|Shares Out. (in M):||15||P/E||0||0|
|Market Cap (in $M):||35||P/FCF||0||0|
|Net Debt (in $M):||43||EBIT||0||0|
Suitable for small funds or PAs.
Bravo Brio Restaurant Group (BBRG) was presented by SlackTide on March 10, 2017, so this will be brief. I don’t love the idea of re-submissions only eight months later, so I won’t count this toward my annual quota. But I think there are some nuances to point out, and that it’s timely to revisit this microcap. For this write-up, I will not address the quasi-activism by TAC Capital, nor the company's February 2017 announcement that it would "explore alternatives to enhance shareholder value" as I have never viewed either of them as material considerations.
Since BBRG was posted on VIC in March, the company has reported three quarters of results. While SSS remain weak (down 2.9% YTD), EBITDA has increased by 24% YTD. The thesis is that a baseline for EBITDA has been set, and with the stock down 39% this year, it is too cheap at 3.7x LTM EBITDA and 5x FCFE.
BBRG pursued an aggressive/foolish leasing strategy during its growth phase, whereby it accepted lease incentives in the form of large upfront cash payments. So BBRG signed many leases where the trade-off for an upfront cash rebate were payments over the life of the lease that are above the industry average, as a % of sales. Essentially, they pulled-forward cash out of their lease arrangements, as a form of financing. The cash proceeds were then re-invested into new locations, most of which are in malls. The abnormally high ongoing lease expense has been exacerbated by the company’s decline in sales. Further, this negative working capital cycle created by this strategy is now unwinding, as the company is no longer signing new leases and thus not receiving upfront cash. Finally, even accounting for the cash rebates, the company signed several leases that were too expensive for their revenue base over the last few years. It was a bad combination of aggressive financing arrangements and just plain bad lease deals. Notably, the CEO who led this charge left the company at the end of 2015.
As the accounting works, the amortization of these lease incentives is deducted from the Occupany expense on income statement, however it remains a cash outflow – this is now inflating the company’s reported “income statement” EBITDA. I have made adjustments to account for this lease incentive amortization with all of my references to EBITDA so that it reflects the true cash economics of the business. I felt this was fully understood and discounted at under $4 per share, but apparently not.
With this piper now being paid, BBRG shares have become unusually cheap to this Adjusted EBITDA. Several years of declining SSS and EBITDA are the culprit, however EBITDA has turned demonstrably of late. LTM EBITDA is now 16% ahead of 2016; YTD EBITDA is up 24% versus 2016; and 2Q + 3Q 2017 EBITDA is double what it was for the same quarters of 2016. Despite revenue declines, I believe there is more margin improvement to be had. The table below lays out the numbers, in comparison to the three best comparable companies in my judgement. They’re not perfect, but they illustrate the delta in margins.
Note that I adjust EBITDA for the “lease incentive” portion that is amortized (and deducted) from the expense item on the income statement. Therefore my Adjusted EBITDA is lower than what would appear in company screens.
As shown above, BBRG’s margins are improving but remain too low:
Food costs are line with its peers, and this is good news. While they are certainly price-takers, they’re not in purgatory with regard to this line time
Labor/Operating/G&A expense has improved some, but I believe there is more to follow. It remains too high
They have several bad leases and cash flow-negative stores from which they are exiting. So far, they have exited 5 stores this year, and I expect 5 or so additional closures next year. Finally, I believe there are selective opportunities for price concessions where leases that are up for renewal imminently (say 1-2 years out). Many of the malls they are in are even more price-takers than is BBRG
I think item 2 above will continue to show modest improvement. And while there is not much they can do about most of their leases (they are stuck with above-market rent in most places), there will be marginal improvement there as a % of revenue. For comparison’s sake, below is comp table – I added KONA for another perspective, namely because it is also a microcap with debt. And for comic relief.
There is not a lot to like about this group, and BBRG in particular. BBRG has suffered a horrendous multi-year slide in SSS (-5.2%, -2.8%, -5.0%, -2.8% from 2016 back to 2013), and one must go back to 2012 to hit flat/positive comp sales. In addition, the company recently required a waiver to their bank agreement, after threatening to trip a lease-adjusted leverage ratio – the lease capitalization pushed over what was a tight convenant, and it seems clear the banks want out of this one. One of the concessions was to move up the maturity from November 2019 to December 1, 2018. I have low concern over the company’s ability to work out a new financing arrangement, likely with cash flow sweeps, which I expect in weeks to two months.
Next, the CFO departed for personal reasons in September (I am satisfied with what I have been told regarding this). Finally, one of the few analysts still following the company, from Piper Jaffray, downgraded the stock upon the CFO announcement. To the positive, the company filled the role within a month, luring back a BBRG veteran (ten years as VP-Finance / Accounting) who had recently left the company.
From the announcement of the beginning of the bank waiver discussions until now, the stock has been cut in half. In between, they have reported two quarters that have reinforced my thesis. I project that BBRG can achieve a 6% Adjusted EBITDA margin run-rate, on a sales base of $380M (pro forma for restaurant closures) by mid-2018. This generates EBITDA of $23M and free cash flow to the equity of $9M, representing 3.1x EBITDA and a 25% FCFE yield. This assumes an annual capex budget of $8M, which includes maintenance; continuation of their ongoing refurbishment program; and zero new stores. This also assumes continued negative 2-3% comps for another year, followed by a leveling-off toward flat. Remember, some negative-margin stores have been cut, with those benefits to be seen over coming quarters. In addition, there is still room for expense improvement for the better locations, and the company has shown modest gains there over the last two quarters. So coming from such a low base, there is still room to push margins upward. I think the shares are too cheap to ignore.
-- Continued SSS declines
-- Bank maturity on December 1, 2018
-- Bank Debt Refinancing
|Entry||11/24/2017 11:23 AM|
I have been trying to understand why the comps have been trending negative for 5 years. One thing that I have noticed is the rise of the quasi-local chain. For example, in Ohio, I have noticed restaurants such as The Rail and Burntwood Tavern near several of their locations with much better Yelp ratings. Antecdotally these restaurants seem to be much busier than the old national chains. Do you have any thoughts on whether this dynamic is impacting Bravo and Brio and if it is a permanent secular trend? I've also wondered if this dynamic is skewing Knapp Track and Black Box.
|Entry||11/26/2017 12:21 PM|
it's a combination of reasons. lots of bad locations in bad malls, suffering from traffic declines. this doesn't fully explain it, but you're beginning to see more vibrant concepts like BJ's suffer, as well as the gold standard CAKE (which has had negative traffic trends for a long time, they've managed to offset by pushing price - that's no longer possible).
the brands are also a little tired. it has a pretty old demographic, and they've only recently begun to try to gently transition to a younger crowd. this is tricky, as older folks remain the core customer and they don't like the change, but it must be done. the Coastal bar remodels are one way, small menu changes are another. it's not easy. so i think the dynamic you point out will be a persistent headwind.
as far as pure Italian comps, Olive Garden is tough as they have an enormous advertising budget. Maggiano's (Brinker) hung in there until 2015 when it began comping down and so far this year that slide is accelerating. Carrabba's (Bloomin' Brands) has been sliding for years, and that is also accelerating.
Romano's Macaroni Grill has changed hands many times over the years and just filed BK -- locations have gone from 153 at the end of 2014 to 93 company-owned now. AUV is $1.9M (versus $2.9 for Bravo and $3.9M for Brio), and their LTM EBITDA for August 2017 was minus $12M. Romano's projects a restaurant-level operating profit of 10%, after many store closures and a halt in SSS declines -- right now, their restaurant-level operating profit is 1%.
i bring up Romano's because BBRG has an LTM restaurant-level operating profit of 11%, and it has not yet benefited from rolling off of bad leases and other closures. and it has only begun to see other margin improvement. i think people will be surprised to see how healthy and profitable the core locations are, even now.
so to summarize, it's worrisome. and it's tiny, no one cares, there's not even enough votes here to even rate the idea. i don't blame anyone for that. the 3Q comps were bad, even after adjusting for hurricanes. 1Q and 2Q had been ok, for them anyway. i think it's priced for doom, as exemplified by the tags here "looks like a zero" and "rainforest cafe" -- i have the other side. i like the price and i think it gets re-financed shortly.
|Entry||01/30/2018 01:27 PM|
Robert Earl (Planet Hollywood) filed, I was chuckling at the irony of the rainforest cafe tag ... who knows, there's been an activist in this one previously, that surely didn't help last time.
I realize it's tiny, no one cares and I'm talking to myself. I just thought I'd post.
|Entry||01/30/2018 04:37 PM|
I follow it. I hate management as I believe that they are inept. It amazed me when the old CEO got a better job to destroy another restaurant company.
|Subject||Re: Re: 13D|
|Entry||03/09/2018 09:36 AM|
company sold at $4.05, cash offer. done at 5.3x LTM EBITDA, no 4Q report out yet (i think it was decent, probably representing improved EBITDA).
i don't know if mgmt keeps their jobs, but they are the kind to entrench themselves while continuing in their quest to suck as much as possible. 76% return since initiation, but it is still theft. three 13Ds in the fold, stock traded heavy volume yesterday at the buyout level.