SAUC - Diversified Restaurant Holdings

[valuedontlie]

This is the other side of the Bagger Dave's spinoff (RemainCo). After running from low $1 range to $4, stock has rolled back to $2.45 or so.

 

This is the largest franchisee of BWLD restaurants with 64 locations (11% of total BWLD). Bagger Dave's was spun off in Dec 2016. Comps have been tough lately: down 0.3% in 1Q17 and down 3% in 2016. This is roughly in-line with BWLD overall. Debt is also high at $114m net (5.1x leverage).

 

So why own it?

 

The company generates a lot of cash and intends to aggressively pay down debt. Yes, a lovely deleveraging story from a crappy restaurant with declining SSS. Management's goal: get to 3x leverage by 2018.

 

The math is pretty simple here. Guidance calls for $23.5-26.5m in 2017 EBITDA (optimistic) and $4-6m in capex (down from $12.5m in 2016). EBITDA of $23.5m less $4.8m interest less $5m in capex = $13.7m in free cash to pay down debt (no cash taxes for several years due to NOLs). Market cap is currently $65m so 4.8x FCF multiple. This is a bit misleading as $5m in capex is unsustainable. They'll also need to grow EBITDA to hit the goal. Let's say they don't and EBITDA stays at $25m or so (opened 1 new location in June 2017): less $4.5m in interest leaves $20.5m before capex. So even if capex jumps to $8-10m in 2018 they can pay down another $11-13m in debt. This would have them at $91m in net debt by YE2018 (3.6x leverage). Even if FCF remained near $10m it'd be a 15% FCF yield at current price.

 

At 7.5x (where this has historically traded and in-line with TAST multiple), this would be a $3.60 stock for 47% upside or so (still sub 10x FCF multiple). They view Carrol's (TAST) as the model they are pursuing so eventually additional franchise acquisitions will come into the picture. Feel free to view that as a positive or negative. A similar deal to QSR/TAST would be pretty interesting for this name and the likelihood probably goes up with Marcato's win at BWLD.

[atbed]

This is the other side of the Bagger Dave's spinoff (RemainCo). After running from low $1 range to $4, stock has rolled back to $2.45 or so.

 

This is the largest franchisee of BWLD restaurants with 64 locations (11% of total BWLD). Bagger Dave's was spun off in Dec 2016. Comps have been tough lately: down 0.3% in 1Q17 and down 3% in 2016. This is roughly in-line with BWLD overall. Debt is also high at $114m net (5.1x leverage).

 

So why own it?

 

The company generates a lot of cash and intends to aggressively pay down debt. Yes, a lovely deleveraging story from a crappy restaurant with declining SSS. Management's goal: get to 3x leverage by 2018.

 

The math is pretty simple here. Guidance calls for $23.5-26.5m in 2017 EBITDA (optimistic) and $4-6m in capex (down from $12.5m in 2016). EBITDA of $23.5m less $4.8m interest less $5m in capex = $13.7m in free cash to pay down debt (no cash taxes for several years due to NOLs). Market cap is currently $65m so 4.8x FCF multiple. This is a bit misleading as $5m in capex is unsustainable. They'll also need to grow EBITDA to hit the goal. Let's say they don't and EBITDA stays at $25m or so (opened 1 new location in June 2017): less $4.5m in interest leaves $20.5m before capex. So even if capex jumps to $8-10m in 2018 they can pay down another $11-13m in debt. This would have them at $91m in net debt by YE2018 (3.6x leverage). Even if FCF remained near $10m it'd be a 15% FCF yield at current price.

 

At 7.5x (where this has historically traded and in-line with TAST multiple), this would be a $3.60 stock for 47% upside or so (still sub 10x FCF multiple). They view Carrol's (TAST) as the model they are pursuing so eventually additional franchise acquisitions will come into the picture. Feel free to view that as a positive or negative. A similar deal to QSR/TAST would be pretty interesting for this name and the likelihood probably goes up with Marcato's win at BWLD.

 

Interesting, how many units do you think they can take down per year?

[valuedontlie]

atbed --

 

I don't see them adding leverage to acquire additional units over the next 18-24 months as they chip away at the debt load.

 

Alternatively, I would like to see them engage BWLD in a transaction similar to QSR/TAST a few years ago -- BWLD could contribute X locations to SAUC in exchange for a significant equity stake in the company and possibly a right of first refusal on marketed locations. SAUC is already the largest franchisee and a good operator (compare SAUC margins burdened with franchise fees to BWLD margins). This structure would immediately reduce leverage as well. No idea the likelihood of this but I know SAUC is aware of QSR/TAST deal and open to it.

[atbed]

atbed --

 

I don't see them adding leverage to acquire additional units over the next 18-24 months as they chip away at the debt load.

 

Alternatively, I would like to see them engage BWLD in a transaction similar to QSR/TAST a few years ago -- BWLD could contribute X locations to SAUC in exchange for a significant equity stake in the company and possibly a right of first refusal on marketed locations. SAUC is already the largest franchisee and a good operator (compare SAUC margins burdened with franchise fees to BWLD margins). This structure would immediately reduce leverage as well. No idea the likelihood of this but I know SAUC is aware of QSR/TAST deal and open to it.

 

A QSR/TAST type deal is interesting and could certainly give them the FCF to take down other units or build new units. Any thoughts on on current management? It seems Ansley played a big role in the past. Not saying performance will go down, or that it can't improve from here. But Ansley's leaving could be a risk factor

 

Jeez required debt payments are steep...

 

"Payments of principal are based upon a 12-year straight-line amortization schedule, with monthly principal payments totaling $833,333 on the June 2015 Term and $126,385 on the DF Term Loan, plus accrued interest."

[DTEJD1997]

Hey all:

 

Anybody watching this one?  The price seems to have backed off a bit on mildly disappointing earnings.  The price of chicken wings is silly high.

 

Looks like they might have about $20MM in cash flow to pay down debt in the upcoming 12 months.  They have a TON of debt, but will knock a chunk of it out if they can indeed pay down around $20MM.

 

Do that for ANOTHER year, grow sales & cash flow modestly, and there is an argument to be made that this is a cheap stock.

 

Any input?

[valuedontlie]

Hey all:

 

Anybody watching this one?  The price seems to have backed off a bit on mildly disappointing earnings.  The price of chicken wings is silly high.

 

Looks like they might have about $20MM in cash flow to pay down debt in the upcoming 12 months.  They have a TON of debt, but will knock a chunk of it out if they can indeed pay down around $20MM.

 

Do that for ANOTHER year, grow sales & cash flow modestly, and there is an argument to be made that this is a cheap stock.

 

Any input?

 

These guys are walking a tightrope in a sense that they are levered and facing headwinds yet still generating a lot of underlying cash flow. If they manage to chip away at the debt over the next 18 months or so this should work out well. If headwinds increase and SSS fall further, things could get ugly. It's a classic deleveraging play where decreases in debt should accrue to equity. I own this name but am watching closely.

[DTEJD1997]

Hey all:

 

My confidence in this turning around is quite a bit lower after reading the SHORT case on Wingstop over at VIC.

 

It seems crazy that wing prices are now higher than chicken breast, and are near all time highs.  Obviously, this is hurting all "wing" places.  Further, there are increases in minimum wage, insurance, utilities & so on.  None of this price inflation appears to be abating in the near future.

 

Further, these guys just don't make a lot of money...and they borrowed a TON of money to get/build out their restaurant base.  EV/EBIDTA is about 9.  There are some restaurant companies with NO  DEBT trading at a much lower ratio...ones that are profitable and much better run.  Heck, some of their better run competitors even pay a dividend!

 

In the end, I think too many things have to go right.  Even assuming that they can put $20MM of their cash flow this year towards debt reduction (and that might be a tad optimistic), they will still have too much financial leverage.  Even if things got a bit better next year, and they paid down ANOTHER $25MM of debt, they would still have a lot of leverage.

 

I guess this one will stay on the watch list, but at $2.20, the risk/reward ratio still looks a bit off.

[DTEJD1997]

Hey all:

 

Lots of exciting developments in the market the last 48 hours.  Almost overlooked what happened here.

 

Earnings were mildly disappointing, a loss of $.02/share.  Revenue was down almost 6% though!

 

They lost a bit of sales due to the hurricane.

 

They continue to have problems with various costs, citing labor being the primary one.

 

I don't think they will be able to pay down debt quite like what they originally thought.  I don't think they will come anywhere CLOSE to paying down $20MM of debt this year.

 

One thing that really scared me a lot was that management was talking about delivery of chicken wings and "right sizing" their buy one, get one free (BOGO) offerings.  In my experience, management gets on the delivery bandwagon...wanting to appear "hip" and "down with the interwebs".  I take that as management's tank of ideas is running on fumes.

 

Then you've got the problems with the NFL.  Papa John's was complaining bitterly about how the NFL has mishandled player protests and alienated their fans.  If Papa John's has a problem with this, SAUC most definitely does also.

 

One interesting thing is that management has engaged Duff & Phelps as financial advisor.  Maybe preparing for a sale?  How would they get a premium?

 

I see a bumpy road ahead for these dudes.

[valuedontlie]

In my mind, the "strategic alternatives" announcement screams things are not alright...

 

They have now cut EBITDA guidance several quarters in a row and I still have a hard time seeing how they hit the full year mark. Sales guidance of $166-168m would mean 4-9% revenue growth in Q4!

 

Leverage is going up, cash flow coming down, headwinds accelerating (negative comps, wage pressure, wing inflation, etc.). The ship is taking on water. I view the strategic alternatives as them crying out for additional capital or restructuring. There is a possibility these guys could be toast.

[DTEJD1997]

Hey all:

 

Much to my surprise I learned the Winter Olympics are still going on! (2.21.18)  I thought they ended weeks ago...Several other people also had no idea that they were even going on.

 

I wonder if SAUC has a week quarter, the lack of viewership of the Olympics and bad weather in much of the USA will get the blame.

 

Part of the reason that I have no idea what is going on with the Olympics is that I no longer have broadcast TV.  I will sometimes listen to broadcast radio...but they have not even mentioned anything about it.

 

Another thing I was shocked at was that Michigan's minimum wage is now $9.25/hour!  Not that I hire any minimum wage workers (now), but that has got to be hurting a bunch of business, especially restaurants.

 

I think a lot of marginal restaurant operators are going to have a hard time going forward...SAUC included.

[Spekulatius]

Hey all:

 

I wonder if SAUC has a week quarter, the lack of viewership of the Olympics and bad weather in much of the USA will get the blame.

 

Part of the reason that I have no idea what is going on with the Olympics is that I no longer have broadcast TV.  I will sometimes listen to broadcast radio...but they have not even mentioned anything about it.

 

So chicken wing consumption is correlated with sports events? I thought a lot of women watch the Winter Olympics. I do believe that you are onto something with the lower viewership for the Olympics and cord cutting.

[DTEJD1997]

Hey all:

 

I wonder if SAUC has a week quarter, the lack of viewership of the Olympics and bad weather in much of the USA will get the blame.

 

Part of the reason that I have no idea what is going on with the Olympics is that I no longer have broadcast TV.  I will sometimes listen to broadcast radio...but they have not even mentioned anything about it.

 

So chicken wing consumption is correlated with sports events? I thought a lot of women watch the Winter Olympics. I do believe that you are onto something with the lower viewership for the Olympics and cord cutting.

 

Chicken wing/beer consumption is most definitely tied to watching sports on TV.  Why do you think that these places have 50-100 TV's?  If I remember correctly, SAUC has talked about the World Series and the teams playing, and how it affected some of SAUC's markets. The effect was that fans liked/disliked who was in contention, who was playing, how many games were played, and so on.

 

I know people that eat chicken wings/beer...I can't think of ANYBODY I know at this point in life that watches/follows/interested in the Winter Olympics.

 

I have read a few stories now about how much lower rating for the Olympics are in the USA.

 

I just think it will be interesting to see if SAUC has poor results for the quarter of the Olympics and if so, do the Olympics get blamed.  Will be interesting to see  if that happens for other related restaurants also.

[valuedontlie]

any impact from the olympics would be felt during Q1 which would be reported in May (quite some time from now) and would probably be less meaningful than super bowl viewership (which was also down)...

 

more important will be the sudden decline in chicken wing prices... will be curious to see how that impacts 2018...

[DooDiligence]

Hey all:

 

I wonder if SAUC has a week quarter, the lack of viewership of the Olympics and bad weather in much of the USA will get the blame.

 

Part of the reason that I have no idea what is going on with the Olympics is that I no longer have broadcast TV.  I will sometimes listen to broadcast radio...but they have not even mentioned anything about it.

 

So chicken wing consumption is correlated with sports events? I thought a lot of women watch the Winter Olympics. I do believe that you are onto something with the lower viewership for the Olympics and cord cutting.

 

Chicken wing/beer consumption is most definitely tied to watching sports on TV.  Why do you think that these places have 50-100 TV's?  If I remember correctly, SAUC has talked about the World Series and the teams playing, and how it affected some of SAUC's markets. The effect was that fans liked/disliked who was in contention, who was playing, how many games were played, and so on.

 

I know people that eat chicken wings/beer...I can't think of ANYBODY I know at this point in life that watches/follows/interested in the Winter Olympics.

 

I have read a few stories now about how much lower rating for the Olympics are in the USA.

 

I just think it will be interesting to see if SAUC has poor results for the quarter of the Olympics and if so, do the Olympics get blamed.  Will be interesting to see  if that happens for other related restaurants also.

 

Maybe ratings would improve if they'd replace curling & the biathlon with Swedish massage & Jello wrestling?

[DTEJD1997]

Hey all:

 

SAUC came out with earnings today.

 

At first glance, it appears to be a "train wreck".

 

They posted a loss of $.74/share.  To be fair, a lot of this was due to write down of tax loss credits.

 

The alarming metric (to me) was that SSS was down 6.8%!!!!

 

These guys need SSS to go UP not DOWN!

 

Total debt was reduced by about $7mm from $120mm to $113mm.  They also got a waiver from their lenders until the end of 2019.

 

Overhead was down a bit.

 

Bone in chicken prices are still at/near highs.

 

Management seems to be ineffectual.

 

SAUC last traded around $1.44/share.  They are probably going to have to consider doing a reverse split...

 

Unless something changes for the better, I just don't see how these guys are going to make it long term.

 

 

[valuedontlie]

These guys need to raise capital... If this thing was 3.5x levered as opposed to 5.5x I'd be all over it, headwinds and all... But at this level, there's a decent chance this is a zero...

[DTEJD1997]

These guys need to raise capital... If this thing was 3.5x levered as opposed to 5.5x I'd be all over it, headwinds and all... But at this level, there's a decent chance this is a zero...

 

If they are going to raise capital...they are going to be doing at one of the WORST possible times for existing shareholders.

 

Nothing like floating shares at a 52 week LOW. 

 

Perhaps management could help raise margins by forfeiting 2/3 of their salaries and benefits?  Just think of what a message that would send! "We f'd up, now we are going to share the pain of shareholders."

 

That could EASILY add $1MM to the bottom line if JUST Mr. Ansley, Burke, Knight & Curtis did that.  Crazy thing is, even after a 2/3 cut, these guys would not be anywhere near going hungry!

 

What do you want to be that will happen?

[valuedontlie]

Raising capital at inopportune times is what stressed/distressed companies do... Industry headwinds + high leverage mean they either need to sell assets or raise equity (or both)... Given Ansley owns most the company, it'd be a shocker if they raise equity here...

 

So management will likely either 1) sell some locations to raise cash or (even more likely) 2) attempt to ride out the storm and hope the industry/business turns before the debt consumes them!

[DTEJD1997]

Hey all:

 

Anybody still following this?

 

They posted earnings of $.01/share.

 

Unfortunately, SSS are down BIGLY, something like 8% or 9%.

 

About 90% of their cash flow, was used to pay down debt...this amounted to just under $3mm.  Total net debt outstanding is something like $106mm.

 

Even at 90% of cash flow going to debt reduction...these guys are YEARS away from getting that knocked down significantly.  They will run out of time before they run out of debt.  That is, they are going to have to spend on existing unit upkeep...Maybe not now, not next year, but certainly in 3-5 years or so.  At the current rate of debt paydown, they will have $50mm of debt 3 year from now!

 

They got some price relief on chicken wings...so things were not a total trainwreck...

 

They also got some leeway on their 2019 debt from the banks...

 

The end result is that they HAVE to get SSS up.  They have to start posting some good earnings...and they have to accelerate the debt paydown.

 

 

Unless things get MUCH better quick, I don't see how they are going to make it?

[Foreign Tuffett]

Their debt load looms large:

 

https://seekingalpha.com/news/3372034-diversified-restaurant-holdings-prices-equity-offering?app=1

[chrispy]

With regards to the discussion in February about sports and restaurant sales...

 

I believe that there is a shift happening in how sports are viewed that will effect ticket sales and sports bars. Good quality home entertainment systems are relatively cheap, HD and DVR is widespread, and folks love being on their phone reading Twitter, playing fantasy, and "socializing". Additionally food delivery is becoming more common. My small sample size of friends and family are attending less games and going to sports bars less due to these factors.

[SnarkyPuppy]

What's the plan here?  It's clear that they aren't going to meet their bullets in June 2020. 

 

Are they waiting as long as they can for the Rourke led turnaround before selling restaurants? Do they think they can refinance the >$50mm debt that will remain?  A $6mm raise just seems so small relative to their current earnings power and upcoming bullet...

[DTEJD1997]

What's the plan here?  It's clear that they aren't going to meet their bullets in June 2020. 

 

Are they waiting as long as they can for the Rourke led turnaround before selling restaurants? Do they think they can refinance the >$50mm debt that will remain?  A $6mm raise just seems so small relative to their current earnings power and upcoming bullet...

I think the plan here is to just stay in business and not breach debt covenants.  They should be able to do that for a while...but their SSS are just terrible...really bad.

 

They have to get that turned around quick fast & in a hurry!

 

A couple of interesting things about the equity sale.

 

A). It was done precisely when the stock was at it's lowest.  Management couldn't see the need to raise KASH and do it when share were $3 or even $2?  They had to do it at $1/share?

 

B). They got something like $5mm?  That is tiny in comparison to the debt.  The only logical thing that makes sense is that they wanted to take JUST the absolute minimum to get by until things improve.

 

I'll be checking on this company from time to time, but unless things change in a MAJOR way, I just don't see how this is going to work out well for shareholders...

[SnarkyPuppy]

What's the plan here?  It's clear that they aren't going to meet their bullets in June 2020. 

 

Are they waiting as long as they can for the Rourke led turnaround before selling restaurants? Do they think they can refinance the >$50mm debt that will remain?  A $6mm raise just seems so small relative to their current earnings power and upcoming bullet...

I think the plan here is to just stay in business and not breach debt covenants.  They should be able to do that for a while...but their SSS are just terrible...really bad.

 

They have to get that turned around quick fast & in a hurry!

 

A couple of interesting things about the equity sale.

 

A). It was done precisely when the stock was at it's lowest.  Management couldn't see the need to raise KASH and do it when share were $3 or even $2?  They had to do it at $1/share?

 

B). They got something like $5mm?  That is tiny in comparison to the debt.  The only logical thing that makes sense is that they wanted to take JUST the absolute minimum to get by until things improve.

 

I'll be checking on this company from time to time, but unless things change in a MAJOR way, I just don't see how this is going to work out well for shareholders...

 

Do you have a sense of what their various options are for the debt?  Are they counting on a refinancing?  Can't they sell off some of their franchises?

 

Seems like a very interesting setup given the team responsible for the turnaround and the levered equity stub.  Trying to gauage actual downside here because upside could be substantial in a successful turnaround

[DTEJD1997]

What's the plan here?  It's clear that they aren't going to meet their bullets in June 2020. 

 

Are they waiting as long as they can for the Rourke led turnaround before selling restaurants? Do they think they can refinance the >$50mm debt that will remain?  A $6mm raise just seems so small relative to their current earnings power and upcoming bullet...

I think the plan here is to just stay in business and not breach debt covenants.  They should be able to do that for a while...but their SSS are just terrible...really bad.

 

They have to get that turned around quick fast & in a hurry!

 

A couple of interesting things about the equity sale.

 

A). It was done precisely when the stock was at it's lowest.  Management couldn't see the need to raise KASH and do it when share were $3 or even $2?  They had to do it at $1/share?

 

B). They got something like $5mm?  That is tiny in comparison to the debt.  The only logical thing that makes sense is that they wanted to take JUST the absolute minimum to get by until things improve.

 

I'll be checking on this company from time to time, but unless things change in a MAJOR way, I just don't see how this is going to work out well for shareholders...

 

Do you have a sense of what their various options are for the debt?  Are they counting on a refinancing?  Can't they sell off some of their franchises?

 

Seems like a very interesting setup given the team responsible for the turnaround and the levered equity stub.  Trying to gauage actual downside here because upside could be substantial in a successful turnaround

 

I often have mixed thoughts about SAUC....

 

They very well MIGHT make money IF they can turn around SSS AND then couple that with dropping wing prices and then run that for a about 3 years with the first 2 going exclusively to debt pay down....

 

HOWEVER, that is a lot of "ifs".

 

Unless I am mistaken, these dudes never really made a lot of money or good returns.  They simply had access to capital and bought/opened a bunch of chicken wing places.  They screwed up the Bagger Dave's operation (even thought the burgers & food was above average).

 

I don't have any special insight into the debt situation other than the banks are wanting to be repaid and they must deleverage.

 

If they go to sell locations...they have a problem.  If they want to get good money, I am going to guess that they have to sell the "crown jewels".  If they sell average locations that will be a forced sale and they will probably book a loss.  Their under performing locations?  A definite loss.

 

Then think about AFTER the sale....if the good locations are gone, they are stuck with average & below average locations and will still likely be losing $$$$.

 

My guess is that in order for shareholders to do well, there is going to have to be a management shakeup AND several factors of "good luck".

 

Most likely common equity is a doughnut.  I also think there are WAY more interesting/less risky speculations out there.  I'm still keeping it on the watch list though...