I know of one money manager who avoided restaurants like the plague, likening them to dinosaurs, which of course went extinct. Indeed, it's a rough business, subject to changing consumer tastes as well as challenging cost structures where labor and food costs reign supreme and margins can be thin.
The dynamics for publicly traded names have been changing dramatically the past several years. We've seen a multitude of initial public offerings (IPOs), many of which soared early on only to falter (Noodles & Co., (NDLS) , Potbelly Corp. (PBPB) , Zoe's Kitchen) or flatten or trade sideways to varying degrees (El Pollo Loco (LOCO) , Fiesta Restaurant Group (FRGI) , Del Taco Restaurants (TACO) , Bloomin' Brands (BLMN) , Chuy's Holdings (CHUY) , J Alexander (JAX) , Fogo de Chao). We've seen very successful stories such as Chipotle Mexican Grill (CMG) , Panera, Wingstop Inc. (WING) and Dunkin Brands (DNKN) , and there have been the moderately successful (Dave & Buster's Entertainment (PLAY) , Restaurant Brands International (QSR) ).
What we've seen most, however, have been acquisitions as the industry has bounced between IPO mode and consolidations. The list of acquired names is long, and includes Panera, Buffalo Wild Wings, Krispy Kreme, Del Frisco's, Famous Dave's, Fogo De Chao, Ruby Tuesday, Bob Evans, Sonic, Zoe's Kitchen, Bravo Brio, Bojangles, and most recently Habit Restaurants (HABT) .
That's a trend that I expect will continue. I've sought and owned names in the past that I believed to be ripe for a deal, among them Krispy Kreme, Zoe's, Ruby Tuesday and Bob Evans. I've learned a great deal in that regard; the most obvious lesson is not to expect premium prices, even where there is substantial real estate (Ruby Tuesday). A struggling brand will not command what you might expect.
That goes for busted IPOs as well (such as Zoe's), which seemed like a brilliant concept but could never quite get to profitability. Zoe's eventually was acquired for $12.75 a share, under the $15 IPO price four years after debuting. By contrast, Bob Evans was a winner; although a second-tier restaurant brand, it was profitable and was also a solid brand name for the packaged foods business it went all in on. It also owned solid real estate and lots of it. In addition, the company had an activist investor involved who pushed the company on and off for years.
I wonder what will happen with the Steak 'n Shake brand of Biglari Holdings (BH) , which Biglari salvaged and seemingly straightened out several years ago only to see it fall on hard times more recently. Last year BH took a radical step "temporarily" closing 111 locations and searching for new operator-owners, who could buy in for $10,000 but would need to split the profits evenly with the parent company. In addition, the new owners would only be permitted to own just one location.
As of late November, it was reported that 101 Steak 'n Shake locations were still closed. Seems like a crazy solution, but we'll see if it works out for Biglari, which has seen its shares fall 16% over the past year. In addition, BH has been shedding its Cracker Barrel Old Country Store (CBRL) stake; at one point it owned 20% of the company, but as of late October owned 8.3%
I am on the hunt for which companies might be next in terms of acquisition candidates and will reveal some ideas soon.
