BOJANGLES' INC BOJA
January 10, 2018 - 12:55pm EST by
abcd1234
2018 2019
Price: 12.15 EPS 1.18 1.55
Shares Out. (in M): 37 P/E 10.3 7.8
Market Cap (in $M): 450 P/FCF 7.7 4.1
Net Debt (in $M): 148 EBIT 59 67
TEV ($): 597 TEV/EBIT 9.0 7.1

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  • Restaurant
 

Description

There is no shortage of restaurant write-ups on VIC (both long and short), but nonetheless, I think BOJA is the most compelling in the space at its current price (admittedly I might be biased as I’m from the Southeast).  I think it makes a lot of sense that value investors like restaurant concepts – they are easy to understand, easy to model, easy to assess as a businesses (unit economics), not subject to much technological disruption (people will still need food 50 and 100 years from now), and generally have very long runways for growth.  At the right price and with the right concept, they make for phenomenal long term investments. 

LimitedDownside did a BOJA write-up in September 2017 which I would highly encourage anyone interested in this to read (to make it easier on myself, I won’t be repeating much of what he said on unit economics or some of the general stats on the businesses).  My thesis is generally the same (excellent, proven concept at an attractive price) but I want to fill everyone in on what has happened with the business since then and provide a few personal opinions on what I think the market is underappreciating.

I began spending a lot of time on the QSR and fast casual restaurant industry in mid-2016, predominantly due to the dramatic decline in Chipotle’s stock and the daily coverage in the news.  While I had been a Bojangles customer for most of my life, this was when I noticed it was publicly traded (still majority owned and controlled by the PE firm Advent International).  And like LimitedDownside, I think busted IPOs can occasionally provide some compelling opportunities.

For those unfamiliar, Bojangles is a Southeastern fried chicken LSR concept with a specialty or focus on breakfast (~40% of sales).  It’s most distinguished item which provides the primary moat or brand value is its made-from-scratch biscuits.  I personally love their chicken but the biscuits are their true “differentiator” relative to other fried chicken or breakfast concepts. It attempts (unsuccessfully in my opinion) to spin itself as more of a fast casual restaurant than a QSR as everything is made in plain sight and there are servers that bring you your food.  It doesn’t allow any of its restaurants to have a microwave.

Why is the stock down so much?

Starting from the beginning, the company IPO’ed in May 2015 at $19, rallied to nearly $30, and subsequently declined to the $14-16 range 12-18 months later.  Essentially, newer and trendier QSR/fast casual concepts such as Potbelly, Noodles, Zoe’s, and Shake Shack IPO’ed in the 2013-2015 time frame with tremendous success pushing the market multiples on the entire space (including Bojangles) to highly overvalued levels.  The air was slowly let out of this balloon starting in the second half of 2015 with multiples compressing across the industry.  Bojangles initially garnered a substantial premium, initially trading as high as 20x forward EBITDA and 40x forward P/E.  Same store sales growth slowed in 2016 and that premium multiple turned into a discount around when LimitedDownside posted his piece. 

This was around when I began buying the stock.  While my entry price has obviously been poor and I’ve been wrong for now, I don’t beat myself up about it too much.  At the time, Bojangles had been in existence for nearly 40 years and had just demonstrated its 26th consecutive quarter of SSS growth.  SSS growth was slowing and margins were historically high, but even with conservative assumptions of 1-2% future SSS growth, average margins, and company-guided 7-8% unit growth, the purchase price implied a high teens IRR with decades of runway.  I looked very smart shortly thereafter as the stock rallied to a high of $22 before reporting its 1Q17 earnings.  This was even after the company had reported large SSS declines for January and February in its 4Q16 earnings.

I sadly did not sell a share during this run-up which was unrelated to fundamentals as I simply believed the stock was getting closer to fair value.  The company has since posted 1-2% SSS declines for the first three quarters of 2017 and will likely do similar or worse numbers for the 4th quarter.  The market has punished the stock for this with it declining 45% from its highs in April as I write this.  Margins have shrunk predominantly due to the sales deleverage substantially hitting EBITDA and net income while the market multiples have also declined which is obviously a vicious combination.  I guess I learned my lesson on paying any sort of growth multiple (I generally stick closer to the deep value parts of the market).

What now?

The stock has muddled around the $12 context since mid-October and got a temporary pop after disappointing 3Q earnings due to the announcement of a $50mm share buyback authorization (~11% of the company at current prices).  I think it’s worth pointing out that the stock received no boost at all from the new tax plan coming together despite the fact I expect it to increase FCF by ~15%.

At the current price of $12.15, the stock is trading at 7.5x trailing EBITDA and 13.6x trailing EPS.  LTM EBITDA is $79mm (compared to 2016 EBITDA of $89mm) and Street consensus for 2018 and 2019 EBITDA is $68mm and $72mm, respectively.  To start, I think consensus is far too low.  I assume 1.5% SSS growth, flat contribution margins in 2018 and 70bps of improvement in 2019 and am coming out to $77mm and $86mm, respectively.  I think these are conservative assumptions as my contribution margins are still significantly lower than any other year going back to 2012.  Below are summary financials any me forecasts through 2019:

$mm

 

 

2012

2013

2014

2015

2016

2017E

2018E

2019E

                     

Total Revenues

 

        348.8

        375.2

        430.5

        488.2

        531.9

        539.4

        568.4

        593.2

EBITDA

   

          41.0

          59.8

          68.2

          77.9

          88.9

          73.4

          77.0

          85.5

Net Income

 

             7.7

          24.3

          26.1

          26.5

          37.7

          30.9

          38.5

          44.4

Capex

   

             8.0

             9.3

             7.5

          12.0

             9.7

          17.0

          10.5

          10.1

                     

System-wide Units

 

           538

           577

           622

           662

           716

           761

           796

           829

System-wide SSS

 

7.0%

2.5%

4.6%

4.1%

1.3%

-1.9%

1.5%

1.5%

                     

Co-Op Contribution Margin

16.8%

17.1%

17.9%

18.2%

18.8%

15.6%

15.6%

16.3%

 

At the current price and assuming most of FCF is used to buyback stock, you are paying 5.6x 2019 EBITDA and will be earning a FCF yield of 17%, on my assumptions.

What is being overlooked or underappreciated

To start, I think the market must be lower than my expectations (and possibly below the Street as well) otherwise the multiples above are far too cheap.  Thus my first opinion is that the market is underappreciating the resiliency of this brand.  Even the venerable McDonald’s had -1% SSS declines in 2014 (LSD traffic declines for 2013 and 2014 but partially offset by price increases) so I don’t think SSS declines of 1-2% in a single indicates the death of Bojangles as the market price seems to imply.

I think most would agree that New York based concepts generally receive a substantial premium in the market (see SHAK multiples) and as a corollary, concepts unfamiliar to New Yorkers can occasionally be discriminated against.  Bojangles began in Charlotte and truly has a cult-like following in the Carolinas (similar to Chick-fil-A in Georgia but Chick-fil-A has a much strong presence and brand recognition nationally).  Many of these units do more than $3mm in AUVs which is pretty spectacular outside of densely populated urban areas.  If the market truly thinks this brand has “run its course” I think it’s wildly mistaken, especially with respect to its units in the Carolinas.

Secondly, while its not totally unique to Bojangles, I think the market doesn’t appreciate the combination of franchised and company-owned concepts.  Franchise-only concepts trade at 15-20x EBITDA, while BOJA with nearly 60% of its units franchised, garners a mid-high single-digit multiple.  The capital efficiency and stability of a franchise model are obvious, but there is only so much white space for a good restaurant concept and the absolute dollars made per restaurant are much higher for company-owned so I think it’s the right business decision to own the majority of your core markets.

Somewhat combining the prior two points, I don’t think the downside protection of Bojangles is appreciated at this price.  Even if the expansion to “adjacent markets” and outside the Southeast is untenable (we’ll never see the 20x EBITDA multiple again), the core units are tried and true and aren’t going anywhere.  Unit growth may grind to a halt but the base of units doing over $2mm in AUV (system-wide average is currently $1.8mm) are very safe and stable.   The 433 (and growing) franchised units also provide stability against general cycles in the QSR category (food/labor inflation, etc.).

 

Lastly, I don’t think the risk asymmetry at the current price is appreciated.  While my points above illustrate why I think the downside is muted, I think the potential upside is tremendous.  The same vicious combination of shrinking margins and declining multiples reverses if there is any sort of meaningful SSS growth.  Applying the same unit economics the company demonstrated in 2015 (which was worse than 2016) on the 2019 expected units, the company generates of $100mm in EBITDA and $70mm in FCF.  At a 15x FCF multiple, this would be greater than a $30 stock.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Share buybacks
  • SSS growth
  • Margin improvement
    sort by    

    Description

    There is no shortage of restaurant write-ups on VIC (both long and short), but nonetheless, I think BOJA is the most compelling in the space at its current price (admittedly I might be biased as I’m from the Southeast).  I think it makes a lot of sense that value investors like restaurant concepts – they are easy to understand, easy to model, easy to assess as a businesses (unit economics), not subject to much technological disruption (people will still need food 50 and 100 years from now), and generally have very long runways for growth.  At the right price and with the right concept, they make for phenomenal long term investments. 

    LimitedDownside did a BOJA write-up in September 2017 which I would highly encourage anyone interested in this to read (to make it easier on myself, I won’t be repeating much of what he said on unit economics or some of the general stats on the businesses).  My thesis is generally the same (excellent, proven concept at an attractive price) but I want to fill everyone in on what has happened with the business since then and provide a few personal opinions on what I think the market is underappreciating.

    I began spending a lot of time on the QSR and fast casual restaurant industry in mid-2016, predominantly due to the dramatic decline in Chipotle’s stock and the daily coverage in the news.  While I had been a Bojangles customer for most of my life, this was when I noticed it was publicly traded (still majority owned and controlled by the PE firm Advent International).  And like LimitedDownside, I think busted IPOs can occasionally provide some compelling opportunities.

    For those unfamiliar, Bojangles is a Southeastern fried chicken LSR concept with a specialty or focus on breakfast (~40% of sales).  It’s most distinguished item which provides the primary moat or brand value is its made-from-scratch biscuits.  I personally love their chicken but the biscuits are their true “differentiator” relative to other fried chicken or breakfast concepts. It attempts (unsuccessfully in my opinion) to spin itself as more of a fast casual restaurant than a QSR as everything is made in plain sight and there are servers that bring you your food.  It doesn’t allow any of its restaurants to have a microwave.

    Why is the stock down so much?

    Starting from the beginning, the company IPO’ed in May 2015 at $19, rallied to nearly $30, and subsequently declined to the $14-16 range 12-18 months later.  Essentially, newer and trendier QSR/fast casual concepts such as Potbelly, Noodles, Zoe’s, and Shake Shack IPO’ed in the 2013-2015 time frame with tremendous success pushing the market multiples on the entire space (including Bojangles) to highly overvalued levels.  The air was slowly let out of this balloon starting in the second half of 2015 with multiples compressing across the industry.  Bojangles initially garnered a substantial premium, initially trading as high as 20x forward EBITDA and 40x forward P/E.  Same store sales growth slowed in 2016 and that premium multiple turned into a discount around when LimitedDownside posted his piece. 

    This was around when I began buying the stock.  While my entry price has obviously been poor and I’ve been wrong for now, I don’t beat myself up about it too much.  At the time, Bojangles had been in existence for nearly 40 years and had just demonstrated its 26th consecutive quarter of SSS growth.  SSS growth was slowing and margins were historically high, but even with conservative assumptions of 1-2% future SSS growth, average margins, and company-guided 7-8% unit growth, the purchase price implied a high teens IRR with decades of runway.  I looked very smart shortly thereafter as the stock rallied to a high of $22 before reporting its 1Q17 earnings.  This was even after the company had reported large SSS declines for January and February in its 4Q16 earnings.

    I sadly did not sell a share during this run-up which was unrelated to fundamentals as I simply believed the stock was getting closer to fair value.  The company has since posted 1-2% SSS declines for the first three quarters of 2017 and will likely do similar or worse numbers for the 4th quarter.  The market has punished the stock for this with it declining 45% from its highs in April as I write this.  Margins have shrunk predominantly due to the sales deleverage substantially hitting EBITDA and net income while the market multiples have also declined which is obviously a vicious combination.  I guess I learned my lesson on paying any sort of growth multiple (I generally stick closer to the deep value parts of the market).

    What now?

    The stock has muddled around the $12 context since mid-October and got a temporary pop after disappointing 3Q earnings due to the announcement of a $50mm share buyback authorization (~11% of the company at current prices).  I think it’s worth pointing out that the stock received no boost at all from the new tax plan coming together despite the fact I expect it to increase FCF by ~15%.

    At the current price of $12.15, the stock is trading at 7.5x trailing EBITDA and 13.6x trailing EPS.  LTM EBITDA is $79mm (compared to 2016 EBITDA of $89mm) and Street consensus for 2018 and 2019 EBITDA is $68mm and $72mm, respectively.  To start, I think consensus is far too low.  I assume 1.5% SSS growth, flat contribution margins in 2018 and 70bps of improvement in 2019 and am coming out to $77mm and $86mm, respectively.  I think these are conservative assumptions as my contribution margins are still significantly lower than any other year going back to 2012.  Below are summary financials any me forecasts through 2019:

    $mm

     

     

    2012

    2013

    2014

    2015

    2016

    2017E

    2018E

    2019E

                         

    Total Revenues

     

            348.8

            375.2

            430.5

            488.2

            531.9

            539.4

            568.4

            593.2

    EBITDA

       

              41.0

              59.8

              68.2

              77.9

              88.9

              73.4

              77.0

              85.5

    Net Income

     

                 7.7

              24.3

              26.1

              26.5

              37.7

              30.9

              38.5

              44.4

    Capex

       

                 8.0

                 9.3

                 7.5

              12.0

                 9.7

              17.0

              10.5

              10.1

                         

    System-wide Units

     

               538

               577

               622

               662

               716

               761

               796

               829

    System-wide SSS

     

    7.0%

    2.5%

    4.6%

    4.1%

    1.3%

    -1.9%

    1.5%

    1.5%

                         

    Co-Op Contribution Margin

    16.8%

    17.1%

    17.9%

    18.2%

    18.8%

    15.6%

    15.6%

    16.3%

     

    At the current price and assuming most of FCF is used to buyback stock, you are paying 5.6x 2019 EBITDA and will be earning a FCF yield of 17%, on my assumptions.

    What is being overlooked or underappreciated

    To start, I think the market must be lower than my expectations (and possibly below the Street as well) otherwise the multiples above are far too cheap.  Thus my first opinion is that the market is underappreciating the resiliency of this brand.  Even the venerable McDonald’s had -1% SSS declines in 2014 (LSD traffic declines for 2013 and 2014 but partially offset by price increases) so I don’t think SSS declines of 1-2% in a single indicates the death of Bojangles as the market price seems to imply.

    I think most would agree that New York based concepts generally receive a substantial premium in the market (see SHAK multiples) and as a corollary, concepts unfamiliar to New Yorkers can occasionally be discriminated against.  Bojangles began in Charlotte and truly has a cult-like following in the Carolinas (similar to Chick-fil-A in Georgia but Chick-fil-A has a much strong presence and brand recognition nationally).  Many of these units do more than $3mm in AUVs which is pretty spectacular outside of densely populated urban areas.  If the market truly thinks this brand has “run its course” I think it’s wildly mistaken, especially with respect to its units in the Carolinas.

    Secondly, while its not totally unique to Bojangles, I think the market doesn’t appreciate the combination of franchised and company-owned concepts.  Franchise-only concepts trade at 15-20x EBITDA, while BOJA with nearly 60% of its units franchised, garners a mid-high single-digit multiple.  The capital efficiency and stability of a franchise model are obvious, but there is only so much white space for a good restaurant concept and the absolute dollars made per restaurant are much higher for company-owned so I think it’s the right business decision to own the majority of your core markets.

    Somewhat combining the prior two points, I don’t think the downside protection of Bojangles is appreciated at this price.  Even if the expansion to “adjacent markets” and outside the Southeast is untenable (we’ll never see the 20x EBITDA multiple again), the core units are tried and true and aren’t going anywhere.  Unit growth may grind to a halt but the base of units doing over $2mm in AUV (system-wide average is currently $1.8mm) are very safe and stable.   The 433 (and growing) franchised units also provide stability against general cycles in the QSR category (food/labor inflation, etc.).

     

    Lastly, I don’t think the risk asymmetry at the current price is appreciated.  While my points above illustrate why I think the downside is muted, I think the potential upside is tremendous.  The same vicious combination of shrinking margins and declining multiples reverses if there is any sort of meaningful SSS growth.  Applying the same unit economics the company demonstrated in 2015 (which was worse than 2016) on the 2019 expected units, the company generates of $100mm in EBITDA and $70mm in FCF.  At a 15x FCF multiple, this would be greater than a $30 stock.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    Subjecttiming
    Entry01/11/2018 10:16 AM
    Memberbluewater12

    abcd1234- 

    Thanks for flagging this idea. There’s a lot to like – busted IPO, dominant regional concept, some cyclical and company specific issues, optically cheap, wrong comp set thanks to more valuable franchise stream, buying back stock, etc. – and there’s a huge opportunity in timing an earnings inflection. It’s a great setup, especially if you get the timing right. You have numbers above the Street and think consensus is far too low, so I went reading looking for this potential light at the end of the tunnel (re SSS inflection or margin inflection). 

    What do you make of their ICR commentary on 1/9/18? Management seems like straight shooters and investing for the long-term, but it sounds like things get worse before they get better…

    • Re competitive discounting threats: “"But some of the things that we did learn is that the discounting, that's even more heavy today than it was even six weeks ago."
    • Re the success of BOJA promotional activity in 4Q17: “Now, as far as the discounting, we got involved with that in the September-October timeframe…and built upon that with our 40th anniversary last year, and did what we call the Welcome Home campaign in Charlotte. And we did a lot of the discounting…No doubt about it, we drove transactions like crazy….So, while we drove traffic, no doubt about it, it definitely hurt checks, hurt sales, and hurt margins from that perspective. So after that, starting in the end of 2017, we hired three different companies for, one to do a consumer research, one to do a marketing spend, and then one from a pricing standpoint. All that will be to us sometime the end of January or through February when we get all of that data.”
    • Re competition: “While we've taken some from other companies, McDonald's has been the 800-pound gorilla, they outspend us every day.”
    • Re margin outlook for 2018: “Yeah, so, when you look at fiscal 2017, our restaurant contribution margins were negatively impacted and that basically was from three major areas. One is our negative comp sales which that was impacted obviously by the discounting. Number two is labor pressures both from an inflationary perspective and in hours utilized. And then number three is, is from our new unit performance. And when you look into 2018, we still see labor inflation as being above normal and that's going to continue to be something we're going to have to face. In addition, we have lower pricing than normal going into 2018 and that's going to impact us some… we're sort of seeing about a 2% to 3% commodity inflation for fiscal 2018…In addition, we've seen our turnover increase, and the result of turnover increasing has made us less efficient in our restaurants. And I think it particularly probably impacts us more than some of our competitors, because we actually cook in our restaurants and we make things from scratch.”

    To me it seemed like he was lowering the bar for 4Q17 and 2018 in a big way. Meanwhile traffic was down -5.3% in 3Q17, -6.5% in 2Q17, -5.4 in 1Q17, (and slightly negative transactions in 2016 after years of pushing pricing). Oof. The Street is largely flat SSS in 2018 with restaurant margins up vs 2H17. Just based on this ICR commentary both of those seem wrong and we could see a big miss on 2018 EPS guide (maybe 60-65c)? If that happens, this could be a sub $10 stock. 

    I know you are investing long-term here, but would love any thoughts on what you are doing/watching for re confidence in timing an earnings inflection. Thank you. 


    SubjectRe: timing
    Entry01/11/2018 11:52 AM
    Memberabcd1234

    Thanks for the comments.  To start, I'm not a big fan of this management team.  I think Advent needs to step up and either blowout their stake to a new sponsor or revamp the management team and press forward with a more aggressive focus.

    I'd also note that the stock responded to the ICR comments you mentioned - it was comfortably north of $13 (a nice rebound from what I believe was some tax loss selling at the end of 2017) and traded down to the low $12s when I posted this after ICR.  

    The negative things he mentioned are totally excuses in my opinion.  Your first three bullets are mostly on discounting and  competition/advertising and they have been using this excuse all year, nothing new.  There's no reason discounting should benefit MCD or anyone else more than BOJA and no reason BOJA should be losing share.  If food prices are lower which is causing the discounting, BOJA should be able to do it too.  On advertising, while yes BOJA is a small company, it still has 750 units in essentially 5 states.  It actually spends a lot of money on advertising in those areas so I don't think that's a fair excuse either.  Maybe their advertising isn't very effective (which is probably true) but that is their problem.  My point is that I think these are very fixable issues.  I think Clifton is deflecting blame and not admitting some of his mistakes but I think they are at least making some of the right decisions for 2018.

    My major focus for BOJA is traffic and comps.  He talked about the 3 things that hurt them in 2017 but the traffic/comps were at least 90% of it.  I agree that the traffic trends in 2017 are troubling but that is really the bet I'm make here.  I think that was a swing in the business cycle of this restaurant but I don't think it was secular or indicates a "busted brand."  Restaurants seem to frequently make the mistake of trying to combat traffic declines with price increases and that never works.  BOJA made that mistake and has gone back to attempting to offer good value.   

    So I guess we'll see.  I think we see some traffic growth this year which will improve comps (without price) and will allow margins to remain the same as the average 2017.  I think slowing the company-owned growth was needed because they need to focus more on the stores they already own.  I can't possibly get to 60-65c of EPS without large SSS declines.  If I keep sales flat, I have to hit restaurant margins by 400bps to get to that context which would be extremely out of whack with historical margins.

    And separately, most analysts blamed poor industry performance on food price deflation over the past couple years (leads to more discounting/competition and people eating at home more than eating out).  This can't cut both ways.  Either the analysts are wrong about this cause or modest food price inflation should be a good thing.      


    SubjectRe: how are you 40% above street for upcoming q
    Entry01/12/2018 10:32 AM
    Memberabcd1234

    I'm at $18.5mm of EBITDA for 4Q (granted, this was from before ICR so I might want to lower margins slightly).  They did $54.8mm through the first 3 quarters (hence the 73.4mm total).  To be clear, I'm not recomending this because I'm expecting a 4Q beat.  I don't focus my time on being extremely granular on the quarters and if I'm 1-2mm off for a given qtr, depending on the cause, it doesn't frequently change my view on the value of the businesses for the next 10 years.  If I thought the Street was way too high for the quarter or for the next few years I might size my position smaller even if I thought it was really cheap but I like this stock because of the cash it will generate in the future relative to what I'm paying today.


    SubjectShare loss
    Entry01/13/2018 09:46 AM
    Memberrhubarb

    Given the recent MSD decline in traffic it appears they have been losing share.  Where is this going?  Is chick-fil-a expanding in their markets?


    SubjectRe: Share loss
    Entry01/16/2018 10:45 AM
    Memberabcd1234

    Out of the publicly traded comps, it's really only the large national chains (MCD, WEN, etc.) that have been showing positive SSS during this period.  BOJA always highlights MCD as being their most prominant competitor.  They generally blame highly aggressive discounting by the larger chains and lower grocery store prices as the causes of their share loss.  I think BOJA made a strategy mistake by choosing to compete less on price for most of last year.  It also doesn't help that they are unable to mandate discount deals for their franchisees (but their franchisees have been performing far better than corporate stores lately).

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