
|Jacmar as % of food/bev/paper||53.5%||57.1%||54.6%||44.2%||53.4%||49.5%||47.9%|
|EOP total restaurants||30||36||45||55||70||82||93|
|EOP in ca/nv||22||25||32||37||41||46||52|
|avg % ca/nv||73.3%||71.2%||70.4%||69.0%||62.4%||57.2%||56.0%|
|$ to jacmar||19.3||24.8||27.1||42.9||46.8||51.0|
|$ increase if jacmar at full px||4.8||7.2||15.2||7.2||7.3||8.6|
|change as % of ebit||21.6%||61.9%||-51.8%||0.6%||6.5%|
|catch-up as % of ebit||75.7%||64.5%||117.0%||47.0%||51.5%||43.1%|
|this ignores that CA is probably AUV higher than chain average|
5) Insider selling
In March, BJ's insiders sold around $7 million of stock. I suspect there is more to come.
weak quarter, though no particular insight here
skepticism around Jacmar relationship, and dilution of their benefit as the company grows outside of California
|Subject||also, regarding jacmar|
|Entry||04/19/2010 04:05 PM|
the quarterly pattern also seems strange here, almost as if they had tried manage earnings around 4q08 somehow... also, somehow they paid jacmar less in 3q09 than in 3q08 despite flattish comps and 10% more restaurants open...
|Subject||RE: also, regarding jacmar|
|Entry||04/21/2010 11:21 AM|
Nice idea. This Jacmar thing reminds me of a similar situation at NDN in 2002/2003. NDN's founder, David Gold, owned about 25% of NDN equity through various family vehicles. His stake had a market value of around $650m at the peak. He also owned all of Universal International (which he had bought from NDN in 2000 for book value, most of which was inventory). From 2000 through 2003, Universal paid NDN $3-5m a year in management fees and rent. This came to 5-10% of NDN's profits. This related party transaction seemed to be flowing in a favorable direction (cash into the company, not out of it) and was completely ignored, but it had been helping NDN both inflate and smooth earnings. Universal's actual business was actually shut down at the end of 2002, but continued to pay NDN fees through the following year. The incentive was clear for Gold to favor his $650m stake in NDN vs. marginal profitability at his smaller private company, since NDN's valuation multiple in the public market (around 25x EBIT) far exceeded anything he could ever get for Universal (which was liquidating). Nobody on the sell side or anywhere else cared at the time ("money flowing in the right direction", "amount not material", etc.) but eventually the fees stopped flowing up to NDN, and this contributed partially to the decline in NDN's earnings. It also was an indication of purposefully misleading communication with investors, which was subsequently displayed elsewhere by the Golds.
Somewhat off-topic, but a reminder of why related party transactions can be bad for multiple reasons, and why this Jacmar thing smells very strange. Jacmar has $111m today in BJRI stock at market - where exactly are their incentives? While there is no "catalyst" for the Jacmar relationship to terminate, its positive effect will naturally dilute over time, presenting a headwind for margins. And if enough people begin to question the relationship, it seems that under scrutiny it could normalize much more quickly.
|Subject||RE: RE: also, regarding jacmar|
|Entry||04/21/2010 12:10 PM|
yeah it cuts both ways-- on the one hand, margins will be diluted as california drops as a % of total, on the other, they can use this to smooth earnings as long as they need to until people start to pay attention to it...
|Subject||BJRI: possible fraud?|
|Entry||04/26/2010 10:33 AM|
i do not throw that word around lightly, but i seems that BJRI is actually losing money on their non-california stores. this is significant for a few reasons, first that the economic model of their stores is much worse than they tell people, and second, the involvement of jacmar in determining the cost structure of the california operations is even more important. please check my calculations and let me know if you disagree- i have assumed 5% higher sales/sf in california (likely conservative) and an equal distribution of sg&a by store.
another interesting datapoint is that i spoke to a distributor who was displaced by jacmar once BJRI had enough stores in northern california for jacmar to build a new facility. he said that his salesman saw the invoices after the contract moved to jacmar and "there is no way that jacmar could have been making money at those prices". anecdotal obviously...
|Entry||04/26/2010 03:31 PM|
i want to retract the statement that this is a fraud just to be careful here. my lawyers are not sure that giving free money to shareholders is illegal (one thinks it is (market manipulation), another thinks it is not).